<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-45227
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 23, 1998)
26,000,000 FELINE PRIDES (SERVICE MARK)
(CONSISTING OF INCOME PRIDESSM AND GROWTH PRIDESSM)
[CENDANT CORPORATION LOGO]
CENDANT CORPORATION
2,000,000 Trust Preferred Securities
Cendant Capital I
6.45% Trust Originated Preferred Securities (Service Mark)
("TOPrS"(Service Mark))
(Liquidation Amount $50 per Trust Preferred Security)
fully and unconditionally guaranteed to
the extent set forth herein by
Cendant Corporation
-----------------
The securities offered hereby are 26,000,000 FELINE PRIDES (Service Mark)
("FELINE PRIDES") of Cendant Corporation, a Delaware corporation ("Cendant"
or the "Company"), and 2,000,000 6.45% Trust Originated Preferred Securities
(the "Trust Preferred Securities" and, together with the FELINE PRIDES, the
"Securities") of Cendant Capital I, a statutory business trust formed under
the laws of the State of Delaware (the "Trust"), having a stated liquidation
amount per (continued on next page)
-----------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-29 OF THIS PROSPECTUS SUPPLEMENT
FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE SECURITIES.
Prior to the offering made hereby, there has been no public market for the
Securities. The Income PRIDES and the Growth PRIDES have been approved for
listing on the New York Stock Exchange ("NYSE") under the symbols "CDPrI" and
"CDPrG", respectively, subject to official notice of issuance. On February
24, 1998, the last reported sale price of the Common Stock on the NYSE was
$37 per share.
-----------------
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 SUPPLEMENT OR THE PROSPECTUS
TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PRICE TO PUBLIC(1)
------------------
$50.00 per Income PRIDES
$42.52 per Growth PRIDES
$50.00 per Trust Preferred Security
- -------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
COMMISSION(2) COMPANY(3)
- -------------------------------------------------------------------------------
Total(4) ..................................... $39,500,000 $1,260,500,000
- -------------------------------------------------------------------------------
(1) Plus, as applicable, accrued distributions, interest and Contract
Adjustment Payments, if any, from March 2, 1998.
(2) The Company and the Trust have agreed to indemnify the Underwriters
against certain liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at
$1,500,000; after deducting $85,040,000 used to purchase the Treasury
Securities component of the 2,000,000 Growth PRIDES.
(4) The Company and the Trust have granted to the Underwriters 30-day
options to purchase up to an additional 3,600,000 Income PRIDES,
300,000 Growth PRIDES and 300,000 Trust Preferred Securities, to cover
over-allotments, if any. If such options are exercised in full, the
total Underwriting Commission and Proceeds to Company will be
$45,350,000 and $1,449,650,000 (after deducting $97,796,000 used to
purchase the Treasury Securities component of the Growth PRIDES),
respectively. See "Underwriting."
-----------------
The Securities are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, and subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Securities offered hereby will be made in New York, New York
on or about March 2, 1998.
-----------------
MERRILL LYNCH & CO. CHASE SECURITIES INC.
-----------------
The date of this Prospectus Supplement is February 24, 1998.
- -----------------
(Service Mark) Service Mark of Merrill Lynch & Co., Inc.
<PAGE>
(cover continued from previous page)
Trust Preferred Security equal to the Stated Amount (as defined herein),
representing a preferred undivided beneficial interest in the assets of the
Trust. Initially, 24,000,000 of the Trust Preferred Securities will be issued
and held as a component of the FELINE PRIDES. The FELINE PRIDES offered
hereby will initially consist of (A) 24,000,000 units (referred to as "Income
PRIDES" (Service Mark) ) with a Stated Amount, per Income PRIDES, of $50 (the
"Stated Amount") and (B) 2,000,000 units (referred to as "Growth PRIDES"
(Service Mark) ) with a face amount, per Growth PRIDES, equal to the Stated
Amount. Each Income PRIDES will initially consist of a unit comprised of (a)
a stock purchase contract (a "Purchase Contract") under which (i) the holder
will purchase from the Company on February 16, 2001 (the "Purchase Contract
Settlement Date"), for an amount of cash equal to the Stated Amount, a number
of newly issued shares of common stock, $0.01 par value per share (the
"Common Stock"), of the Company equal to the Settlement Rate described
herein, and (ii) the Company will pay the holder unsecured contract
adjustment payments ("Contract Adjustment Payments") at the rate of 1.05% of
the Stated Amount per annum and (b) either beneficial ownership of a Trust
Preferred Security or upon the occurrence of a Tax Event Redemption (as
defined herein) prior to the Purchase Contract Settlement Date, the
Applicable Ownership Interest (as defined herein). Each Growth PRIDES will
initially consist of a unit comprised of (a) a Purchase Contract under which
(i) the holder will purchase from the Company on the Purchase Contract
Settlement Date, for an amount in cash equal to the Stated Amount, a number
of newly issued shares of Common Stock of the Company, equal to the
Settlement Rate, and (ii) the Company will pay the holder Contract Adjustment
Payments, at the rate of 1.3% of the Stated Amount per annum, and (b) a 1/20
undivided beneficial interest in a zero-coupon U.S. Treasury Security (CUSIP
No. 912833 CD 0) in an amount equal to $1,000 payable on February 15, 2001
(the "Treasury Securities"). The Company will, directly or indirectly, own
all the common securities (the "Common Securities" and, together with the
Trust Preferred Securities, the "Trust Securities") representing undivided
beneficial interests in the assets of the Trust. The Trust exists for the
sole purpose of issuing the Trust Securities and investing the proceeds
thereof in an equivalent amount of Debentures of the Company, due February
16, 2003 and initially bearing interest at 6.45% (the "Debentures"). As long
as the FELINE PRIDES are in the form of Income PRIDES or Growth PRIDES, the
related Trust Preferred Securities or the Treasury Portfolio or Treasury
Securities, as applicable, will be pledged to the Collateral Agent (as
defined herein), to secure the holders' obligation to purchase Common Stock
under the related Purchase Contracts.
Aggregate payments of 7.5% of the Stated Amount per annum will be made or
accrue on each Income PRIDES quarterly in arrears on February 16, May 16,
August 16 and November 16 of each year, commencing May 16, 1998, until the
Purchase Contract Settlement Date. These payments will consist of cumulative
cash distributions on the related Trust Preferred Securities or Treasury
Portfolio, as applicable, payable at the rate of 6.45% of the Stated Amount
per annum, and Contract Adjustment Payments payable by the Company at the
rate of 1.05% of the Stated Amount per annum, subject in the case of Trust
Preferred Securities and Contract Adjustment Payments, to the Company's right
to defer payment of such amounts. Contract Adjustment Payments, payable by
the Company at the rate of 1.3% of the Stated Amount per annum, will be made
or accrue on each Growth PRIDES quarterly in arrears on February 16, May 16,
August 16 and November 16 of each year, commencing May 16, 1998, until the
Purchase Contract Settlement Date, subject to the Company's right to defer
such payments. In addition, original issue discount ("OID") will accrue on
the related Treasury Security. Subject to the Company's right to defer such
payments, holders of each Trust Preferred Security will receive cumulative
cash distributions, payable quarterly in arrears, on February 16, May 16,
August 16 and November 16 of each year, commencing May 16, 1998 at the rate
of 6.45% of the Stated Amount per annum. Such quarterly distributions on the
Trust Preferred Securities will constitute a portion of the quarterly
distribution on the related Income PRIDES. The ability of the Trust to make
the quarterly distributions on the Trust Preferred Securities will be solely
dependent upon the receipt of corresponding interest payments from the
Company on the Debentures. The Company will have the right at any time, and
from time to time, limited to a period not extending beyond the maturity date
of the Debentures, to defer the interest payments due on the Debentures. As a
consequence of such deferral, quarterly distributions on the Trust Preferred
Securities and the Income PRIDES (to the extent that a portion of the
quarterly distribution on the Income PRIDES is comprised of the quarterly
distributions on the Trust Preferred Securities)
S-2
<PAGE>
would be deferred, but would continue to accrue with interest compounded
quarterly. The Company will have the right at any time, and from time to
time, limited to a period not extending beyond the Purchase Contract
Settlement Date, to defer Contract Adjustment Payments. As a consequence of
such deferral, such portion of the cumulative quarterly distributions on the
Income PRIDES that is comprised of the Contract Adjustment Payments and the
quarterly cash distributions on the Growth PRIDES would be deferred; however,
such deferred Contract Adjustment Payments, if any, would continue to accrue
at the rate of 7.5% per annum, compounded quarterly. If a Tax Event
Redemption has occurred and the Treasury Portfolio has become a component of
the Income PRIDES as described herein, quarterly distributions on such
Treasury Portfolio as a portion of the cumulative cash distributions to the
holders of Income PRIDES will not be deferred.
The applicable distribution rate on the Trust Preferred Securities and the
interest rate on the related Debentures that remain outstanding on and after
the Purchase Contract Settlement Date will be reset on the third Business Day
(as defined herein) immediately preceding the Purchase Contract Settlement
Date to a rate per annum (the "Reset Rate") to be determined by the Reset
Agent (as defined herein) equal to the sum of (x) a spread amount (the "Reset
Spread") to be determined by the Reset Agent on the tenth Business Day prior
to the Purchase Contract Settlement Date and (y) the rate of interest on the
Two-Year Benchmark Treasury (as defined herein) in effect on the third
Business Day immediately preceding the Purchase Contract Settlement Date,
such sum being the distribution rate the Trust Preferred Securities should
bear in order for a Trust Preferred Security to have an approximate market
value of 100.5% of the Stated Amount on the third Business Day immediately
preceding the Purchase Contract Settlement Date, provided that the Company
may limit such Reset Spread to be no higher than 200 basis points (2%). Such
market value may be less than 100.5% if the Reset Spread is limited to a
maximum of 2%.
The payment of distributions and certain redemptions out of monies held by
the Trust and payments on liquidation of the Trust will be guaranteed by the
Company (the "Guarantee") to the extent described herein and under
"Description of the Guarantee." The Guarantee covers payments of
distributions and other payments on the Trust Preferred Securities only if
and to the extent the Trust has funds available therefor, which will not be
the case unless the Company has made a payment of principal or interest on
the Debentures held by the Trust as its sole asset. The Guarantee, when taken
together with the Company's obligations under the Debentures, the Indenture
(as defined herein) and the Company's obligations under the Declaration (as
defined below), provides a full and unconditional guarantee on a senior
unsecured basis by the Company of amounts due on the Trust Preferred
Securities.
The Company's obligations in respect of the Debentures and the Guarantee
generally will be senior unsecured obligations of the Company. The Contract
Adjustment Payments will be subordinated and junior in right of payment only
to the Company's obligations under the Senior Indebtedness (as defined
herein). "Senior Indebtedness" means indebtedness of any kind of the Company
unless the instrument under which such indebtedness is incurred expressly
provides that it is in parity or subordinate in right of payments to the
Contract Adjustment Payments.
If the holder of an Income PRIDES (unless a Tax Event Redemption has
occurred) has not notified the Purchase Contract Agent (as defined herein) by
the fifth Business Day immediately preceding the Purchase Contract Settlement
Date, in the manner described herein, of its intention to settle the related
Purchase Contract with separate cash on the Business Day immediately
preceding the Purchase Contract Settlement Date, the Remarketing Agent (as
defined herein), pursuant to the terms of the Remarketing Agreement and the
Remarketing Underwriting Agreement (each as defined herein), will use its
reasonable efforts to remarket the related Trust Preferred Security (bearing
the Reset Rate) on the third Business Day immediately preceding the Purchase
Contract Settlement Date for settlement on the Purchase Contract Settlement
Date at a price of approximately 100.5% of such Trust Preferred Security's
stated liquidation amount plus accrued and unpaid distributions (including
deferred distributions, if any) thereon. The proceeds from such remarketing,
in an amount equal to the aggregate stated liquidation amount of such Trust
Preferred Securities, will automatically be applied to satisfy in full such
holder's obligation to purchase Common Stock under the related Purchase
Contract. In addition, after deducting as a remarketing fee (the "Remarketing
Fee") an amount not exceeding 25 basis points (.25%) of the aggregate stated
liquidation amount of the remarketed securities from any amount received in
connection
S-3
<PAGE>
with such remarketing in excess of the aggregate stated liquidation amount of
such Trust Preferred Securities plus any accrued and unpaid distributions
(including deferred distributions, if any), the Remarketing Agent will remit
the remaining portion of the proceeds, if any, to the Purchase Contract Agent
for the benefit of such holder. If, despite using its reasonable efforts the
Remarketing Agent fails to remarket the Trust Preferred Securities at a price
not less than 100% of their aggregate stated liquidation amount plus accrued
and unpaid distributions (including deferred distributions, if any), the
remarketing will be deemed to have failed (a "Failed Remarketing") and the
Company will exercise its rights as a secured party to dispose of the Trust
Preferred Securities in accordance with applicable law and satisfy in full,
from the proceeds of such disposition, such holder's obligation to purchase
Common Stock under the related Purchase Contracts; provided, that if the
Company exercises such rights as a secured party with respect to such Trust
Preferred Securities, any accrued and unpaid distributions (including any
deferred distributions, if any) on such Trust Preferred Securities will be
paid in cash by the Company to the holder of record of such Trust Preferred
Securities. The Company will cause a notice of such Failed Remarketing to be
published on the second Business Day immediately preceding the Purchase
Contract Settlement Date.
Pursuant to the Remarketing Agreement and subject to the terms of the
Remarketing Underwriting Agreement, on or prior to the fifth Business Day
immediately preceding the Purchase Contract Settlement Date, but no earlier
than the Payment Date immediately preceding the Purchase Contract Settlement
Date, holders of separate Trust Preferred Securities which are not components
of Income PRIDES may elect, in the manner described herein, to have their
Trust Preferred Securities remarketed by the Remarketing Agent. Holders of
Trust Preferred Securities electing to have their Trust Preferred Securities
remarketed will also have the right to withdraw such election on or prior to
the fifth Business Day immediately preceding the Purchase Contract Settlement
Date.
On or prior to the fifth Business Day immediately preceding the Purchase
Contract Settlement Date, each holder (including, initially, an Underwriter)
of an Income PRIDES (unless a Tax Event Redemption has occurred) will have
the right to substitute for the related Trust Preferred Securities held by
the Collateral Agent the Treasury Securities, in an amount per Income PRIDES
equal to the Stated Amount per Trust Preferred Security, thereby creating
Growth PRIDES. Because Treasury Securities are issued in integral multiples
of $1,000, holders of Income PRIDES may make such substitutions only in
integral multiples of 20 Income PRIDES; provided, however, if a Tax Event
Redemption has occurred prior to the Purchase Contract Settlement Date and
the Treasury Portfolio has become a component of the Income PRIDES, holders
of Income PRIDES may make such substitutions only in integral multiples of
160,000 Income PRIDES (but obtaining the release of the appropriate
Applicable Ownership Interest of the Treasury Portfolio rather than the Trust
Preferred Securities), at any time on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date. Such Treasury
Securities will be substituted for the Trust Preferred Securities or the
appropriate Applicable Ownership Interest of the Treasury Portfolio, as the
case may be, and will be pledged with the Collateral Agent to secure the
holder's obligation to purchase Common Stock under the related Purchase
Contracts. In the event that Contract Adjustment Payments are at a higher
rate for Growth PRIDES than for Income PRIDES, holders of Income PRIDES
wishing to recreate Growth PRIDES will also be required to deliver cash in an
amount equal to the excess of the Contract Adjustment Payments that would
have accrued since the last Payment Date through the date of substitution on
the Growth PRIDES being created by such holders, over the Contract Adjustment
Payments that have accrued over the same time period on the related Incoming
PRIDES.
A holder of Growth PRIDES will have the right to subsequently recreate
Income PRIDES at any time on or prior to the fifth Business Day immediately
preceding the Purchase Contract Settlement Date by delivering 20 Growth
PRIDES to the Purchase Contract Agent plus 20 Trust Preferred Securities to
the Collateral Agent in exchange for 20 Income PRIDES and the release of the
related Treasury Security to such holder; provided, however, if a Tax Event
Redemption has occurred prior to the Purchase Contract Settlement Date and
the Treasury Portfolio has become a component of the Income PRIDES, holders
of Growth PRIDES may make such substitution (but using the appropriate
Applicable Ownership Interest of the Treasury Portfolio rather than Trust
Preferred Securities) only in integral
S-4
<PAGE>
multiples of 160,000 Growth PRIDES at any time on or prior to the second
Business Day immediately preceding the Purchase Contract Settlement Date.
Such Trust Preferred Securities or the appropriate Applicable Ownership
Interest of the Treasury Portfolio, as the case may be, will be substituted
for the Treasury Security and will be pledged with the Collateral Agent to
secure the holder's obligation to purchase Common Stock under the related
Purchase Contracts. In the event that Contract Adjustment Payments are at a
higher rate for Income PRIDES than for Growth PRIDES, holders of Growth
PRIDES wishing to recreate Income PRIDES will also be required to deliver
cash in an amount equal to the excess of the Contract Adjustment Payments
that would have accrued since the last payment date through the date of
substitution on the Income PRIDES being created by such holders, over the
Contract Adjustment Payments that have accrued over the same time period on
the related Growth PRIDES.
On or prior to the fifth Business Day immediately preceding the Purchase
Contract Settlement Date, each holder of a Growth PRIDES (unless a Tax Event
Redemption has occurred) will have the right to substitute for the related
Treasury Securities held by the Collateral Agent Trust Preferred Securities
in an amount per Growth PRIDES equal to the Stated Amount per Treasury
Security, thereby creating Income PRIDES. Such Trust Preferred Securities
will be pledged with the Collateral Agent to secure the holder's obligation
to purchase Common Stock under the related Purchase Contracts. Holders of
Growth PRIDES may make such substitutions only in integral multiples of 20
Growth PRIDES; provided, however, if a Tax Event Redemption has occurred and
the Treasury Portfolio has become a component of the Income PRIDES, holders
of Growth PRIDES may make such substitution only in integral multiples of
160,000 Growth PRIDES at any time on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date (but obtaining
the release of the appropriate Applicable Ownership Interest of the Treasury
Portfolio rather than the Treasury Securities). In the event that Contract
Adjustment Payments are at a higher rate for Income PRIDES than for Growth
PRIDES, holders of Growth PRIDES wishing to create Income PRIDES will also be
required to deliver cash in an amount equal to the excess of the Contract
Adjustment Payments that would have accrued since the last Payment Date
through the date of substitution on the Income PRIDES being created by such
holders, over the Contract Adjustment Payments that have accrued over the
same time period on the related Growth PRIDES. Upon the substitution of Trust
Preferred Securities for the related Treasury Securities as collateral, such
Treasury Securities will be released to the Growth PRIDES holder as described
herein. A holder of such Income PRIDES will have the right to subsequently
recreate Growth PRIDES by delivering 20 Income PRIDES to the Purchase
Contract Agent plus a Treasury Security to the Collateral Agent in exchange
for 20 Growth PRIDES and the release of the 20 related Trust Preferred
Securities to such Income PRIDES holder; provided, however, if a Tax Event
Redemption has occurred and the Treasury Portfolio has become a component of
the Income PRIDES, holders of Income PRIDES may make such substitutions only
in integral multiples of 160,000 Income PRIDES. In the event that Contract
Adjustment Payments are at a higher rate for Growth PRIDES than for Income
PRIDES, holders of Income PRIDES will also be required to deliver cash in an
amount equal to the excess of the Contract Adjustment Payments that would
have accrued since the last Payment Date through the date of substitution on
the Growth PRIDES being recreated by such holders, over the Contract
Adjustment Payments that have accrued over the same time period on the
related Income PRIDES.
If a Failed Remarketing has occurred, each holder of Trust Securities
(including, following the distribution of the Debentures upon a dissolution
of the Trust as described herein, such Debenture holders) holding such Trust
Securities or Debentures, as the case may be, following the Purchase Contract
Settlement Date will have the right, in the case of the Trust Securities, to
require the Trust to put to the Company the related Debentures or, in the
case of the Debentures, to put such Debentures directly to the Company on
March 2, 2001, upon at least three Business Days' prior notice, at a price
equal to the principal amount thereof, plus accrued and unpaid interest
(including deferred interest), if any, thereon. Upon the repurchase of such
Debentures by the Company, (i) the proceeds from such repurchase shall
simultaneously be applied (in the case of Trust Securities) to redeem such
Trust Securities of such holder having an aggregate stated liquidation amount
equal to the aggregate principal amount of the Debentures so repurchased and
(ii) any accrued and unpaid distributions (including deferred distributions)
with respect to such Trust Securities will be paid to such holder in cash.
S-5
<PAGE>
On the Business Day immediately preceding the Purchase Contract
Settlement Date, unless a holder of Income PRIDES or Growth PRIDES (i) has
settled the related Purchase Contracts through the early delivery of cash to
the Purchase Contract Agent in the manner described herein, (ii) in the case
of Income PRIDES, has settled the related Purchase Contracts with separate
cash on the Business Day immediately preceding the Purchase Contract
Settlement Date pursuant to prior notification to the Purchase Contract
Agent, (iii) has had the Trust Preferred Securities related to such holder's
Purchase Contract remarketed in the manner described herein in connection
with settling such Purchase Contracts, or (iv) an event described under
"Description of the Purchase Contracts -- Termination" has occurred, then (A)
in the case of Income PRIDES (unless a Tax Event Redemption has occurred) the
Company will exercise its rights as a secured party to dispose of the Trust
Preferred Securities in accordance with applicable law and (B) in the case of
Growth PRIDES or Income PRIDES (in the event that a Tax Event Redemption has
occurred), the principal amount of the related Treasury Securities or the
appropriate Applicable Ownership Interest of the Treasury Portfolio, as
applicable, when paid at maturity, will automatically be applied, pursuant to
the exercise of such rights by the Company to satisfy in full such holder's
obligation to purchase Common Stock under the related Purchase Contracts.
In the event that a holder of either Income PRIDES or Growth PRIDES
effects the early settlement of the related Purchase Contracts through the
delivery of cash or settles (in the case of Income PRIDES) such Purchase
Contracts with cash on the Business Day immediately preceding the Purchase
Contract Settlement Date, the related Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or
Treasury Securities, as the case may be, will be released to the holder as
described herein.
The Company will have the right at any time to dissolve the Trust, after
satisfaction of liabilities to creditors, and cause the Debentures to be
distributed to the holders of the Trust Securities. If the Debentures are
distributed to the holders of the Trust Preferred Securities, the Company
will use its best efforts to cause the Debentures to be listed on such
exchange, if any, on which the Trust Preferred Securities are then listed.
The Debentures (and, thus, the Trust Securities) are redeemable at the
option of the Company, in whole but not in part, on not less than 30 days nor
more than 60 days prior notice upon the occurrence and continuation of a Tax
Event (as defined herein) under the circumstances described herein (a "Tax
Event Redemption"). If the Company so redeems all of the Debentures, the
Trust must redeem all of the Trust Securities at a redemption price (the
"Redemption Price") per Trust Security equal to the Redemption Amount (as
defined herein) plus accrued and unpaid distributions including deferred
distributions, if any, thereon to the date fixed for redemptions and pay in
cash such Redemption Price to the holders of such Trust Securities. If such
Tax Event Redemption occurs prior to the Purchase Contract Settlement Date,
the Redemption Price payable upon liquidation of the Income PRIDES holders'
interests in the Trust or in the Debentures will be distributed to the
Collateral Agent, who in turn will apply an amount equal to the Redemption
Amount of such Redemption Price to purchase, on behalf of the holders of
Income PRIDES, the Treasury Portfolio and remit the remaining portion, if
any, of such Redemption Price to the Purchase Contract Agent for payment to
the holder of such Income PRIDES. See "Description of the Debentures -- Tax
Event Redemption." Such Treasury Portfolio will be substituted for the Trust
Preferred Securities and will be pledged to the Collateral Agent to secure
such Income PRIDES holders' obligations to purchase the Common Stock under
their Purchase Contracts.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES AND
THE COMMON STOCK OF THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING
TRANSACTIONS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT POSITIONS
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
S-6
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and consolidated financial statements of the Company
appearing elsewhere in the accompanying Prospectus, this Prospectus
Supplement or in the documents incorporated herein or in the accompanying
Prospectus by reference. A listing of the pages on which certain definitions
of capitalized terms used in this Prospectus Supplement Summary and elsewhere
in this Prospectus Supplement are defined is set forth in the "Index of Terms
for Prospectus Supplement" herein. Except as otherwise noted, all information
in this Prospectus Supplement assumes no exercise of the Underwriters'
over-allotment option. Unless the context otherwise requires, the terms
"Cendant" and "Company" refer to Cendant Corporation and its consolidated
subsidiaries.
THE COMPANY
The Company is one of the foremost consumer and business services
companies in the world. The Company was created through the merger (the
"Merger") of CUC International Inc. ("CUC") and HFS Incorporated ("HFS") in
December 1997 and provides all of the services formerly provided by each of
CUC and HFS, including technology-driven, membership-based consumer services,
travel services and real estate services. See "The Company."
THE TRUST
The Trust is a statutory business trust created under Delaware law
pursuant to (i) a declaration of trust, executed by the Company, as sponsor
(the "Sponsor"), and certain of the trustees of the Trust (the "Cendant
Trustees") and (ii) the filing of a certificate of trust with the Secretary
of State of the State of Delaware on February 5, 1998. Such declaration will
be amended and restated in its entirety (as so amended and restated, the
"Declaration") substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus Supplement forms a part. The
Declaration will be qualified as an indenture under the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). The Trust exists for the
exclusive purposes of (i) issuing the Trust Securities representing undivided
beneficial interests in the assets of the Trust, (ii) investing the gross
proceeds of the Trust Securities in the Debentures and (iii) engaging in only
those other activities necessary, appropriate, convenient or incidental
thereto. See "The Trust."
THE OFFERING
Securities Offered ............ 26,000,000 FELINE PRIDES, consisting of
24,000,000 Income PRIDES, 2,000,000 Growth
PRIDES, and 2,000,000 separate Trust
Preferred Securities. 24,000,000 Trust
Preferred Securities will be initially
issued and held as a component of the Income
PRIDES.
Issuers ....................... Cendant Corporation and Cendant Capital I.
Listing of the Income
PRIDES, Growth PRIDES and
Trust Preferred Securities ... The Income PRIDES and the Growth PRIDES have
been approved for listing on the NYSE under
the symbols "CDPrI" and "CDPrG",
respectively, subject to official notice of
issuance. The Trust Preferred Securities
will not initially be listed on any
exchange. See "Underwriting."
NYSE Symbol of Common Stock ... "CD"
Use of Proceeds ............... Substantially all of the proceeds from the
sale of the Growth PRIDES will be used to
purchase the underlying Treasury Securities
to be transferred to holders of the Growth
PRIDES pursuant to the terms thereof, and
the Company will receive no proceeds from
the sale of the Growth PRIDES. All or
substan-
S-7
<PAGE>
tially all of the proceeds from the sale of
the Income PRIDES, the Trust Preferred
Securities which are not components of
Income PRIDES and the Common Securities will
be invested by the Trust in Debentures of
the Company. The Company currently
anticipates using substantially all of the
net proceeds from the sale of the
Debentures, estimated to be approximately
$1,259 million (after deducting the
underwriting commission and expenses), to
repay outstanding indebtedness under the
Company's revolving credit facilities,
including at February 24, 1998 (i)
approximately $565 million of outstanding
indebtedness under the $1.25 billion 364-Day
Competitive Advance and Revolving Credit
Agreement dated as of October 2, 1996, as
amended and restated, among the Company (as
successor by Merger with HFS), the lenders
named therein (the "Lenders") and The Chase
Manhattan Bank ("Chase"), as Administrative
Agent (the "364-Day Revolving Credit
Facility") and (ii) approximately $673
million of outstanding indebtedness under
the $750 million Five-Year Competitive
Advance and Revolving Credit Agreement dated
as of October 2, 1996, as amended and
restated, among the Company, the Lenders and
Chase, as Administrative Agent (the "Five
Year Revolving Credit Facility" and,
together with the 364-Day Revolving Credit
Facility, the "Revolving Credit
Facilities"). The Company will use the
remaining proceeds for general corporate
purposes including acquisitions.
The 364-Day Revolving Credit Facility will
mature on September 30, 1998, provided that
the Company is entitled to annually request
a 364-day extension of such maturity date,
and the Five Year Revolving Credit Facility
will mature on October 1, 2001.
The 364-Day Revolving Credit Facility and
the Five Year Revolving Credit Facility
provide for revolving loans which bear
interest, at the option of the Company, at
rates based on competitive bids of Lenders
participating in such facilities, at a prime
rate or at LIBOR plus a margin approximating
22.5 basis points. The proceeds of such
loans have been used for general corporate
purposes, primarily for business
acquisitions.
Chase is an affiliate of Chase Securities
Inc., an Underwriter.
FELINE PRIDES
Stated Amount ................. $50 per FELINE PRIDES.
Components of FELINE PRIDES ... The 26,000,000 FELINE PRIDES offered hereby
will initially consist of (A) 24,000,000
units referred to as Income PRIDES and (B)
2,000,000 units referred to as Growth
PRIDES. Each Income PRIDES will initially
consist of a unit comprised of (a) a
Purchase Contract under which (i) the holder
will purchase from the Company on the
Purchase Contract Settlement Date, for an
amount of cash equal to the Stated Amount, a
number of newly issued shares of Common
Stock of the Company equal to
S-8
<PAGE>
the Settlement Rate, and (ii) the Company
will pay Contract Adjustment Payments at the
rate of 1.05% of the Stated Amount per annum
to the holder, and (b) either beneficial
ownership of a 6.45% Trust Originated
Preferred Security, having a stated
liquidation amount equal to the Stated
Amount, representing a preferred, undivided
beneficial interest in the assets of the
Trust or upon the occurrence of a Tax Event
Redemption prior to the Purchase Contract
Settlement Date, the appropriate Applicable
Ownership Interest in the Treasury
Portfolio. The purchase price of each Income
PRIDES will be allocated between the related
Purchase Contract and the related Trust
Preferred Security in proportion to their
respective fair market values at the time of
purchase. Each Growth PRIDES will initially
consist of a unit comprised of (a) a
Purchase Contract under which (i) the holder
will purchase from the Company on the
Purchase Contract Settlement Date, for an
amount in cash equal to the Stated Amount, a
number of newly issued shares of Common
Stock of the Company, equal to the
Settlement Rate, and (ii) the Company will
pay Contract Adjustment Payments at the rate
of 1.3% of the Stated Amount per annum and
(b) a 1/20 undivided beneficial interest in
a zero-coupon U.S. Treasury Security (CUSIP
No. 912833 CD 0) in an amount of $1,000
payable on February 15, 2001. The purchase
price of each Growth PRIDES will be
allocated between the related Purchase
Contract and the related interest in the
Treasury Security in proportion to their
respective fair market values at the time of
purchase.
The applicable distribution rate on the
Trust Preferred Securities and the interest
rate on the related Debentures that remain
outstanding on and after the Purchase
Contract Settlement Date will be reset on
the third Business Day immediately preceding
the Purchase Contract Settlement Date to the
Reset Rate, to be determined by a nationally
recognized investment banking firm chosen by
the Company (the "Reset Agent"). See
"Description of the Trust Preferred
Securities -- Market Rate Reset."
The Company will have the right at any time
to dissolve the Trust and, after
satisfaction of liabilities to creditors of
the Trust, if any, to cause the Debentures
to be distributed to the holders of the
Trust Preferred Securities. References
herein to Trust Preferred Securities, unless
the context otherwise requires, mean (i) the
Trust Preferred Securities or (ii) the
Debentures which have been delivered to the
holders of the Trust Preferred Securities
upon dissolution of the Trust. In addition,
as described below, upon the occurrence of a
Tax Event (as defined herein) prior to the
Purchase Contract Settlement Date, the
Company may at its option cause the
Debentures (and, thus, the Trust Preferred
Securities) to be redeemed at the Redemption
Price and the Treasury Portfolio will be
substituted for the redeemed Trust Preferred
Securities in the manner described herein to
secure the Income PRIDES holders'
obligations under
S-9
<PAGE>
their related Purchase Contracts. The
distribution rate and the payment dates for
the Trust Preferred Securities will
correspond to the interest rate and the
payment dates for the Debentures, which will
be the sole assets of the Trust. As long as
a FELINE PRIDES is in the form of an Income
PRIDES or Growth PRIDES, the related Trust
Preferred Securities, Treasury Securities or
the Treasury Portfolio, as applicable, will
be pledged pursuant to a pledge agreement,
to be dated as of March 2, 1998 (the "Pledge
Agreement"), between the Company and The
Chase Manhattan Bank, as collateral agent
for the Company (together with any successor
thereto in such capacity, the "Collateral
Agent"), to secure the holder's obligation
to purchase Common Stock under the related
Purchase Contract. See "Risk Factors."
Purchase Contract Agreement ... The FELINE PRIDES will be issued under a
Purchase Contract Agreement, to be dated as
of March 2, 1998 (the "Purchase Contract
Agreement"), between the Company and The
First National Bank of Chicago, as agent for
the holders of the FELINE PRIDES (together
with any successor thereto in such capacity,
the "Purchase Contract Agent").
Substitution of Pledged
Securities ................... Each holder of an Income PRIDES will have
the right, on or prior to the fifth Business
Day immediately preceding the Purchase
Contract Settlement Date, to substitute for
the related Trust Preferred Securities held
by the Collateral Agent Treasury Securities
in an amount per Income PRIDES equal to the
Stated Amount per Trust Preferred Security.
Such Treasury Securities will be substituted
for the Trust Preferred Securities and will
be pledged with the Collateral Agent to
secure the holder's obligation to purchase
Common Stock under the related Purchase
Contracts. Because Treasury Securities are
issued in integral multiples of $1,000,
holders of Income PRIDES may make such
substitutions only in integral multiples of
20 Income PRIDES; provided, however, if a
Tax Event Redemption has occurred prior to
the Purchase Contract Settlement Date and
the Treasury Portfolio has become a
component of the Income PRIDES, holders of
Income PRIDES may make such substitutions
only in integral multiples of 160,000 Income
PRIDES (but obtaining the release of the
appropriate Applicable Ownership Interest of
the Treasury Portfolio rather than the Trust
Preferred Securities) at any time on or
prior to the second Business Day immediately
preceding the Purchase Contract Settlement
Date. In the event that Contract Adjustment
Payments are at a higher rate for Growth
PRIDES than for Income PRIDES, holders of
Income PRIDES wishing to create Growth
PRIDES will also be required to deliver cash
in an amount equal to the excess of the
Contract Adjustment Payments that would have
accrued since the last Payment Date through
the date of substitution on the Growth
PRIDES being created by such holders, over
the Contract Adjustment Payments that have
accrued over the same time period on the
related Income PRIDES.
S-10
<PAGE>
Each holder of Growth PRIDES will have the
right, on or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date, to create Income PRIDES by
delivering 20 Growth PRIDES to the Purchase
Contract Agent plus 20 Trust Preferred
Securities to the Collateral Agent in
exchange for 20 Income PRIDES and the
release of the related Treasury Security to
such holder; provided, however, if a Tax
Event Redemption has occurred prior to the
Purchase Contract Settlement Date and the
Treasury Portfolio has become a component of
the Income PRIDES, holders of Growth PRIDES
may make such substitution (but using the
Treasury Portfolio rather than Trust
Preferred Securities) only in integral
multiples of 160,000 Growth PRIDES at any
time on or prior to the second Business Day
immediately preceding the Purchase Contract
Settlement Date. Such Trust Preferred
Securities or the appropriate Applicable
Ownership Interest of the Treasury
Portfolio, as the case may be, will be
pledged with the Collateral Agent to secure
the holder's obligation to purchase Common
Stock under the related Purchase Contracts.
In the event that Contract Adjustment
Payments are at a higher rate for Income
PRIDES than for Growth PRIDES, holders of
Growth PRIDES wishing to create Income
PRIDES will also be required to deliver cash
in an amount equal to the excess of the
Contract Adjustment Payments that would have
accrued since the last Payment Date through
the date of substitution on the Income
PRIDES being created by such holders, over
the Contract Adjustment Payments that have
accrued over the same time period on the
related Growth PRIDES. See "Description of
the FELINE PRIDES -- Substitution of Pledged
Securities."
Holders who elect to substitute Pledged
Securities (as defined in "Description of
the Purchase Contracts -- Pledged Securities
and Pledge Agreement"), will be responsible
for any fees or expenses payable in
connection therewith. See "Certain
Provisions of the Purchase Contract
Agreements and the Pledge Agreement --
Miscellaneous."
Recreating Income PRIDES
or Growth PRIDES ............. On or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date, a holder of Growth PRIDES
will have the right to recreate Income
PRIDES by delivering 20 Growth PRIDES to the
Purchase Contract Agent plus 20 Trust
Preferred Securities to the Collateral Agent
in exchange for 20 Income PRIDES and the
release of the related Treasury Security to
such holder; provided, however, if a Tax
Event Redemption has occurred prior to the
Purchase Contract Settlement Date and the
Treasury Portfolio has become a component of
the Income PRIDES, holders of Growth PRIDES
may make such substitution (but using the
Treasury Portfolio rather than Trust
Preferred Securities) only in integral
multiples of 160,000 Growth PRIDES at any
time on or prior to the second Business Day
immediately preceding the Purchase
S-11
<PAGE>
Contract Settlement Date. Such Trust
Preferred Securities or the appropriate
Applicable Ownership Interest of the
Treasury Portfolio, as the case may be, will
be pledged with the Collateral Agent to
secure the holder's obligation to purchase
Common Stock under the related Purchase
Contracts. In the event that Contract
Adjustment Payments are at a higher rate for
Income PRIDES than for Growth PRIDES,
holders of Growth PRIDES wishing to recreate
Income PRIDES will also be required to
deliver cash in an amount equal to the
excess of the Contract Adjustment Payments
that would have accrued since the last
Payment Date through the date of
substitution on the Income PRIDES being
recreated by such holders, over the Contract
Adjustment Payments that have accrued over
the same time period on the related Growth
PRIDES.
On or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date, a holder of Income PRIDES
will have the right to subsequently recreate
Growth PRIDES by delivering 20 Income PRIDES
to the Purchase Contract Agent plus a
Treasury Security to the Collateral Agent in
exchange for 20 Growth PRIDES and the
release of the 20 related Trust Preferred
Securities to such Income PRIDES holder;
provided, however, if a Tax Event Redemption
has occurred and the Treasury Portfolio has
become a component of the Income PRIDES,
holders of Income PRIDES may make such
substitutions only in integral multiples of
160,000 Income PRIDES. In the event that
Contract Adjustment Payments are at a higher
rate for Growth PRIDES than for Income
PRIDES, holders of Income PRIDES wishing to
recreate Growth PRIDES will also be required
to deliver cash in an amount equal to the
excess of the Contract Adjustment Payments
that would have accrued since the last
Payment Date through the date of
substitution on the Growth PRIDES being
recreated by such holders, over the Contract
Adjustment Payments that have accrued over
the same time period on the related Income
PRIDES. See "Description of the FELINE
PRIDES -- Recreating Income PRIDES and
Growth PRIDES."
Current Payments .............. Holders of Income PRIDES will be entitled to
receive aggregate cash distributions at a
rate of 7.5% of the Stated Amount per annum
from and after March 2, 1998, payable
quarterly in arrears, consisting of
cumulative cash distributions on the related
Trust Preferred Securities or the Treasury
Portfolio, as applicable, payable at the
rate of 6.45% of the Stated Amount per
annum, and Contract Adjustment Payments,
payable by the Company at the rate of 1.05%
of the Stated Amount per annum, subject (in
the case of both the distributions on the
Trust Preferred Securities and of the
Contract Adjustment Payments), to the
Company's right to defer the payment of such
amounts. The ability of the Trust to make
the quarterly distributions on the related
Trust Preferred Securities will be solely
dependent upon the receipt of corresponding
interest
S-12
<PAGE>
payments from the Company on the Debentures.
The Company's obligations with respect to
the Debentures will be senior and unsecured
and will rank on a parity in right of
payment with all other senior unsecured
obligations of the Company.
If a Tax Event Redemption has occurred prior
to the Purchase Contract Settlement Date as
described herein and the Treasury Portfolio
has become a component of the Income PRIDES,
quarterly distributions on the appropriate
Applicable Ownership Interest of the
Treasury Portfolio, as a portion of the
cumulative quarterly distribution to the
holders of Income PRIDES, will not be
deferred.
Holders of Growth PRIDES will be entitled to
receive quarterly cash distributions of
Contract Adjustment Payments, payable by the
Company at the rate of 1.3% of the Stated
Amount per annum, subject to the Company's
rights of deferral described herein. In
addition, OID would continue to accrue on
the related Treasury Securities. See "Risk
Factors -- Right to Defer Current Payments."
Contract Adjustment Payments .. Contract Adjustment Payments will be fixed
at a rate per annum of 1.05% of the Stated
Amount per Purchase Contract in the case of
Income PRIDES, and 1.3% of the Stated Amount
per Purchase Contract, in the case of Growth
PRIDES. The Contract Adjustment Payments
will be subordinated and junior in right of
payment to the Senior Indebtedness. See
"Description of the Purchase Contracts --
Contract Adjustment Payments."
Option to Extend Distribution
Payment Periods .............. The Company has the right at any time, and
from time to time, limited to a period not
extending beyond the maturity date of the
Debentures, to defer the interest payments
due on the Debentures. As a consequence of
such deferral, the corresponding quarterly
distributions to holders of Trust Preferred
Securities and Income PRIDES would be
deferred (but despite such deferral, would
continue to accumulate quarterly and would
accrue interest thereon compounded quarterly
at the rate of 6.45% per annum through and
including February 15, 2001, and at the
Reset Rate thereafter). The Company also has
the right to defer the payment of Contract
Adjustment Payments on the related Purchase
Contracts until no later than the Purchase
Contract Settlement Date; however, such
deferred Contract Adjustment Payments will
bear additional Contract Adjustment Payments
at the rate of 7.5% per annum (such deferred
Contract Adjustment Payments together with
such additional Contract Adjustment Payments
shall be referred to as the "Deferred
Contract Adjustment Payments"). See
"Description of the Purchase Contracts --
Contract Adjustment Payments." If interest
payments on the Debentures or the Contract
Adjustment Payments are deferred, the
Company has agreed, among other things, not
to declare or pay any dividend on or repur-
S-13
<PAGE>
chase its capital stock (subject to certain
exceptions) during the period of such
deferral. If a Tax Event Redemption has
occurred prior to the Purchase Contract
Settlement Date and the Treasury Portfolio
has become a component of the Income PRIDES,
quarterly distributions on the appropriate
Applicable Ownership Interest Treasury
Portfolio as a portion of the cumulative
quarterly distributions to the holders of
Income PRIDES will not be deferred.
In the event that the Company elects to
defer the payment of Contract Adjustment
Payments on the related Purchase Contracts
until the Purchase Contract Settlement Date,
each holder of the related Income PRIDES or
Growth PRIDES will receive on the Purchase
Contract Settlement Date in respect of such
Deferred Contract Adjustment Payments, in
lieu of a cash payment, a number of shares
of Common Stock equal to (x) the aggregate
amount of Deferred Contract Adjustment
Payments payable to such holder divided by
(y) the Applicable Market Value (as defined
herein). See "Description of the Purchase
Contracts -- Option to Defer Contract
Adjustment Payments."
Payment Dates ................. Subject to the deferral provisions described
herein, the current payments described above
in respect of the Income PRIDES will be
payable quarterly in arrears on February 16,
May 16, August 16 and November 16 of each
year, commencing May 16, 1998, through and
including (i) in the case of the Contract
Adjustment Payments, the earlier of the
Purchase Contract Settlement Date or the
most recent such quarterly date on or prior
to any early settlement of the related
Purchase Contracts and (ii) in the case of
Trust Preferred Securities, the most recent
such quarterly date on or prior to the
earlier of the Purchase Contract Settlement
Date and the date the liquidation amount of
a Trust Preferred Security, together with
all accumulated and unpaid distributions
thereon (each, a "Payment Date").
Remarketing ................... Unless a Tax Event Redemption has occurred,
pursuant to a remarketing agreement (the
"Remarketing Agreement") dated as of March
2, 1998, among the Company, the Trust, the
Purchase Contract Agent and a nationally
recognized investment banking firm chosen by
the Company (the "Remarketing Agent"), and
subject to the terms of a Remarketing
Underwriting Agreement to be dated as of the
third Business Day immediately preceding the
Purchase Contract Settlement Date among such
parties (the "Remarketing Underwriting
Agreement"), the Trust Preferred Securities
of such Income PRIDES holders who have
failed to notify the Purchase Contract
Agent, on or prior to the fifth Business Day
immediately preceding the Purchase Contract
Settlement Date, of their intention to
settle the related Purchase Contracts with
separate cash, will be remarketed on the
third Business Day immediately preceding the
Purchase Contract Settlement Date. The
Remarketing Agent will use its reasonable
efforts to remarket such Trust
S-14
<PAGE>
Preferred Securities (bearing the Reset
Rate) on such date for settlement on the
Purchase Contract Settlement Date at a price
of approximately 100.5% of the aggregate
stated liquidation amount of such Trust
Preferred Security, plus accrued and unpaid
distributions (including any deferred
distributions), if any, thereon. The portion
of the proceeds from such remarketing equal
to the aggregate stated liquidation amount
of such Trust Preferred Securities will be
automatically applied to satisfy in full
such Income PRIDES holders' obligations to
purchase Common Stock under the related
Purchase Contracts. In addition, after
deducting as the Remarketing Fee an amount
not exceeding 25 basis points (.25%) of the
aggregate stated liquidation amount of the
remarketed securities from any amount of
such proceeds in excess of the aggregate
stated liquidation amount of the remarketed
Trust Preferred Securities plus any accrued
and unpaid distributions (including any
deferred distributions), the Remarketing
Agent will remit the remaining portion of
the proceeds, if any, for the benefit of
such holder. Income PRIDES holders, whose
Trust Preferred Securities are so remarketed
will not otherwise be responsible for any
Remarketing Fee in connection therewith. If,
despite using its reasonable efforts, the
Remarketing Agent cannot remarket the
related Trust Preferred Securities of such
holders of Income PRIDES at a price not less
than 100% of the aggregate stated
liquidation amount of such Trust Preferred
Securities plus accrued and unpaid
distributions, including deferred
distributions, if any, resulting in a Failed
Remarketing, the Company will exercise its
rights as a secured party to dispose of the
Trust Preferred Securities in accordance
with applicable law and to satisfy in full,
from the proceeds of such disposition, such
holder's obligation to purchase Common Stock
under the related Purchase Contracts,
provided, that if the Company exercises such
rights as a secured party with respect to
such Trust Preferred Securities, any accrued
and unpaid distributions (including any
deferred distributions) on such Trust
Preferred Securities will be paid in cash by
the Company to the holder of record of such
Trust Preferred Securities. The Company will
cause a notice of such Failed Remarketing to
be published on the second Business Day
immediately preceding the Purchase Contract
Settlement Date. It is currently anticipated
that Merrill Lynch, Pierce, Fenner & Smith
Incorporated will be the Remarketing Agent.
See "Description of the Purchase Contracts
-- Remarketing."
Purchase Contract Settlement
Date ......................... February 16, 2001.
Settlement of Purchase
Contracts .................... On the Business Day immediately preceding
the Purchase Contract Settlement Date,
unless a holder of Income PRIDES or Growth
PRIDES (i) has settled the related Purchase
Contracts through the early delivery of cash
to the Purchase Contract Agent in the manner
described herein, (ii) in the case of Income
PRIDES, has settled the related Purchase
Contracts
S-15
<PAGE>
with separate cash on the Business Day prior
to the Purchase Contract Settlement Date
pursuant to prior notification to the
Purchase Contract Agent, (iii) has had the
Trust Preferred Securities related to such
holder's Purchase Contracts remarketed in
the manner described herein in connection
with settling such Purchase Contracts, or
(iv) an event described under "Description
of the Purchase Contracts -- Termination"
has occurred, (A) in the case of Income
PRIDES (unless a Tax Event Redemption has
occurred), the Company will exercise its
rights as a secured party to dispose of the
related Trust Preferred Securities in
accordance with the applicable law, and (B)
in the case of Growth PRIDES or Income
PRIDES (if a Tax Event Redemption has
occurred) the principal amount of the
related Treasury Securities or the
appropriate Applicable Ownership Interest of
the Treasury Portfolio, as applicable, when
paid at maturity, will automatically be
applied, pursuant to the exercise of such
rights by the Company to satisfy in full
such holder's obligation to purchase Common
Stock under the related Purchase Contracts.
In the event that a holder of either Income
PRIDES or Growth PRIDES effects the early
settlement of the related Purchase Contracts
through the delivery of cash or, in the case
of an Income PRIDES, settles such Purchase
Contracts with cash on the Business Day
immediately preceding the Purchase Contract
Settlement Date, the related Trust Preferred
Securities, the appropriate Applicable
Ownership Interest of the Treasury Portfolio
or the Treasury Securities, as the case may
be, will be released to such holder as
described herein.
Settlement Rate ............... The number of newly issued shares of Common
Stock issuable upon settlement of each
Purchase Contract on the Purchase Contract
Settlement Date (the "Settlement Rate") will
be calculated as follows (subject to
adjustment under certain circumstances): (a)
if the Applicable Market Value is equal to
or greater than $48.10 (the "Threshold
Appreciation Price," which is 30% above the
last reported sale price of the Common Stock
set forth on the cover page of the final
Prospectus Supplement (the "Reference
Price")), the Settlement Rate (which will be
equal to the Stated Amount divided by the
Threshold Appreciation Price) will be
1.0395; accordingly, if, between the date of
this Prospectus Supplement and the period
during which the Applicable Market Value is
measured, the market price for the Common
Stock increases to an amount that is higher
than the Threshold Appreciation Price, the
aggregate market value of the shares of
Common Stock issued upon settlement of each
Purchase Contract (assuming that such market
value is the same as the Applicable Market
Value of such Common Stock) will be higher
than the Stated Amount, and if such market
price is the same as the Threshold
Appreciation Price, the aggregate market
value of such shares (assuming that such
market value is the same as the Applicable
Market Value of such Common Stock)
S-16
<PAGE>
will be equal to the Stated Amount; (b) if
the Applicable Market Value is less than the
Threshold Appreciation Price but greater
than the Reference Price, the Settlement
Rate will be equal to the Stated Amount
divided by the Applicable Market Value;
accordingly, if the market price for the
Common Stock increases between the date of
this Prospectus Supplement and the period
during which the Applicable Market Value is
measured but such market price is less than
the Threshold Appreciation Price, the
aggregate market value of the shares of
Common Stock issued upon settlement of each
Purchase Contract (assuming that such market
value is the same as the Applicable Market
Value of such Common Stock) will be equal to
the Stated Amount; and (c) if the Applicable
Market Value is less than or equal to the
Reference Price, the Settlement Rate (which
will be equal to the Stated Amount divided
by the Reference Price) will be 1.3514;
accordingly, if the market price for the
Common Stock decreases between the date of
this Prospectus Supplement and the period
during which the Applicable Market Value is
measured, the aggregate market value of the
shares of Common Stock issued upon
settlement of each Purchase Contract
(assuming that such market value is the same
as the Applicable Market Value of such
Common Stock) will be less than the Stated
Amount, and if such market price stays the
same, the aggregate market value of such
shares (assuming that such market value is
the same as the Applicable Market Value of
such Common Stock) will be equal to the
Stated Amount. "Applicable Market Value"
means the average of the Closing Price (as
defined herein) per share of Common Stock on
each of the twenty consecutive Trading Days
(as defined herein) ending on the third
Trading Day immediately preceding the
Purchase Contract Settlement Date. See
"Description of the Purchase Contracts --
General."
Early Settlement .............. A holder of Income PRIDES (unless a Tax
Event Redemption has occurred) may settle
the related Purchase Contracts on or prior
to the fifth Business Day immediately
preceding the Purchase Contract Settlement
Date in the manner described herein, but
only in integral multiples of 20 Income
PRIDES; provided, however, if a Tax Event
Redemption has occurred prior to the
Purchase Contract Settlement Date and the
Treasury Portfolio has become a component of
the Income PRIDES, holders of Income PRIDES
may settle early only in integral multiples
of 160,000 Income PRIDES at any time on or
prior to the second Business Day immediately
preceding the Purchase Contract Settlement
Date. A holder of Growth PRIDES may settle
the related Purchase Contracts on or prior
to the second Business Day immediately
preceding the Purchase Contract Settlement
Date in the manner described herein (in
either case, an "Early Settlement"). Upon
such Early Settlement, (a) the holder will
pay to the Company through the Purchase
Contract Agent in immediately available
funds an amount equal to the Stated Amount
for each Purchase Contract to be settled and
S-17
<PAGE>
deliver the Income PRIDES or Growth PRIDES,
as the case may be, to the Purchase Contract
Agent; (b) the related Trust Preferred
Securities, the appropriate Applicable
Ownership Interest of the Treasury Portfolio
or the Treasury Securities, as the case may
be, within three Business Days of the date
of Early Settlement, will be transferred to
the holder free and clear of the Company's
security interest therein; and (c) the
Company, within three Business Days of the
date of Early Settlement, will deliver
1.0395 newly issued shares of Common Stock
(an amount equal to the Stated Amount
divided by the Threshold Appreciation Price)
to the holder for each Purchase Contract so
settled. Upon Early Settlement, (i) the
holder's rights to receive Deferred Contract
Adjustment Payments, if any, on the Purchase
Contracts being settled will be forfeited,
(ii) the holder's right to receive
additional Contract Adjustment Payments, if
any, in respect of such Purchase Contracts
will terminate and (iii) no adjustment will
be made to or for the holder on account of
Deferred Contract Adjustment Payments, or
any amount accrued in respect of Contract
Adjustment Payments. See "Description of the
Purchase Contracts -- Early Settlement."
Termination ................... The Purchase Contracts and the rights and
obligations of The Company and the holders
of the FELINE PRIDES thereunder(including
the right thereunder to receive accrued or
Deferred Contract Adjustment Payments, if
any, and the obligation to purchase Common
Stock) will automatically terminate upon the
occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to
the Company. Upon such termination, the
Collateral Agent will release the related
Trust Preferred Securities, the appropriate
Applicable Ownership Interest of the
Treasury Portfolio or Treasury Securities,
as the case may be, held by it to the
Purchase Contract Agent for distribution to
the holders, subject in the case of the
Treasury Portfolio to the Purchase Contract
Agent's disposition of the subject
securities for cash, and the payment of such
cash to the holders, to the extent that the
holder would otherwise have been entitled to
receive less than $1,000 of any such
security. Upon such termination, there may
be a delay before such release and
distribution. In the event that the Company
becomes the subject of a case under the
United States Bankruptcy Code of 1978, as
amended (the "Bankruptcy Code"), such delay
may occur as a result of the automatic stay
under the Bankruptcy Code and continue until
such automatic stay has been lifted. The
Company expects any such delay to be
limited. See "Description of the Purchase
Contracts -- Termination."
Voting and Certain Other
Rights ....................... Holders of Trust Preferred Securities will
not be entitled to vote to appoint, remove
or replace, or to increase or decrease the
number of Regular Trustees (as defined
herein) and will generally have no voting
rights except in the limited circumstances
described under "Description of Trust
Preferred Securities --
S-18
<PAGE>
Voting Rights." Holders of Purchase
Contracts forming part of the Income PRIDES
or Growth PRIDES in their capacities as such
holders will have no voting or other rights
in respect of the Common Stock.
TRUST PREFERRED SECURITIES
The Trust ..................... The Trust is a Delaware statutory business
trust. The sole assets of the Trust will
consist of the Debentures. The Company will
directly or indirectly own all of the Common
Securities representing common undivided
beneficial ownership interests in the assets
of the Trust.
Trust Preferred Securities .... 6.45% Trust Preferred Securities
(liquidation amount $50 per Trust Preferred
Security), representing preferred, undivided
beneficial ownership interests in the assets
of the Trust.
Distributions ................. Distributions on the Trust Preferred
Securities will be cumulative, will accrue
from the first date of issuance of the Trust
Preferred Securities and will be payable
initially at the annual rate of 6.45% of the
liquidation amount of $50 per Trust
Preferred Security to but excluding the
Purchase Contract Settlement Date, and in
the case of Trust Preferred Securities that
remain outstanding on and after the Purchase
Contract Settlement Date, from the Purchase
Contract Settlement Date to but excluding
February 16, 2003, at the Reset Rate, in
each case, when, as and if funds are
available for payment. Subject to the
distribution deferral provisions,
distributions will be payable quarterly in
arrears on each February 16, May 16, August
16 and November 16, commencing May 16, 1998.
Market Rate Reset ............. The applicable quarterly distribution rate
on the Trust Preferred Securities and the
interest rate on the Debentures on and after
the Purchase Contract Settlement Date, will
be reset on the third Business Day
immediately preceding the Purchase Contract
Settlement Date to the Reset Rate,
determined by the Reset Agent as the rate
the Trust Preferred Securities should bear
in order for a Trust Preferred Security to
have an approximate market value of 100.5%
of the Stated Amount on the third Business
Day immediately preceding the Purchase
Contract Settlement Date, provided, that the
Company may limit such Reset Rate to be no
higher than the rate on the Two-Year
Benchmark Treasury plus 200 basis points
(2%). Such market value may be less than
100.5% if the Reset Spread is limited to a
maximum of 2%. It is currently anticipated
that Merrill Lynch, Pierce, Fenner & Smith
Incorporated will be the Reset Agent. See
"Description of the Trust Preferred
Securities -- Market Rate Reset."
Optional Remarketing .......... Pursuant to the Remarketing Agreement and
subject to the terms of the Remarketing
Underwriting Agreement, on or prior to the
fifth Business Day immediately preceding the
Purchase
S-19
<PAGE>
Contract Settlement Date, but no earlier
than the Payment Date immediately preceding
the Purchase Contract Settlement Date,
holders of separate Trust Preferred
Securities which are not components of
Income PRIDES may elect to have their Trust
Preferred Securities remarketed, by
delivering their Trust Preferred Securities
along with a notice of such election to The
Chase Manhattan Bank, as custodial agent
(the "Custodial Agent"). Holders of Trust
Preferred Securities electing to have their
Trust Preferred Securities remarketed will
also have the right to withdraw such
election on or prior to the fifth Business
Day immediately preceding the Purchase
Contract Settlement Date. On the fourth
Business Day immediately preceding the
Purchase Contract Settlement Date, the
Custodial Agent will deliver such Trust
Preferred Securities to the Remarketing
Agent for remarketing. The Remarketing Agent
will use its reasonable efforts to remarket
such Trust Preferred Securities (bearing the
Reset Rate) on the third Business Day
immediately preceding the Purchase Contract
Settlement Date at a price of approximately
100.5% of the aggregate stated liquidation
amount of such Trust Preferred Securities,
plus accrued and unpaid distributions
(including deferred distributions), if any,
thereon. The portion of the proceeds from
such remarketing equal to the aggregate
stated liquidation amount of such Trust
Preferred Securities will be remitted by the
Remarketing Agent to the Custodial Agent for
the benefit of such Trust Preferred
Securities holders. In addition, after
deducting as the Remarketing Fee an amount
not exceeding 25 basis points (.25%) of the
aggregate stated liquidation amount of the
remarketed securities from any amount of
such proceeds in excess of the aggregate
stated liquidation amount of the remarketed
Trust Preferred Securities plus any accrued
and unpaid distributions (including any
deferred distributions), the Remarketing
Agent will remit to the Custodial Agent the
remaining portion of the proceeds, if any,
for the benefit of such holder of Trust
Preferred Securities. If, despite using its
reasonable efforts, the Remarketing Agent
cannot remarket the Trust Preferred
Securities of such holders of Trust Prefered
Securities at a price not less than 100% of
the aggregate stated liquidation amount of
such Trust Preferred Securities plus accrued
and unpaid distributions, including deferred
distributions, if any, resulting in a Failed
Remarketing, the Remarketing Agent will
return such Trust Preferred Securities to
the Custodial Agent to return such Trust
Preferred Securities to such holders. The
Company will cause a notice of such Failed
Remarketing to be published on the second
Business Day immediately preceding the
Purchase Contract Settlement Date. It is
currently anticipated that Merrill Lynch,
Pierce, Fenner & Smith Incorporated will be
the Remarketing Agent. See "Description of
the Trust Preferred Securities -- Optional
Remarketing."
S-20
<PAGE>
Distribution Deferral
Provisions ................... The ability of the Trust to pay
distributions on the Trust Preferred
Securities will be solely dependent on the
receipt of interest payments from the
Company on the Debentures. The Company will
have the right at any time, and from time to
time, to defer the interest payments due on
the Debentures for successive extension
periods (the "Extension Periods") limited,
in the aggregate, to a period not extending
beyond the maturity date of the Debentures.
The corresponding quarterly distributions on
the Trust Preferred Securities would be
deferred by the Trust (but would continue to
accumulate quarterly and would accrue
interest, compounded quarterly, at the rate
of 6.45% per annum through and including
February 15, 2001, and at the Reset Rate
thereafter) until the end of any such
Extension Period. If a deferral of an
interest payment occurs, the holders of the
Trust Preferred Securities will be required
to accrue interest income for United States
federal income tax purposes in advance of
the receipt of any corresponding cash
distribution with respect to such deferred
interest payment. See "Risk Factors -- Right
to Defer Current Payments," "Description of
the Trust Preferred Securities --
Distributions" and "Certain Federal Income
Tax Consequences -- Income PRIDES -- Trust
Preferred Securities -- Interest Income and
Original Issue Discount."
Rights Upon Deferral of
Distribution ................. During any period in which interest payments
on the Debentures are deferred, interest
will accrue on the Debentures (compounded
quarterly) and the corresponding quarterly
distributions on the Trust Preferred
Securities will continue to accumulate with
interest thereon at the rate of 6.45% per
annum through and including February 15,
2001, and at the Reset Rate thereafter,
compounded quarterly.
Liquidation Preference ........ In the event of any liquidation of the
Trust, and after satisfaction of liabilities
to creditors of the Trust, if any, holders
will be entitled to receive Debentures in an
aggregate principal amount equal to the
aggregate stated liquidation amount of the
Trust Preferred Securities.
Put Option .................... If a Failed Remarketing has occurred,
holders of Trust Securities (including,
following the distribution of the Debentures
upon a dissolution of the Trust as described
herein, such Debenture holders), holding
such Trust Securities or Debentures, as the
case may be, following the Purchase Contract
Settlement Date will have the right, in the
case of Trust Securities, to require the
Trust to put to the Company the related
Debentures, or in the case of Debentures, to
put such Debentures directly to the Company
on March 2, 2001, upon at least three
Business Days' prior notice, at a price
equal to the principal amount, plus accrued
and unpaid interest (including deferred
interest), if any, thereon. Upon the
repurchase of such Debentures the proceeds
of such repurchase shall simulta-
S-21
<PAGE>
neously be applied (in the case of Trust
Securities) to redeem such Trust Securities
of such holder in an aggregate stated
liquidation amount equal to the aggregate
principal amount of the Debentures so
repurchased and (ii) any accrued and unpaid
distributions (including deferred
distributions) with respect to such Trust
Securities will be paid to such holder in
cash. See "Description of the Debentures --
Put Option."
Distribution of Debentures .... In certain circumstances involving an
Investment Company Event, the Trust would be
dissolved, with the result that, after
satisfaction of liabilities to creditors of
the Trust, if any, Debentures with an
aggregate principal amount equal to the
aggregate stated liquidation amount of the
Trust Preferred Securities would be
distributed to the holders of the Trust
Preferred Securities on a pro rata basis
including the Collateral Agent. In such
event an Income PRIDES would thereafter
consist of beneficial ownership of a
Debenture with a principal amount equal to
the Stated Amount of such Income PRIDES and
the related Purchase Contract, and such
Debenture would be otherwise treated as if
it were a Trust Preferred Security. See
"Description of the Trust Preferred
Securities -- Distribution of Debentures."
Tax Event Redemption .......... The Debentures (and, thus, the Trust
Securities) are redeemable, at the option of
the Company, on not less than 30 days or
more than 60 days prior written notice in
whole but not in part upon the occurrence
and continuation of a Tax Event under the
circumstances described herein at a
Redemption Price equal to, for each
Debenture, the Redemption Amount together
with accrued and unpaid distributions
(including deferred distributions). See
"Description of the Debentures -- Tax Event
Redemption." If the Company so redeems all
of the Debentures, the Trust must redeem all
of the Trust Securities and pay in cash such
Redemption Price to the holders of such
Trust Securities. If such Tax Event
Redemption occurs prior to the Purchase
Contract Settlement Date, the Redemption
Price payable in liquidation of any Income
PRIDES holders' interest in the Trust, will
be distributed to the Collateral Agent, who
in turn will apply an amount equal to the
Redemption Amount of such Redemption Price
to purchase the Treasury Portfolio on behalf
of the holders of Income PRIDES and remit
the remaining portion, if any, of such
Redemption Price to the Purchase Contract
Agent for payment to holders of such Income
PRIDES. The Treasury Portfolio will be
substituted for the Trust Preferred Security
and will be pledged with the Collateral
Agent to secure such Income PRIDES holders'
obligations to purchase the Common Stock
under their Purchase Contracts.
Other than in the event of a Tax Event
Redemption, the Company will not have the
ability to redeem the Debentures prior to
their stated maturity date. See "Description
of the Debentures -- Tax Event Redemption of
Trust Preferred Securities."
S-22
<PAGE>
Guarantee ..................... The Company will irrevocably and
unconditionally guarantee (the "Guarantee"),
generally on a senior unsecured basis, the
payment in full of (i) distributions on the
Trust Preferred Securities to the extent the
Trust has funds available therefor, (ii) the
redemption price of Trust Preferred
Securities in respect of which the related
Debentures have been repurchased by the
Company on the Purchase Contract Settlement
Date, to the extent the Trust has funds
available therefor, and (iii) generally, the
liquidation amount of the Trust Preferred
Securities or the Redemption Price upon a
Tax Event Redemption, to the extent the
Trust has assets available for distribution
to holders of Trust Preferred Securities in
the event of a dissolution of the Trust. The
Company's obligations under the Guarantee
will be a senior unsecured obligation of the
Company and will rank on a parity with all
of the Company's other senior unsecured
obligations. See "Description of the
Guarantee."
Debentures .................... Unless a Tax Event Redemption has occurred,
the Debentures will mature on February 16,
2003, and will bear interest initially at
the rate of 6.45% per annum, payable
quarterly in arrears on each February 16,
May 16, August 16 and November 16,
commencing May 16, 1998. The interest rate
on the Debentures, and the distribution rate
on the Trust Preferred Securities, that
remain outstanding after the Purchase
Contract Settlement Date will be reset on
the third Business Day immediately preceding
the Purchase Contract Settlement Date to the
Reset Rate determined by the Reset Agent.
See "Description of Debentures -- Interest."
Interest payments on the Debentures may be
deferred from time to time by the Company
for successive Extension Periods not
extending, in the aggregate, beyond the
stated maturity date of the Debentures.
During any Extension Period, interest at the
rate of 6.45% per annum through and
including February 15, 2001, and at the
Reset Rate thereafter would continue to
accrue and compound quarterly. Upon the
termination of any Extension Period and the
payment of all amounts then due, the Company
may commence a new Extension Period,
provided such new Extension Period does not
extend beyond the stated maturity date of
the Debentures. No interest shall be due
during an Extension Period until the end of
such period. During an Extension Period, the
Company will be prohibited (subject to
certain exceptions) from paying dividends on
or purchasing any of its capital stock and
making certain other restricted payments
until quarterly interest payments are
resumed and all amounts then due on the
Debentures are paid. The Debentures will be
senior unsecured obligations of the Company
and will rank on a parity with all of the
Company's other senior unsecured
obligations. See "Description of the
Debentures."
S-23
<PAGE>
Federal Income Tax
Consequences Related to the
Income PRIDES, Growth PRIDES
and Trust Preferred Securities
............................... Provided the Company does not exercise its
right to defer interest on the Debentures, a
beneficial owner of Income PRIDES and Trust
Preferred Securities will include in gross
income its pro rata share of the stated
interest on the Debentures when such
interest income is paid or accrued in
accordance with its regular method of tax
accounting. The Company intends to report
the Contract Adjustment Payments as income
to holders of Income PRIDES and Growth
PRIDES, but holders should consult their tax
advisors concerning the possibility that the
Contract Adjustment Payments may be treated
as loans, purchase price adjustments,
rebates or option premiums rather than being
includible in income on a current basis. A
beneficial owner of Growth PRIDES will be
required to include in gross income its
allocable share of any OID with respect to
the Treasury Securities as it accrues on a
constant yield to maturity basis. If a Tax
Event Redemption has occurred, a beneficial
owner of Income PRIDES will be required to
include in gross income its allocable share
of OID on the Treasury Portfolio as it
accrues on a constant yield to maturity
basis. See "Certain Federal Income Tax
Consequences."
S-24
<PAGE>
EXPLANATORY DIAGRAMS
For illustrative purposes only, the following diagrams demonstrate some of
the key features of Purchase Contracts, Income PRIDES and Growth PRIDES and
the transformation of Income PRIDES into Growth PRIDES and Trust Preferred
Securities.
The following diagrams and the related text are not complete, are general
in nature and are qualified in their entirety by more detailed information
appearing elsewhere in the accompanying Prospectus, this Prospectus
Supplement and in documents which are on file with the Commission.
FELINE PRIDES PURCHASE CONTRACT
o Income PRIDES and Growth PRIDES both include a Purchase
Contract under which the investor agrees to purchase shares of
Common Stock of the Company at the end of three years. In
addition, such Purchase Contracts include specified Contract
Adjustment Payments as shown in the diagrams on the following
pages.
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
PURCHASE CONTRACT
-----------------
VALUE OF DELIVERED SHARES QUANTITY OF DELIVERED SHARES
AT MATURITY AT MATURITY
---------------------- ----------------------
| /| | |\ |
| / | | | \ |
| / | | | \ |
| / | | | \ |
| / | | | \ |
| ________/ | | | \_______|
| /| | | | | | |
| / | | | | | | |
| / | | | | (a) | (b) | (c) |
| / | | | | | | |
| / | | | | | | |
|/ | | | | | | |
---------------------- ----------------------
Reference Threshold Reference Threshold
Price Apperciation Price Apperciation
$37.00 Price $37.00 Price
$48.10 $48.10
COMMON STOCK PRICE COMMON STOCK PRICE
---------> --------->
- ---------
(a) Deliver 100% of Shares
(b) Deliver Between 77% and 100% of Shares
(c) Deliver 77% of Shares
S-25
<PAGE>
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
INCOME PRIDES
o Income PRIDES consist of two components as described below.
TRUST PREFERRED
PURCHASE CONTRACT SECURITIES
----------------- ----------
- --------------------------------- ---------------------------------
| (Owed to Investor) /| | |
| / | | |
| / | | (Owed to Investor) |
| Shares / | | |
| _____________________/ | | |
| / | | |
| / | | 6.45% per annum |
| / | | paid quarterly |
| / | | |
|/ | | |
- --------------------------------- | |
| + | | (reset at end of year 3) |
| Contract Adjustment | | |
| Payment | | |
| 1.05% per annum | | |
| paid quarterly | | |
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
| | | |
| $50 AT MATURITY | | $50 AT MATURITY |
| (end of year 3) | | (end of year 5) |
| | | |
| (Owed to Company) | | (Owed to Investor) |
| | | |
- --------------------------------- ---------------------------------
o The investor owns the Trust Preferred Securities but will pledge them to
the Company to secure its obligations under the Pruchase Contract.
GROWTH PRIDES
o Growth PRIDES consist of two components as described below.
ZERO-COUPON TREASURY
PURCHASE CONTRACT SECURITY
----------------- --------
- ---------------------------------
| (Owed to Investor) /|
| / |
| / |
| Shares / |
| _____________________/ |
| / |
| / |
| / |
| / |
|/ |
- ---------------------------------
| + |
| Contract Adjustment |
| Payment |
| 1.3% per annum |
| paid quarterly |
- ---------------------------------
- --------------------------------- ---------------------------------
| | | |
| $50 AT MATURITY | | $50 AT MATURITY |
| (end of year 3) | | (end of year 3) |
| | | |
| (Owed to Company) | | (Owed to Investor) |
| | | |
- --------------------------------- ---------------------------------
o The investor owns the Zero-Coupon Treasury Security but will pledge it to
the Company to secure its obligations under the Pruchase Contract.
S-26
<PAGE>
TRUST PREFERRED SECURITIES
o Trust Preferred Securities have the terms described below
--------------------------
| (Owed to Investor) |
| |
| 6.45% per annum |
| paid quarterly |
| |
|(reset at end of year 3)|
--------------------------
--------------------------
| $50 AT MATURITY |
| (end of year 5) |
| |
| (Owed to Investor) |
--------------------------
o The holder of Trust Preferred Securities which are a component of Income
PRIDES has an option at the end of year 3 to either
o Cash settle the Purchase Contract for $50 and receive Trust Preferred
Securities whose rate has been reset at the end or year 3 or
o Cash settle the Purchase Contract by allowing the Trust Preferred
Securities to be included in the remarketing process.
o The holder of Trust Preferred Securities that are separate and not a
component of Income PRIDES has an option at the end of year 3 to either
o Continue to hold the Trust Preferred Securities whose rate has been
reset at the end of year 3, or
o Deliver the Trust Preferred Securities to the Custodial Agent to be
included in the remarketing process.
S-27
<PAGE>
TRANSFORMING INCOME PRIDES INTO GROWTH PRIDES AND TRUST PREFERRED SECURITIES
o To create a Growth PRIDES, the investor separates an Income PRIDES into its
two components -- the Purchase Contract and the Trust Preferred Securities
-- and then combines the Purchase Contract with a specific Zero-Coupon
Treasury Security which matures concurrently with the maturity of the
Purchase Contract.
o The investor owns the Zero-Coupon Treasury Security but will pledge it to
the Company to secure its obligations under the Purchase Contract.
o The Zero-Coupon Treasury Security together with the Purchase Contract
constitute a Growth PRIDES. The Trust Preferred Securities which are no
longer a component of the Income PRIDES are tradeable as separate
securities.
<PAGE>
TRUST PREFERRED
PURCHASE CONTRACT SECURITIES
----------------- ----------
- --------------------------------- ---------------------------------
| (Owed to Investor) /| | |
| / | | |
| / | | (Owed to Investor) |
| Shares / | | |
| _____________________/ | | |
| / | | |
| / | | 6.45% per annum |
| / | | paid quarterly |
| / | | |
|/ | | |
- --------------------------------- + | |
| + | | (reset at end of year 3) |
| Contract Adjustment | | |
| Payment | | |
| 1.05% per annum | | |
| paid quarterly | | |
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
| | | |
| $50 AT MATURITY | | $50 AT MATURITY |
| (end of year 3) | | (end of year 5) |
| | | |
| (Owed to Company) | | (Owed to Investor) |
| | | |
- --------------------------------- ---------------------------------
|______________________|
|
INCOME PRIDES
ZERO-COUPON TREASURY
PURCHASE CONTRACT SECURITY
----------------- --------
- ---------------------------------
| (Owed to Investor) /|
| / |
| / |
| Shares / |
| _____________________/ |
| / |
| / |
| / |
| / |
|/ |
- --------------------------------- +
| + |
| Contract Adjustment |
| Payment |
| 1.3% per annum |
| paid quarterly |
- ---------------------------------
- --------------------------------- ---------------------------------
| | | |
| $50 AT MATURITY | | $50 AT MATURITY |
| (end of year 3) | | (end of year 3) |
| | | |
| (Owed to Company) | | (Owed to Investor) |
| | | |
- --------------------------------- ---------------------------------
|______________________|
|
GROWTH PRIDES
+
TRUST PREFERRED
SECURITIES
----------
--------------------------
| (Owed to Investor) |
| |
| 6.45% per annum |
| paid quarterly |
| |
|(reset at end of year 3)|
--------------------------
--------------------------
| $50 AT MATURITY |
| (end of year 5) |
| |
| (Owed to Investor) |
--------------------------
o The investor can also transform Growth PRIDES and Trust Preferred
Securities into Income PRIDES.
S-28
<PAGE>
RISK FACTORS
Potential purchasers of the FELINE PRIDES offered hereby should carefully
consider the risk factors set forth herein under "Risk Factors" as well as
other information contained in this Prospectus Supplement, the accompanying
Prospectus and the documents incorporated by reference therein.
INVESTMENT IN FELINE PRIDES REQUIRES HOLDERS TO PURCHASE COMMON STOCK; RISK
OF DECLINE IN EQUITY VALUE
Although holders of the FELINE PRIDES will be the beneficial owners of the
related Trust Preferred Securities, Treasury Portfolio or Treasury
Securities, as the case may be, prior to the Purchase Contract Settlement
Date, unless a holder of FELINE PRIDES settles the related Purchase Contracts
through the delivery of cash to the Purchase Contract Agent in the manner
described below or the Purchase Contracts are terminated (upon the occurrence
of certain events of bankruptcy, insolvency or reorganization with respect to
the Company), the proceeds of the repurchase by the Company of the related
Debentures or the principal of the related Treasury Securities, or the
applicable Appropriate Ownership Interest of the Treasury Portfolio, when
paid at maturity, as the case may be, will automatically be applied to the
purchase of a specified number of shares of Common Stock on behalf of such
holder. Thus, unless a holder of Income PRIDES has cash settled, following
the Purchase Contract Settlement Date, the holder will own shares of Common
Stock rather than a beneficial interest in Trust Preferred Securities. See
"Description of the Purchase Contracts -- General." There can be no assurance
that the market value of the Common Stock receivable by the holder on the
Purchase Contract Settlement Date will be equal to or greater than the Stated
Amount of the FELINE PRIDES held by such holder. If the Applicable Market
Value of the Common Stock is less than the Reference Price the aggregate
market value of the Common Stock issued to the holder in settlement of each
Purchase Contract on the Purchase Contract Settlement Date (assuming that
such market value is the same as the Applicable Market Value of such Common
Stock) will be less than the Stated Amount paid for the FELINE PRIDES and the
market value per share of such Common Stock will be less than the effective
price per share paid by each holder for such Common Stock on the date hereof,
in which case an investment in the Securities will result in a loss.
Accordingly, a holder of the FELINE PRIDES assumes the risk that the market
value of the Common Stock may decline, and that such decline could be
substantial.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION
The opportunity for equity appreciation afforded by an investment in the
FELINE PRIDES is less than the opportunity for equity appreciation afforded
by a direct investment in the Common Stock because the market value of the
Common Stock to be received by a holder of Purchase Contracts on the Purchase
Contract Settlement Date (assuming that such market value is the same as the
Applicable Market Value of such Common Stock) will only exceed the Stated
Amount if the Applicable Market Value of the Common Stock exceeds the
Threshold Appreciation Price (which represents an appreciation of 30% over
the Reference Price). Moreover, in such event, holders of FELINE PRIDES would
receive on the Purchase Contract Settlement Date approximately 77% (the
percentage equal to the Reference Price divided by the Threshold Appreciation
Price) of the shares of Common Stock that such holders would have received if
they had made a direct investment in the Common Stock on the date hereof, and
therefore would receive on the Purchase Contract Settlement Date
approximately 77% of the appreciation in the value of the Common Stock in
excess of the Threshold Appreciation Price through such date.
FACTORS AFFECTING TRADING PRICES
The trading prices of Income PRIDES and Growth PRIDES in the secondary
market will be directly affected by the trading prices of the Common Stock in
the secondary market, the general level of interest rates and the credit
quality of the Company. It is impossible to predict whether the price of the
Common Stock or interest rates will rise or fall. Trading prices of the
Common Stock will be influenced by the Company's operating results and
prospects and by economic, financial and other factors and market conditions
that can affect the capital markets generally, including the level of, and
fluctuations in, the trading prices of stocks generally and sales of
substantial amounts of Common Stock in the market
S-29
<PAGE>
subsequent to the offering of the Securities or the perception that such
sales could occur. Fluctuations in interest rates may give rise to
opportunities of arbitrage based upon changes in the relative value of the
Common Stock underlying the Purchase Contracts and of the other components of
the FELINE PRIDES. Any such arbitrage could, in turn, affect the trading
prices of the Income PRIDES, Growth PRIDES, Trust Preferred Securities and
Common Stock.
VOTING AND CERTAIN OTHER RIGHTS
Holders of Trust Preferred Securities will not be entitled to vote to
appoint, remove or replace or to increase or decrease the number of Cendant
Trustees, and generally will have no voting rights except in the limited
circumstances described under "Description of the Trust Preferred Securities
- -- Voting Rights." Holders of FELINE PRIDES will not be entitled to any
rights with respect to the Common Stock (including, without limitation,
voting rights and rights to receive any dividends or other distributions in
respect thereof) unless and until such time as the Company shall have
delivered shares of Common Stock for FELINE PRIDES on the Purchase Contract
Settlement date or as a result of Early Settlement, as the case may be, and
unless the applicable record date, if any, for the exercise of such rights
occurs after such date. For example, in the event that an amendment is
proposed to the Articles of Incorporation or By-Laws of the Company and the
record date for determining the stockholders of record entitled to vote on
such amendment occurs prior to such delivery, holders of FELINE PRIDES will
not be entitled to vote on such amendment.
DILUTION OF COMMON STOCK
The number of shares of Common Stock that holders of the FELINE PRIDES are
entitled to receive on the Purchase Contract Settlement Date or as a result
of Early Settlement is subject to adjustment for certain events arising from
stock splits and combinations, stock dividends and certain other actions of
the Company that modify its capital structure. See "Description of the
Purchase Contracts -- Anti-Dilution Adjustments." Such number of shares of
Common Stock to be received by such holders on the Purchase Contract
Settlement Date or as a result of Early Settlement will not be adjusted for
other events, such as offerings of Common Stock for cash or in connection
with acquisitions. The Company is not restricted from issuing additional
Common Stock during the term of either the Purchase Contracts or the Trust
Preferred Securities and has no obligation to consider the interests of the
holders of FELINE PRIDES for any reason. Additional issuances may materially
and adversely affect the price of the Common Stock and, because of the
relationship of the number of shares to be received on the Purchase Contract
Settlement Date to the price of the Common Stock, such other events may
adversely affect the trading price of Income PRIDES or Growth PRIDES.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how Income PRIDES, Growth PRIDES or Trust
Preferred Securities will trade in the secondary market or whether such
market will be liquid or illiquid. Income PRIDES and Growth PRIDES are novel
securities and there is currently no secondary market for either Income
PRIDES or Growth PRIDES. The Income PRIDES and the Growth PRIDES have been
approved for listing on the NYSE subject to official notice of issuance. The
Trust Preferred Securities will not initially be listed; however, in the
event that they are separately traded to a sufficient extent that applicable
exchange listing requirements are met, the Company will endeavor to cause
such securities to be listed on such exchange on which the Income PRIDES and
Growth PRIDES are then listed, including, if applicable, the NYSE. The
Company and the Trust have been advised by the Underwriters that they
presently intend to make a market for the Trust Preferred Securities;
however, they are not obligated to do so and any market making may be
discontinued at any time. There can be no assurance as to the liquidity of
any market that may develop for the Income PRIDES, the Growth PRIDES or the
Trust Preferred Securities, the ability of holders to sell such securities or
whether a trading market, if it develops, will continue. In addition, in the
event that holders of Income PRIDES or Growth PRIDES were to substitute
Treasury Securities or Trust Preferred Securities for Trust Preferred
Securities or Treasury Securities, thereby converting their Income PRIDES to
Growth PRIDES or their Growth
S-30
<PAGE>
PRIDES to Income PRIDES, as the case may be, the liquidity of Income PRIDES,
Growth PRIDES and Trust Preferred Securities could be adversely affected.
There can be no assurance that the Income PRIDES or Growth PRIDES will not be
delisted from the NYSE or that trading in the Income PRIDES or Growth PRIDES
will not be suspended as a result of the election by holders to create Income
PRIDES or Growth PRIDES through the substitution of collateral, which could
cause the number of Income PRIDES or Growth PRIDES to fall below the
requirement for listing securities on the NYSE that at least 1,000,000 Income
PRIDES or Growth PRIDES be outstanding at any time.
PLEDGED SECURITIES ENCUMBERED
Although the beneficial owners of FELINE PRIDES will be the beneficial
owners of the related Trust Preferred Securities, Treasury Portfolio or
Treasury Securities (together, the "Pledged Securities"), as applicable,
those Pledged Securities will be pledged with the Collateral Agent to secure
the obligations of the holders under the related Purchase Contracts. Thus,
rights of the holders to their Pledged Securities will be subject to the
Company's security interest. Additionally, notwithstanding the automatic
termination of the Purchase Contracts, in the event that the Company becomes
the subject of a case under the Bankruptcy Code, the delivery of the Pledged
Securities to holders of the FELINE PRIDES may be delayed by the imposition
of the automatic stay of Section 362 of the Bankruptcy Code.
INVESTMENT COMPANY EVENT DISTRIBUTION
Upon the occurrence of an Investment Company Event, the Trust will be
dissolved (except in the limited circumstances described in the following
sentence) with the result that Debentures with an aggregate principal amount
equal to the aggregate stated liquidation amount of the Trust Preferred
Securities would be distributed to the holders of the Trust Preferred
Securities on a pro rata basis. Such dissolution and distribution shall be
conditioned on the Company being unable to avoid such Investment Company
Event within a 90-day period by taking some ministerial action or pursuing
some other reasonable measure that will have no adverse effect on the Trust,
the Company or the holders of the Trust Preferred Securities, and will
involve no material cost. In addition, the Company will have the right at any
time to dissolve the Trust. See "Description of the Trust Preferred
Securities -- Distribution of the Debentures."
There can be no assurance as to the impact on the market prices for Income
PRIDES of a distribution of the Debentures in exchange for Trust Preferred
Securities upon a dissolution of the Trust. Because Income PRIDES will
consist of Debentures and related Purchase Contracts upon the occurrence of
the dissolution of the Trust as a result of an Investment Company Event or
otherwise, prospective purchasers of Income PRIDES are also making an
investment decision with regard to the Debentures and should carefully review
all the information regarding the Debentures contained herein. See
"Description of the Trust Preferred Securities -- Distribution of the
Debentures" and "Description of the Debentures -- General."
TAX EVENT REDEMPTION
The Debentures (and, thus, the Trust Securities) are redeemable, at the
option of the Company, on not less than 30 days or more than 60 days prior
written notice, in whole but not in part, at any time prior to the Purchase
Contract Settlement Date upon the occurrence and continuation of a Tax Event
under the circumstances described herein at a Redemption Price equal to, for
each Debenture, the Redemption Amount plus accrued and unpaid distributions
(including deferred distributions). See "Description of the Debentures -- Tax
Event Redemption." If the Company so redeems all of the Debentures, the Trust
must redeem all of the Trust Securities and pay in cash such Redemption Price
to the holder of such Trust Securities. If the Tax Event Redemption has
occurred prior to the Purchase Contract Settlement Date, the Redemption Price
payable in liquidation of the Income PRIDES holders' interest in the Trust
will be distributed to the Collateral Agent, who in turn will apply an amount
equal to the Redemption Amount of such Redemption Price to purchase the
Treasury Portfolio on behalf of the holders of Income PRIDES. Holders of
Trust Preferred Securities, not held in the form of Income PRIDES, will
receive redemption payments directly. The Treasury Portfolio will be
substituted for the Trust Preferred Securities and will be
S-31
<PAGE>
pledged with the Collateral Agent to secure such Income PRIDES holders'
obligations to purchase the Company's Common Stock under their Purchase
Contracts. There can be no assurance as to the impact on the market prices
for the Income PRIDES of the substitution of the Treasury Portfolio as
collateral in replacement of any Trust Preferred Securities so redeemed. See
"Description of the Trust Preferred Securities -- Optional Redemption." A Tax
Event Redemption will be a taxable event to the beneficial owners of the
Trust Preferred Securities. See "Certain Federal Income Tax Consequences --
Tax Event Redemption of Trust Preferred Securities."
RIGHT TO DEFER CURRENT PAYMENTS
The Company may, at its option, defer the payment of Contract Adjustment
Payments on the Purchase Contracts until the Purchase Contract Settlement
Date. However, deferred installments of Contract Adjustment Payments will
bear Deferred Contract Adjustment Payments at the rate of 7.5% per annum
(compounding on each succeeding Payment Date) until paid. If the Purchase
Contracts are settled early or terminated (upon the occurrence of certain
events of bankruptcy, insolvency or reorganization with respect to the
Company), the right to receive Contract Adjustment Payments and Deferred
Contract Adjustment Payments, if any, will also terminate.
In the event that the Company elects to defer the payment of Contract
Adjustment Payments on the Purchase Contracts until the Purchase Contract
Settlement Date, each holder of Purchase Contracts will receive on the
Purchase Contract Settlement Date in respect of the Deferred Contract
Adjustment Payments, in lieu of a cash payment, a number of shares of Common
Stock equal to (x) the aggregate amount of Deferred Contract Adjustment
Payments payable to such holder divided by (y) the Applicable Market Value.
See "Description of the Purchase Contracts -- Contract Adjustment Payments."
The Company also will have the right under the Indenture to defer payments
of interest on the Debentures by extending the interest payment period at any
time, and from time to time, on the Debentures. As a consequence of such an
extension, quarterly distributions on the Trust Preferred Securities, held
either as a component of the Income PRIDES or held separately, would be
deferred (but despite such deferrals would accrue interest at a rate of 6.45%
per annum through and including February 15, 2001, and at the Reset Rate
thereafter, compounded on a quarterly basis) by the Trust during any such
Extension Period. Such right to extend the interest payment period for the
Debentures will be limited such that an Extension Period may not extend
beyond the stated maturity of the Debentures. During any such Extension
Period, (a) the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or 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 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 that rank on a parity with or junior to
the Debentures and (c) the Company shall not make any guarantee payments with
respect to the foregoing (other than payments pursuant to the Guarantee or
the Common Securities Guarantee (as defined herein)). Prior to the
termination of any such Extension Period, the Company may further extend the
interest payment period; provided, that such Extension Period may not extend
beyond the stated maturity of the Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the above requirements. See
"Description of the Trust Preferred Securities -- Distributions" and
"Description of the Debentures -- Option to Extend Interest Payment Period."
S-32
<PAGE>
The Company believes, and intends to take the position, that as of the
issue date of the Debentures, the likelihood that it will exercise its right
to defer payments of stated interest on the Debentures is remote and that,
therefore, the Debentures should not be considered to be issued with OID as a
result of the Company's right to defer payments of stated interest on the
Debentures unless it actually exercises such deferral right. There is no
assurance that the Internal Revenue Service will agree with such position.
See "Certain Federal Income Tax Consequences -- Trust Preferred Securities --
Interest Income and Original Issue Discount."
Should the Company exercise its right to defer payments of interest by
extending the interest payment period, each beneficial owner of Trust
Preferred Securities held either as a component of the Income PRIDES or held
separately would be required to include such beneficial owner's share of the
stated interest on the Trust Preferred Securities in gross income, as OID, on
a daily economic accrual basis, regardless of such owner's method of tax
accounting and in advance of receipt of the cash attributable to such income.
As a result, each such beneficial owner of Trust Preferred Securities would
recognize income for United States federal income tax purposes in advance of
the receipt of cash attributable to such income, and would not receive the
cash from the Trust related to such income if such holder disposes of its
Trust Preferred Securities prior to the record date for the date on which
distributions of such amounts are made. See "Certain Federal Income Tax
Consequences -- Trust Preferred Securities -- Interest Income and Original
Issue Discount." The Company has no current intention of exercising its right
to defer payments of interest by extending the interest payment period on the
Debentures. However, should the Company determine to exercise such right in
the future, the market price of the Trust Preferred Securities is likely to
be affected. A holder that disposes of its Trust Preferred Securities during
an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Trust Preferred Securities.
In addition, as a result of the existence of the Company's right to defer
interest payments, the market price of the Trust Preferred Securities (which
represent a preferred, undivided beneficial interest in the assets of the
Trust) may be more volatile than the market price of other securities that
are not subject to such deferral. See "Certain Federal Income Tax
Consequences -- Trust Preferred Securities -- Interest Income and Original
Issue Discount."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
No statutory, judicial or administrative authority directly addresses the
treatment of the FELINE PRIDES or instruments similar to the FELINE PRIDES
for United States federal income tax purposes. As a result, certain United
States federal income tax consequences of the purchase, ownership and
disposition of FELINE PRIDES are not entirely clear. See "Certain Federal
Income Tax Consequences."
PURCHASE CONTRACT AGREEMENT NOT QUALIFIED UNDER TRUST INDENTURE ACT; LIMITED
OBLIGATIONS OF PURCHASE CONTRACT AGENT
Although the Trust Preferred Securities constituting a part of the Income
PRIDES will be issued pursuant to the Declaration, which will be qualified
under the Trust Indenture Act, the Purchase Contract Agreement will not be
qualified as an indenture under the Trust Indenture Act and the Purchase
Contract Agent will not be required to qualify as a trustee thereunder.
Accordingly, holders of FELINE PRIDES will not have the benefit of the
protections of the Trust Indenture Act. The protections generally afforded
the holder of the security issued under an indenture that has been qualified
under the Trust Indenture Act include disqualification of the indenture
trustee for "conflicting interests" as defined under the Trust Indenture Act,
provisions preventing a trustee that is also a creditor of the issuer from
improving its own credit position at the expense of the security holders
immediately prior to or after a default under such indenture and the
requirement that the indenture trustee deliver reports at least annually with
respect to certain matters concerning the indenture trustee and the
securities. Under the terms of the Purchase Contract Agreement, the Purchase
Contract Agent will have only limited obligations to the holders of FELINE
PRIDES. See "Certain Provisions of the Purchase Contract Agreement and the
Pledge Agreement -- Information Concerning the Purchase Contract Agent."
RIGHTS UNDER THE GUARANTEE
The Guarantee will be qualified as an indenture under the Trust Indenture
Act. Wilmington Trust Company, as Guarantee Trustee (the "Guarantee
Trustee"), will act as indenture trustee under the
S-33
<PAGE>
Guarantee for the purposes of compliance with the provisions of the Trust
Indenture Act. The Guarantee Trustee will hold the Guarantee for the benefit
of the holders of the Trust Preferred Securities.
The Guarantee guarantees to the holders of the Trust Preferred Securities,
generally on a senior unsecured basis, the payment of (i) any accrued and
unpaid distributions that are required to be paid on the Trust Preferred
Securities, to the extent the Trust has funds available therefor, (ii) the
redemption price, including all accumulated and unpaid distributions to the
date of redemption, of Trust Preferred Securities in respect of which the
related Debentures have been repurchased by the Company on the Purchase
Contract Settlement Date, to the extent the Trust has funds available
therefor, and (iii) upon a voluntary or involuntary dissolution of the Trust
(other than in connection with the distribution of Debentures to the holders
of Trust Preferred Securities), the lesser of (a) the aggregate of the
liquidation amount and all accrued and unpaid distributions on the Trust
Preferred Securities to the date of payment to the extent the Trust has funds
available therefor or (b) the amount of assets of the Trust remaining
available for distribution to holders of the Trust Preferred Securities in
liquidation of the Trust. The majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Guarantee
Trustee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee. Notwithstanding the foregoing, any
holder of the Trust Preferred Securities may institute a legal proceeding
directly against the Company to enforce such holder's rights under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. If the Company were to
default on its obligation to pay amounts payable on the Debentures or
otherwise, the Trust would lack funds for the payment of distributions or
amounts payable on redemption of the Trust Preferred Securities or otherwise,
and, in such event, holders of the Trust Preferred Securities would not be
able to rely upon the Guarantee for payment of such amounts. Instead, holders
of the Trust Preferred Securities would rely on the enforcement (1) by the
Institutional Trustee of its rights as registered holder of the Debentures
against the Company pursuant to the terms of the Indenture and the Debentures
or (2) by such holder of the Institutional Trustee's or such holder's own
rights against the Company to enforce payments on the Debentures. See
"--Enforcement of Certain Rights by Holders of Trust Preferred Securities,"
"Description of the Debentures" and "Description of the Guarantee." The
Declaration provides that each holder of Trust Preferred Securities, by
acceptance thereof, agrees to the provisions of the Guarantee, and the
Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Declaration Event of Default (as defined herein) occurs and is
continuing, the holders of Trust Preferred Securities would rely on the
enforcement by the Institutional Trustee of its rights as registered holder
of the Debentures against the Company. In addition, the holders of a majority
in liquidation amount of the Trust Preferred Securities will have the right
to direct the time, method, and place of conducting any proceeding for any
remedy available to the Institutional Trustee or to direct the exercise of
any trust or power conferred upon the Institutional Trustee under the
Declaration, including the right to direct the Institutional Trustee to
exercise the remedies available to it as the holder of the Debentures. The
Indenture provides that the Debt Trustee (as defined herein) shall give
holders of Debentures notice of all defaults or events of default within 30
days after occurrence. However, except in the cases of a default or an event
of default in payment on the Debentures, the Debt Trustee will be protected
in withholding such notice if its officers or directors in good faith
determine that withholding of such notice is in the interest of such holders.
If the Institutional Trustee fails to enforce its rights under the
Debentures in respect of an Indenture Event of Default (as defined herein)
after a holder of record of Trust Preferred Securities has made a written
request, such holder of record of Trust Preferred Securities may, to the
extent permitted by applicable law, institute a legal proceeding against the
Company to enforce the Institutional Trustee's rights under the Debentures.
In addition, if the Company fails to pay interest or principal on the
Debentures on the date such interest or principal is otherwise payable, and
such failure to pay is continuing, a holder of Trust Preferred Securities may
directly institute a proceeding for enforcement of payment to such holder of
the principal of or interest on the Debentures having a principal amount
equal to the aggregate stated liquidation amount of the Trust Preferred
Securities of such holder (a "Direct
S-34
<PAGE>
Action") after the respective due date specified in the Debentures. In
connection with such a Direct Action, the Company shall have the right under
the Indenture to set off any payment made to such holder by the Company. The
holders of Trust Preferred Securities will not be able to exercise directly
any other remedy available to the holders of the Debentures. See "Description
of the Trust Preferred Securities -- Declaration Events of Default."
LIMITED RIGHTS OF ACCELERATION
The Institutional Trustee, as holder of the Debentures, may accelerate
payment of the principal and accrued and unpaid interest on the Debentures
only upon the occurrence and continuation of a Declaration Event of Default
or Indenture Event of Default, which generally are limited to payment
defaults, breach of certain covenants, certain events of bankruptcy,
insolvency and reorganization of the Company and certain events of
dissolution of the Trust. See "Description of the Trust Preferred Securities
- -- Declaration Events of Default." Accordingly, there is no right to
acceleration upon default by the Company of its payment obligations under the
Guarantee.
TRADING PRICE OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the
underlying Debentures. A holder who disposes of his Trust Preferred
Securities between record dates for payments of distributions thereon will be
required to include accrued but unpaid interest on the Debentures through the
date of disposition in income as ordinary income (i.e., interest or,
possibly, OID), and to add such amount to his adjusted tax basis in his pro
rata share of the underlying Debentures deemed disposed of. To the extent the
selling price is less than the holder's adjusted tax basis, a holder will
recognize a loss. See "Certain Federal Income Tax Consequences -- Trust
Preferred Securities -- Interest Income and Original Issue Discount" and
"--Sales, Exchanges or Other Dispositions of Trust Preferred Securities."
S-35
<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 and
HFS in December 1997 and provides all of the services formerly provided by
each of CUC and HFS, including technology-driven, membership-based consumer
services, travel services and real estate services.
Membership Services. The Company's membership-based consumer services
provide more than 66.5 million members with access to a variety of goods and
services worldwide. These memberships include such components as shopping,
travel, auto, dining, home improvement, lifestyle, vacation exchange, credit
card and checking account enhancement packages, financial products and
discount programs. The Company also administers insurance package programs
which are generally combined with discount shopping and travel for credit
union members, distributes welcoming packages which provide new homeowners
with discounts for local merchants, and provides travelers with value-added
tax refunds. The Company believes that it is the leading provider of
membership-based consumer services of these types in the United States. The
Company's membership activities are conducted principally through its
Comp-U-Card division and certain of the Company's wholly-owned subsidiaries,
FISI*Madison Financial Corporation, Benefit Consultants, Inc., Entertainment
Publications, Inc. and SafeCard Services, Inc.
Travel Services. The Company also provides services to consumers through
intermediaries in the travel and real estate industries. In the travel
industry, the Company, through certain of its subsidiaries, franchises hotels
primarily in the mid-priced and economy markets. It is the world's largest
hotel franchisor, operating the Days Inn(Registered Trademark),
Ramada(Registered Trademark) (in the United States), Howard
Johnson(Registered Trademark), Super 8(Registered Trademark),
Travelodge(Registered Trademark) (in North America), Villager
Lodge(Registered Trademark), Knights Inn(Registered Trademark) and Wingate
Inn(Registered Trademark) franchise systems. Additionally, the Company owns
the Avis worldwide vehicle rental system, which is operated through its
franchisees and is the second-largest car rental system in the world (based
on total revenues and volume of rental transactions). The Company currently
owns approximately 27.5% of the capital stock of the world's largest Avis
franchisee, Avis Rent A Car, Inc. The Company also owns Resort Condominiums
International, Inc., a leading timeshare exchange organization. The Company
also operates the second largest provider in North America of comprehensive
vehicle management services and is the market leader in the United Kingdom
among the four nationwide providers of fuel card services and the six
nationwide providers of vehicle management services.
Real Estate Services. In the residential real estate industry, the
Company, through certain of its subsidiaries, franchises real estate
brokerage offices under the Century 21(Registered Trademark), Coldwell
Banker(Registered Trademark) and Electronic Realty Associates(Registered
Trademark) (ERA(Registered Trademark)) real estate brokerage franchise
systems and is the world's largest real estate brokerage franchisor.
Additionally, the Company, through Cendant Mobility Services Corporation, is
the largest provider of corporate relocation services in the United States,
offering relocation clients a variety of services in connection with the
transfer of a client's employees. Through Cendant Mortgage Corporation, the
Company originates, sells and services residential mortgage loans in the
United States, marketing such services to consumers through relationships
with corporations, affinity groups, financial institutions, real estate
brokerage firms and other mortgage banks.
As a franchisor of hotels, residential real estate brokerage offices and
car rental operations, the Company licenses the owners and operators of
independent businesses to use the Company's brand names. The Company does not
own or operate hotels or real estate brokerage offices. Instead, the Company
provides its franchisee customers with services designed to increase their
revenue and profitability.
Other. The Company also offers consumer software in various multimedia
forms. During 1996, the Company acquired Davidson & Associates, Inc., Sierra
On-Line, Inc. and Knowledge Adventure, Inc. These companies develop, publish,
manufacture and distribute educational, entertainment and personal
productivity interactive multimedia products for home and school use.
The Company from time to time explores and conducts discussions with
regard to acquisitions and other strategic corporate transactions in its
industries and in other businesses. Historically, the Company
S-36
<PAGE>
has been involved in numerous transactions of various magnitudes including
transactions in excess of $1 billion, for consideration which included cash
or securities (including Common Stock) or combinations thereof. The Company
will evaluate and pursue appropriate acquisition and combination
opportunities as they arise. No assurance can be given with respect to the
timing, likelihood or financial or business effect of any possible
transaction. In the past, acquisitions by the Company have involved both
relatively small acquisitions and acquisitions which have been significant.
As part of its regular on-going evaluation of acquisition opportunities,
the Company is currently engaged in a number of separate and unrelated
preliminary discussions concerning possible acquisitions. The Company is in
the early stages of such discussions and has not entered into any agreement
in principle with respect to any of these possible acquisitions. The purchase
price for the possible acquisitions may be paid in cash, through the issuance
of Common Stock (which would increase the number of shares of Common Stock
outstanding) Preferred Stock, Debt Securities or other securities of the
Company, borrowings, or a combination thereof. Prior to consummating any such
possible acquisitions, the Company, among other things, will have to initiate
and satisfactorily complete its due diligence investigation; negotiate the
financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and secure financing. The Company cannot
predict whether any such acquisitions will be consummated or, if consummated,
will result in a financial or other benefit to the Company.
The Company's principal executive offices are located at 6 Sylvan Way,
Parsippany, New Jersey 07054 (telephone number: (973) 428-9700).
RECENT DEVELOPMENTS
1997 Financial Results. On February 4, 1998, the Company announced its
financial results for the year ended December 31, 1997. The Company reported
diluted earnings per share of $1.00 for 1997, a 49% increase compared to $.67
earnings per share reported for 1996, excluding one-time charges recognized
in both 1997 and 1996. The Company had revenues of $5.3 billion for 1997
compared with $3.9 billion for 1996, an increase of 36%, and net income of
$872.2 million for 1997, excluding one-time charges, compared with $542.3
million of 1996, excluding one-time charges, an increase of 61%. On a pro
forma basis, which assumes that the financial results include all of the
Company's 1996 acquisitions, accounted for under the purchase method, as if
they had occurred as of January 1, 1996, earnings per share for the year
ended December 31, 1997, excluding one-time charges, was $1.00 representing a
43% increase over pro forma $.70 per share for the year ended December 31,
1996.
When giving effect to one-time charges, the Company reported $.06 diluted
earnings per share for the year ended December 31, 1997 and net income of
$55.4 million for 1997 compared to $423.6 million for 1996. In 1997, one-time
charges totaled $1.1 billion ($816.8 million after-tax, or $.94 per share)
for merger related costs and unusual charges coincident with the Merger, as
well as the merger of HFS and PHH Corporation which was consummated in April
1997. In 1996, one-time charges totaled $179.9 million ($118.7 million
after-tax, or $.15 per share) related to three CUC mergers.
Proposed Acquisition of American Bankers. On January 27, 1998, the Company
made a proposal to acquire American Bankers Insurance Group Inc. ("American
Bankers") for $58 per share in cash and stock, for an aggregate purchase
price of approximately $2.7 billion on a fully diluted basis. On January 28,
1998, the Company commenced a tender offer to purchase approximately 23.5
million of American Bankers' common shares at a price of $58 per share in
cash, which together with shares the Company owns will equal approximately
51% of the fully diluted shares of American Bankers. The Company proposes to
exchange, on a tax free basis, shares of its common stock with a fixed value
of $58 per share for the balance of American Bankers' common stock. The
tender offer is subject to customary conditions and there can be no assurance
that the Company will be successful in its proposal to acquire American
Bankers.
In connection with the Company's proposal to acquire American Bankers, the
Company entered into a commitment letter, dated January 23, 1998, with The
Chase Manhattan Bank and Chase Securities Inc. to provide a $1.5 billion
364-Day revolving credit facility (the "New Facility") which will mature 364
days after the execution of the definitive documentation relating thereto.
The New Facility will bear interest,
S-37
<PAGE>
at the option of the Company, at rates based on competitive bids of lenders
participating in such facilities at a prime rate or at LIBOR plus an
applicable variable margin based on the Company's senior unsecured long-term
debt rating.
Harpur Acquisition. On January 20, 1998, the Company completed the
acquisition of Harpur Group, Ltd., a leading fuel card and vehicle management
company in the United Kingdom, from H-G Holdings, Inc. for approximately $186
million in cash plus future contingent payments of up to $20 million over the
next two years.
Jackson Hewitt Acquisition. On January 7, 1998, the Company completed the
acquisition of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480
million in cash, or $68 per share of common stock of Jackson Hewitt. Jackson
Hewitt is the second largest tax preparation service system in the United
States with locations in 41 states. Jackson Hewitt franchises a system of
approximately 2,050 offices that specialize in computerized preparation of
federal and state individual income tax returns.
Interval Divestiture. On December 17, 1997, in connection with the merger
with HFS, the Company completed the divestiture of its timeshare exchange
subsidiary, Interval International Inc., as contemplated by the consent
decree with the Federal Trade Commission.
Providian Acquisition. On December 10, 1997, the Company announced that it
had entered into a definitive agreement to acquire Providian Auto and Home
Insurance Company ("Providian") and its subsidiaries from an Aegon N.V.
subsidiary for approximately $219 million in cash. Providian sells automobile
insurance to consumers through direct response marketing in 45 states and the
District of Columbia. The closing of this transaction is subject to customary
conditions, including regulatory approval and is anticipated to occur in the
spring of 1998.
Hebdo Mag Acquisition. On October 3, 1997, the Company completed the
acquisition of all of the outstanding capital stock of Hebdo Mag
International Inc. ("Hebdo Mag") in exchange for the issuance of shares of
preferred stock of Getting to Know You of Canada Ltd., an indirect
wholly-owned subsidiary of the Company, exchangeable for shares of Common
Stock (the "Hebdo Acquisition Shares") and the assumption of certain options
of Hebdo Mag exchanged for options to acquire shares of Common Stock, such
Hebdo Acquisition Shares or options having an aggregate value of
approximately $440 million. Based in Paris, France, Hebdo Mag is an
international publisher of over 150 titles and distributor of classified
advertising information with operations in twelve countries, including
Canada, France, Sweden, Hungary, the United States, Italy, Russia and
Holland. The Hebdo Mag Acquisition was accounted for in accordance with the
pooling-of-interests method of accounting.
S-38
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL INFORMATION OF THE COMPANY
The following summary historical and pro forma consolidated financial data of
Cendant should be read in conjunction with (i) the Cendant historical
financial statements and notes thereto and: (ii) the pro forma financial
information of Cendant. Such information is contained in Cendant's Current
Reports on Form 8-K, dated January 29, 1998 and February 16, 1998,
respectively, which are incorporated herein by reference. See "Incorporation
of Certain Documents by Reference" in the accompanying Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
------------------------------------------------------------------------------- ENDED
PRO FORMA SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 (3) 1997 (4)
---------- ---------- ------------ ------------ ------------ --------------- ---------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data: (1)(2)
Net Revenues................. $1,835.5 $2,136.4 $2,446.7 $2,992.1 $ 3,908.8 $ 4,475.3 $3,890.0
-------- -------- -------- -------- --------- --------- --------
Expenses:
Total expenses exclusive of
depreciation, amortization
and interest............... 1,512.4 1,675.8 1,874.6(6) 2,362.6(7) 3,001.8(8) 3,395.7(9) 2,908.3
Depreciation and
amortization............... 68.5 80.8 97.2 112.9 167.9 234.3 190.6
Interest, net............... 17.6 13.9 10.6 13.3 25.4 48.2 43.9
-------- -------- -------- -------- --------- --------- --------
Total expenses............... 1,598.5 1,770.5 1,982.4 2,488.8 3,195.1 3,678.3 3,142.8
-------- -------- -------- -------- --------- --------- --------
Income before income taxes
and extraordinary loss....... 237.0 365.9 464.3 503.3 713.7 797.0 747.2
Net income................... 153.2 209.2(5) 286.6(6) 302.8(7) 423.6(8) 473.4(9) 400.7
Net income per share (fully
diluted).................... $ .30 $ .34(5) $ .41(6) $ .41(7) $ .52(8) $ .56(9) $ .47
Weighted average shares
outstanding (fully
diluted).................... 519.2 607.7 702.2 748.7 820.6 851.1 877.4
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------- AT SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
---------- ---------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data: (1)(2)
Total assets................. $6,027.2 $6,698.8 $7,437.0 $8,994.4 $13,588.4 $14,997.0
Long-term debt............... 303.5 394.1 420.0 354.0 1,004.6 2,422.5
Assets under management and
mortgage programs........... 3,805.7 4,058.8 4,115.4 4,955.6 5,729.2 5,602.2
Debt under management and
mortgage programs........... 3,273.1 3,629.7 3,791.6 4,427.9 5,089.9 4,952.1
Shareholders' equity......... 1,054.1 1,319.3 1,629.8 2,148.6 4,322.7 4,608.9
</TABLE>
- ------------
(1) Financial data reflects and has been restated to include the
following mergers and acquisitions accounted for under the pooling of
interest method of accounting: (i) the Merger; (ii) the April 30,
1997 merger with PHH Corporation; (iii) the July 1996 mergers with
Davidson and Associates Inc. ("Davidson") and Sierra On-Line, Inc.
("Sierra"); (iv) the August 1996 merger with Ideon Group Inc.
("Ideon"); (v) the 1995 acquisitions of Getko Group Inc., North
American Outdoor Group, Inc. and Advance Ross Corporation; and (vi)
other mergers and acquisitions.
(2) Financial data reflects the following acquisitions accounted for
under the purchase method of accounting, and accordingly the
financial results of such acquired companies are reflected since the
respective dates of acquisition: (i) Resort Condominiums
International, Inc. ("RCI") in November 1996; (ii) Avis, Inc.
("Avis") in October 1996; (iii) Coldwell Banker Corporation
("Coldwell Banker") in May 1996; (iv) Century 21 Real Estate
Corporation in August 1995; (v) the Super 8 Motel franchise system in
April 1993; (vi) the Days Inn of America, Inc. franchise system in
January 1992; and (vii) other acquisitions.
(3) Pro forma income statement data include the following acquisitions
and related financing, as if they occurred on January 1, 1996: (i)
Coldwell Banker in May 1996; (ii) Avis in October 1996; (iii) RCI in
November 1996; and (iv) other acquisitions completed during 1996.
S-39
<PAGE>
(4) In the opinion of management, all adjustments necessary for a fair
presentation of the interim consolidated financial data are included.
These interim results are not necessarily indicative of results for a
full year.
(5) Includes extraordinary loss, net of tax of $12.8 million or $.02 per
fully diluted share, related to the early extinguishment of debt.
(6) Includes a net gain of $9.8 million ($6.2 million, after-tax or $.01
per fully diluted share) comprised of the gain on the sale of The
ImagiNation Network, Inc. offset by costs related to Ideon products
abandoned and restructuring.
(7) Includes provision for costs related to the abandonment of certain
Ideon development efforts and the restructuring of Cendant's SafeCard
division and corporate infrastructure. The charges aggregated $97.0
million ($62.1 million, after-tax or $.08 per fully diluted share).
(8) Includes provisions for costs incurred principally in connection with
the 1996 mergers with Davidson, Sierra and Ideon. The charges
aggregated $179.9 million ($118.7 million, after-tax or $.14 per
fully diluted share). Such costs in connection with Cendant's mergers
with Davidson and Sierra are non-recurring and are comprised
primarily of transaction costs and other professional fees. Such
costs associated with Cendant's merger with Ideon are non-recurring
and include transaction costs as well as a provision relating to
certain litigation matters. In June 1997, Cendant entered into an
agreement which provided for the settlement of certain Ideon
litigation matters. Such agreement called for the payment of $70.5
million over a six-year period which was provided for during the year
ended December 31, 1996.
(9) Includes a one-time merger related charge of $303 million ($227
million, after-tax or $.28 per fully diluted share) during the second
quarter of 1997 in connection with the merger with PHH Corporation
("PHH"). Such charge is comprised of merger-related costs, including
severance, facility and system consolidations and terminations, costs
associated with exiting certain activities and professional fees.
S-40
<PAGE>
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a declaration of trust, executed by the Sponsor and certain of the
Cendant Trustees and (ii) the filing of a certificate of trust with the
Secretary of State of the State of Delaware on February 5, 1998. Such trust
declaration will be amended and restated in its entirety substantially in the
form filed as an exhibit to the Registration Statement of which this
Prospectus Supplement forms a part. The Declaration will be qualified as an
indenture under the Trust Indenture Act. Although upon issuance of the Trust
Preferred Securities, the holders of Income PRIDES will be the beneficial
owners of the related Trust Preferred Securities, such Trust Preferred
Securities will be pledged with the Collateral Agent to secure the
obligations of the holders under the related Purchase Contracts. See
"Description of the Purchase Contracts -- Pledged Securities and Pledge
Agreement" and "Description of the Trust Preferred Securities -- Book-Entry
Only Issuance -- The Depository Trust Company." The Company will directly or
indirectly acquire Common Securities in an aggregate liquidation amount equal
to 3% of the total capital of the Trust. The Trust exists for the exclusive
purposes of (i) issuing the Trust Securities representing undivided
beneficial ownership interests in the assets of the Trust, (ii) investing the
proceeds of the Trust Securities in the Debentures and (iii) engaging in only
those other activities necessary, appropriate, convenient or incidental
thereto. The Trust has a term of approximately seven years, but may dissolve
earlier as provided in the Declaration.
The number of Cendant Trustees initially is three. Two of the Cendant
Trustees (the "Regular Trustees") are persons who are employees or officers
of or who are affiliated with the Company. Pursuant to the Declaration, the
third trustee will be a financial institution that is unaffiliated with the
Company, which trustee serves as institutional trustee under the Declaration
and as indenture trustee for the purposes of compliance with the provisions
of the Trust Indenture Act (the "Institutional Trustee"). Initially,
Wilmington Trust Company, a Delaware banking corporation, will be the
Institutional Trustee until removed or replaced by the holder of the Common
Securities. For purposes of compliance with the provisions of the Trust
Indenture Act, Wilmington Trust Company will also act as the Guarantee
Trustee and as trustee resident in the State of Delaware (the "Delaware
Trustee") for purposes of the Delaware Business Trust Act (the "Trust Act").
See "Description of the Guarantee" and "Description of the Trust Preferred
Securities -- Voting Rights."
The Institutional Trustee will hold title to the Debentures for the
benefit of the holders of the Trust Securities and the Institutional Trustee
will have the power to exercise all rights, powers and privileges under the
Indenture as the holder of the Debentures. In addition, the Institutional
Trustee will maintain exclusive control of a segregated noninterest bearing
bank account (the "Property Account") to hold all payments made in respect of
the Debentures for the benefit of the holders of the Trust Securities. The
Institutional Trustee will make payments of distributions and payments on
liquidation, redemption and otherwise to the holders of the Trust Securities
out of funds from the Property Account. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Trust Preferred Securities.
The Company, as the direct or indirect holder of all the Common Securities,
will have the right to appoint, remove or replace any Cendant Trustee and to
increase or decrease the number of Cendant Trustees; provided, however, that
the number of Cendant Trustees shall be at least two, at least one of which
shall be a Regular Trustee. The Company will pay all fees and expenses
related to the Trust and the offering of the Trust Securities. See
"Description of the Debentures -- Miscellaneous."
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in
the Declaration, the Trust Act and the Trust Indenture Act. See "Description
of the Trust Preferred Securities."
The office of the Delaware Trustee currently is Wilmington Trust Company,
Wilmington, Delaware. The principal place of business of the Trust shall be
c/o Cendant Corporation, 6 Sylvan Way, Parsippany, New Jersey 07054 and its
telephone number shall be (973) 428-9700.
S-41
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is listed and traded on the NYSE under the symbol "CD".
The following table sets forth, for the calendar quarters indicated, the high
and low closing sales prices per share on the NYSE for the periods shown
below as reported on the NYSE Composite Tape. All stock prices have been
adjusted to give retroactive effect to the three-for-two stock split
effective October 21, 1996 for shareholders of record on October 7, 1996. On
December 17, 1997, CUC merged with HFS, with CUC surviving and changing its
name to "Cendant Corporation."
<TABLE>
<CAPTION>
MARKET PRICE (1)
----------------
PERIOD HIGH LOW
- ------ ---- ---
<S> <C> <C>
1996:
First Quarter ............................ $26 11/64 $19 5/64
Second Quarter ........................... 26 1/4 18 43/64
Third Quarter ............................ 26 37/64 21 1/4
Fourth Quarter ........................... 27 21/64 22 1/2
1997:
First Quarter ............................ $26 7/8 $22 1/2
Second Quarter ........................... 26 3/4 20
Third Quarter ............................ 31 3/4 23 11/16
Fourth Quarter ........................... 34 3/8 26 15/16
1998:
First Quarter (through February 24, 1998) $37 3/4 $32 7/16
</TABLE>
- ------------
(1) All Cendant Common Stock prices prior to the first quarter of 1998
are for CUC.
The Company has never paid a cash dividend on its Common Stock. The
Company does not anticipate paying cash dividends on its capital stock in the
foreseeable future and intends to retain all earnings to finance the
operations and expansion of the Company's business. The payment of cash
dividends in the future will depend on the Company's earnings, financial
condition and capital needs and on other factors deemed relevant by the Board
of Directors at that time.
S-42
<PAGE>
CAPITALIZATION
The following table summarizes the actual capitalization of the Company
and its consolidated subsidiaries at September 30, 1997 and such
capitalization adjusted to reflect: (i) the sale of the FELINE PRIDES and
Trust Preferred Securities offered hereby, (ii) the concurrent purchase by
the Trust from the Company of approximately $1,340 million principal amount
of Debentures and (iii) an assumed application of the proceeds from the
foregoing, after underwriting commissions and estimated expenses of this
Offering, to repay indebtedness. This table should be read in conjunction
with the Company's Current Report on Form 8-K dated January 29, 1998 which is
incorporated by reference herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
ADJUSTMENTS FOR THE
ISSUANCE OF FELINE AS
(AMOUNTS IN MILLIONS, EXCEPT SHARE AMOUNTS) ACTUAL PRIDES(3)(4)(5) ADJUSTED
----------- ------------------- ----------
<S> <C> <C> <C>
Long-term debt including current portion:
Revolving Credit Facilities..................... $ 1,122.5 $(1,122.5) $ --
5 7/8% Senior Notes due 1998.................... 150.0 150.0
4 1/2% Convertible Senior Notes due 1999(1) .... 149.6 149.6
4 3/4% Convertible Senior Notes due 2003 ....... 240.0 240.0
3% Convertible Subordinated Notes due 2002 .... 550.0 550.0
Other loans and capital lease obligations ...... 210.4 210.4
----------- ------------------- ----------
Total long-term debt including current portion 2,422.5 (1,122.5) 1,300.0
----------- ------------------- ----------
Liabilities under management and mortgage
programs:
Commercial paper................................ 2,431.9 2,431.9
Medium-term notes............................... 2,262.8 2,262.8
Other........................................... 257.4 257.4
----------- ----------
Total liabilities under management and
mortgage programs............................. 4,952.1 4,952.1
----------- ----------
Minority interest in consolidated subsidiaries:
Company-obligated manditorily redeemable
preferred securities of subsidiary trust (2) .. 1,259.0 1,259.0
----------- ------------------- ----------
Shareholders' equity:
Preferred stock, $1.00 par value--authorized 10
million shares; none issued and outstanding .. -- --
Common stock, $.01 par value--authorized 2
billion shares; issued 824,544,641 shares ..... 8.2 8.2
Additional paid-in capital...................... 3,017.5 (37.3) 2,980.2
Retained earnings............................... 1,890.5 1,890.5
Currency translation adjustment................. (27.0) (27.0)
Restricted stock, deferred compensation ........ (28.7) (28.7)
Treasury stock, at cost, 13,964,693 shares ..... (251.6) (251.6)
----------- ------------------- ----------
Total shareholders' equity.................... 4,608.9 (37.3) 4,571.6
----------- ------------------- ----------
Total capitalization.......................... $11,983.5 $ 99.2 $12,082.7
=========== =================== ==========
</TABLE>
- ------------
(1) On October 15, 1997, all of the outstanding principal amount of the 4
1/2% Convertible Senior Notes were converted into shares of Company
Common Stock.
(2) Subsequent to the completion of the Offering, the assets of the Trust
will consist solely of approximately $1,340 million in aggregate
principal amount of the Debentures with an interest rate of 6.45% and
a maturity date of February 16, 2003.
(3) Pro forma adjustments assume that the anticipated net proceeds of
$1,259.0 million, after deducting expenses payable by the Company
estimated at $1.5 million, from the issuance of the FELINE PRIDES and
the Trust Preferred Securities will be used to repay outstanding
borrowings under the revolving credit agreements.
(4) The pro forma adjustments assume that the Underwriters'
over-allotment options are not exercised.
(5) The present value of the Contract Adjustment Payments is charged to
additional paid-in capital.
S-43
<PAGE>
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in the Company's
consolidated financial statements, with the Trust Preferred Securities shown
on the Company's balance sheet under the caption "Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts." The
financial statement footnotes to the Company's consolidated financial
statements will reflect that the sole asset of the Trust will be the
Debentures. Dividends on the Trust Preferred Securities will be reflected as
a charge to the Company's consolidated income, identified as Minority
Interest in Net Income of Consolidated Subsidiaries, whether paid or accrued.
The Purchase Contracts are forward transactions in the Common Stock. Upon
settlement of a Purchase Contract, the Company will receive the Stated Amount
on such Purchase Contract and will issue the requisite number of shares of
Common Stock. The Stated Amount thus received will be credited to
shareholders' equity allocated between the common stock and paid-in capital
accounts. The present value of the Contract Adjustment Payments will
initially be charged to equity, with an offsetting credit to liabilities.
Subsequent Contract Adjustment Payments will be allocated between this
liability account and interest expense based on a constant rate calculation
over the life of the transaction.
Prior to the issuance of shares of Common Stock upon settlement of the
Purchase Contracts, it is anticipated that the FELINE PRIDES will be
reflected in the Company's earnings per share calculations using the treasury
stock method. Under this method, the number of shares of Common Stock used in
calculating earnings per share is deemed to be increased by the excess, if
any, of the number of shares issuable upon settlement of the Purchase
Contracts over the number of shares that could be purchased by the Company in
the market (at the average market price during the period) using the proceeds
receivable upon settlement. Consequently, it is anticipated there will be no
dilutive effect on the Company's earnings per share except during periods
when the average market price of Common Stock is above the Threshold
Appreciation Price.
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the Growth PRIDES will
be used to purchase the underlying Treasury Securities to be transferred to
holders of the Growth PRIDES pursuant to the terms thereof, and the Company
will receive no proceeds from the sale of the Growth PRIDES. All or
substantially all of the proceeds from the sale of the Income PRIDES, the
Trust Preferred Securities which are not components of Income PRIDES and the
Common Securities will be invested by the Trust in Debentures of the Company.
The Company currently anticipates using substantially all of the net proceeds
from the sale of the Debentures, estimated to be approximately $1,259 million
(after deducting the underwriting commission and expenses), to repay
outstanding indebtedness under the Revolving Credit Facilities, including at
February 24, 1998 (i) approximately $565 million of outstanding indebtedness
under the 364-Day Revolving Credit Facility and (ii) approximately $673
million of outstanding indebtedness under the Five-Year Revolving Credit
Facility. The Company will use the remaining proceeds for general corporate
purposes including acquisitions.
The 364-Day Revolving Credit Facility will mature on September 30, 1998,
provided that the Company is entitled to annually request a 364-day extension
of such maturity date, and the Five Year Revolving Credit Facility will
mature on October 1, 2001.
The 364-Day Revolving Credit Facility and the Five Year Revolving Credit
Facility provide for revolving loans which bear interest, at the option of
the Company, at rates based on competitive bids of Lenders participating in
such facilities, at a prime rate or at LIBOR plus a margin approximating 22.5
basis points. The proceeds of such loans have been used for general corporate
purposes, primarily for business acquisitions.
The Chase Manhattan Bank, a lender and the Administrative Agent under the
Revolving Credit Facilities, is an affiliate of Chase Securities Inc., an
Underwriter.
S-44
<PAGE>
DESCRIPTION OF THE FELINE PRIDES
The following descriptions of certain terms of the FELINE PRIDES offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the FELINE PRIDES set
forth in the accompanying Prospectus, to which reference is hereby made. The
summaries of certain provisions of documents described below are not
necessarily complete, and in each instance reference is hereby made to the
copies of such documents (including the definitions therein of certain terms)
which are on file with the Commission. Wherever particular sections of, or
terms defined in, such documents are referred to herein, such sections or
defined terms are incorporated by reference herein. Capitalized terms not
defined herein have the meanings assigned to such terms in the accompanying
Prospectus.
Each FELINE PRIDES will be issued under the Purchase Contract Agreement
between the Company and the Purchase Contract Agent. The 26,000,000 FELINE
PRIDES offered hereby initially will consist of (A) 24,000,000 units referred
to as Income PRIDES and (B) 2,000,000 units referred to as Growth PRIDES.
Each Income PRIDES will initially consist of a unit comprised of (a) a
Purchase Contract under which (i) the holder (including, initially, an
Underwriter) will purchase from the Company on the Purchase Contract
Settlement Date, for an amount of cash equal to the Stated Amount, a number
of newly issued shares of Common Stock equal to the Settlement Rate described
below under "Description of the Purchase Contracts -- General," and (ii) the
Company will pay Contract Adjustment Payments to the holder at the rate of
1.05% of the Stated Amount per amount, and (b) (i) beneficial ownership of a
related 6.45% Trust Originated Preferred Security, having a stated
liquidation amount per Trust Preferred Security equal to the Stated Amount,
representing a preferred, undivided beneficial ownership interest in the
assets of the Trust, which will consist solely of the Debentures, (ii) in the
case of a distribution of the Debentures upon the dissolution of the Trust as
a result of an Investment Company Event, as described below, or otherwise,
Debentures having a principal amount equal to the Stated Amount or (iii) upon
the occurrence of a Tax Event Redemption prior to the Purchase Contract
Settlement Date, the appropriate Applicable Ownership Interest in the
Treasury Portfolio. "Applicable Ownership Interest" means, with respect to an
Income PRIDES and the U.S. Treasury Securities in the Treasury Portfolio, (A)
a 1/20, or 5%, undivided beneficial ownership interest in a $1,000 principal
or interest amount of a principal or interest strip in a U.S. Treasury
Security included in such Treasury Portfolio which matures on or prior to
February 15, 2001 and (B) for each scheduled interest payment date on the
Debentures that occurs after the Tax Event Redemption Date, a .080625%
undivided beneficial ownership interest in a $1,000 face amount of such U.S.
Treasury Security which is a principal or interest strip maturing on such
date. Each Growth PRIDES will initially consist of a unit comprised of (a) a
Purchase Contract under which (i) the holder will purchase from the Company
on the Purchase Contract Settlement Date, for an amount in cash equal to the
Stated Amount, a number of newly issued shares of Common Stock of the
Company, equal to the Settlement Rate, and (ii) the Company will pay the
holder Contract Adjustment Payments at the rate of 1.3% of the Stated Amount,
and (b) a 1/20 undivided beneficial interest in a Treasury Security. The
purchase price of each FELINE PRIDES will be allocated between the related
Purchase Contract and the related Trust Preferred Security or interest in a
Treasury Security in proportion to their respective fair market values at the
time of purchase. The Company expects that the entire purchase price of a
FELINE PRIDES will be allocated to the related Trust Preferred Security or
interest in a Treasury Security and that no amount will be allocated to the
related Purchase Contract. Such position generally will be binding on each
beneficial owner of each Income PRIDES (but not on the IRS (as defined
herein)). See "Certain Federal Income Tax Consequences -- FELINE PRIDES --
Allocation of Purchase Price." As long as FELINE PRIDES are in the form of
Income PRIDES or Growth PRIDES, the related Trust Preferred Securities or the
appropriate Applicable Ownership Interest of the Treasury Portfolio or
Treasury Securities, as applicable, will be pledged to the Collateral Agent
to secure the holder's obligation to purchase Common Stock under the related
Purchase Contracts.
SUBSTITUTION OF PLEDGED SECURITIES
Each holder of an Income PRIDES (unless a Tax Event Redemption has
occurred) will have the right, at any time on or prior to the fifth Business
Day immediately preceding the Purchase Contract
S-45
<PAGE>
Settlement Date, to substitute for the related Trust Preferred Securities
held by the Collateral Agent Treasury Securities in an aggregate principal
amount equal to the aggregate stated liquidation amount of such Trust
Preferred Securities. Such Treasury Securities will be pledged with the
Collateral Agent to secure the holder's obligation to purchase Common Stock
under the related Purchase Contracts. Because Treasury Securities are issued
in integral multiples of $1,000, holders of Income PRIDES may make such
substitution only in integral multiples of 20 Income PRIDES; provided,
however, if a Tax Event Redemption has occurred prior to the Purchase
Contract Settlement Date and the Treasury Portfolio has become a component of
the Income PRIDES, holders of such Income PRIDES may make such substitutions
only in integral multiples of 160,000 Income PRIDES (but obtaining the
release of the Treasury Portfolio rather than the Trust Preferred
Securities), at any time on or prior to the second Business Day immediately
preceding the Purchase Contract Settlement Date. FELINE PRIDES with respect
to which Treasury Securities have been substituted for the related Trust
Preferred Securities or the appropriate Applicable Ownership Interest of the
Treasury Portfolio, as the case may be, as collateral to secure such holder's
obligation under the related Purchase Contracts will be referred to as Growth
PRIDES. To create 20 Growth PRIDES, (unless a Tax Event Redemption has
occurred), the Income PRIDES holder will (a) deposit with the Collateral
Agent a Treasury Security having a principal amount at maturity of $1,000 and
(b) transfer 20 Income PRIDES to the Purchase Contract Agent accompanied by a
notice stating that the Income PRIDES holder has deposited a Treasury
Security with the Collateral Agent and requesting that the Purchase Contract
Agent instruct the Collateral Agent to release to such holder the 20 Trust
Preferred Securities relating to such 20 Income PRIDES. In the event that
Contract Adjustment Payments are at a higher rate for Growth PRIDES than for
Income PRIDES, holders of Income PRIDES wishing to create Growth PRIDES will
also be required to deliver cash in an amount equal to the excess of the
Contract Adjustment Payments that would have accrued since the last Payment
Date through the date of substitution on the Growth PRIDES being created by
such holders, over the Contract Adjustment Payments that have accrued over
the same period on the related Income PRIDES. Upon such deposit and receipt
of an instruction from the Purchase Contract Agent, the Collateral Agent will
effect the release of the related 20 Trust Preferred Securities from the
pledge under the Pledge Agreement free and clear of the Company's security
interest therein to the Purchase Contract Agent, which will (i) cancel the 20
Income PRIDES, (ii) transfer the 20 related Trust Preferred Securities to
such holder and (iii) deliver 20 Growth PRIDES to the holder. The Treasury
Security will be substituted for the Trust Preferred Securities and will be
pledged with the Collateral Agent to secure the holder's obligation to
purchase Common Stock under the related Purchase Contracts. The related Trust
Preferred Securities released to the holder thereafter will trade separately
from the resulting Growth PRIDES. Contract Adjustment Payments will be
payable by the Company on such Growth PRIDES on each Payment Date from the
later of March 2, 1998 and the last Payment Date on which Contract Adjustment
Payments were paid. In addition, original issue discount will accrue on the
related Treasury Securities. Distributions on any Trust Preferred Securities,
up to but not including the Purchase Contract Settlement Date, including
after a substitution of collateral resulting in the creation of Growth
PRIDES, will continue to be payable by the Trust at the rate of 6.45% of the
Stated Amount per annum, subject to the Company's deferral rights described
in "--Current Payments."
Each holder of a Growth PRIDES (unless a Tax Event Redemption has
occurred) will have the right, at any time on or prior to the fifth Business
Day immediately preceding the Purchase Contract Settlement Date, to
substitute for the related Treasury Securities held by the Collateral Agent
Trust Preferred Securities in an aggregate principal amount equal to the
aggregate stated liquidation amount of such Trust Preferred Securities,
thereby creating Income PRIDES. Such Trust Preferred Securities will be
pledged with the Collateral Agent to secure such Income PRIDES holders
obligation to purchase Common Stock under the related Purchase Contract.
Because Treasury Securities are issued in integral multiples of $1,000,
holders of Growth PRIDES may make such substitutions only in integral
multiples of 20 Growth PRIDES; provided, however, if a Tax Event Redemption
has occurred and the Treasury Portfolio has become a component of the Income
PRIDES, holders of the Growth PRIDES, may make such substitution only in
integral multiples of 160,000 Growth PRIDES, at any time, on or prior to the
second Business Day immediately preceding the Purchase Contract Settlement
Date. To create 20 Income PRIDES (unless a Tax Event Redemption has occurred,
the Growth PRIDES holder will (a) deposit with
S-46
<PAGE>
the Collateral Agent 20 Trust Preferred Securities and (b) transfer 20 Growth
PRIDES certificates to the Purchase Contract Agent accompanied by a notice
stating that the Growth PRIDES holder has deposited 20 Trust Preferred
Securities with the Collateral Agent and requesting that the Purchase
Contract Agent instruct the Collateral Agent to release to such Growth PRIDES
holder the Treasury Security relating to such Growth PRIDES. In the event
that Contract Adjustment Payments are at a higher rate for Income PRIDES than
for Growth PRIDES, holders of Growth PRIDES wishing to create Income PRIDES
will also be required to deliver cash in an amount equal to the excess of the
Contract Adjustment Payments that would have accrued since the last Payment
Date through the date of substitution on the Income PRIDES being created by
such holders, over the Contract Adjustment Payments that have accrued over
the same time period on the related Growth PRIDES. Upon such deposit and
receipt of an instruction from the Purchase Contract Agent, the Collateral
Agent will effect the release of the related Treasury Security from the
pledge under the Pledge Agreement free and clear of the Company's security
interest therein to the Purchase Contract Agent, which will (i) cancel the 20
Growth PRIDES, (ii) transfer the related Treasury Security to such holder of
Growth PRIDES and (iii) deliver 20 Income PRIDES to such holder of Growth
PRIDES. The substituted Trust Preferred Securities will be pledged with the
Collateral Agent to secure such Income PRIDES holder's obligation to purchase
Common Stock under the related purchase contacts. Cumulative cash
distribution, payable quarterly at a rate of 7.5% of the Stated Amount per
annum (subject to the Company's deferral rights) on such Income PRIDES, will
be payable on such Income PRIDES by the Company on each Payment Date from the
later of March 2, 1998 and the last Payment Date on which such cumulative
cash distributions, if any, were paid.
Holders who elect to substitute Pledged Securities, thereby creating
Growth PRIDES or Income PRIDES or recreating Income PRIDES or Growth PRIDES
(as discussed below), shall be responsible for any fees or expenses payable
in connection with such substitution. See "Certain Provisions of the Purchase
Contract Agreement and the Pledge Agreement -- Miscellaneous."
RECREATING INCOME PRIDES OR GROWTH PRIDES
On or prior to the fifth Business Day immediately preceding the Purchase
Contract Settlement Date a holder of Growth PRIDES or Income PRIDES may
recreate Income PRIDES or Growth PRIDES (unless a Tax Event Redemption has
occurred) by (a) depositing with the Collateral Agent 20 Trust Preferred
Securities or a Treasury Security and (b) transferring 20 Growth PRIDES or
Income PRIDES, as applicable, to the Purchase Contract Agent accompanied by a
notice stating that the Growth PRIDES or Income PRIDES holder has deposited
20 Trust Preferred Securities or a Treasury Security with the Collateral
Agent and requesting that the Purchase Contract Agent instruct the Collateral
Agent to release to such holder the related Treasury Security or Trust
Preferred Securities, as applicable. Upon such deposit and receipt of
instructions from the Purchase Contract Agent, the Collateral Agent will
effect the release of the related Treasury Security or Trust Preferred
Securities, as applicable, from the pledge of the Pledge Agreement free and
clear of the Company's security interest therein to the Purchase Contract
Agent, which will (i) cancel the 20 Growth PRIDES or Income PRIDES, as
applicable, (ii) transfer such Treasury Security or Trust Preferred
Securities, as applicable, to such holder and (iii) deliver 20 Income PRIDES
or 20 Growth PRIDES, as applicable, to such holder; provided, however, if a
Tax Event Redemption has occurred prior to the Purchase Contract Settlement
Date and the Treasury Portfolio has become a component of the Income PRIDES,
holders of Growth PRIDES or Income PRIDES, as applicable, may make such
substitutions (but using the appropriate Applicable Ownership Interest of the
Treasury Portfolio rather than the Trust Preferred Securities, in the case of
the Growth PRIDES) at any time on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date but only in
integral multiples of 160,000 Growth PRIDES or Income PRIDES, as applicable.
In the event that Contract Adjustment Payments are at a higher rate for
Growth PRIDES than for Income PRIDES, holders of Income PRIDES wishing to
recreate Growth PRIDES will also be required to deliver cash in an amount
equal to the excess of the Contract Adjustment Payments that would have
accrued since the last Payment Date through the date of substitution on the
Growth PRIDES being recreated by such holders, over the Contract Adjustment
Payments that have accrued over the same time period on the related Income
PRIDES. In the event that Contract Adjustment Payments are at a higher rate
for Income PRIDES than for Growth PRIDES, holders of Growth PRIDES wishing to
recreate
S-47
<PAGE>
Income PRIDES will also be required to deliver cash in an amount equal to the
excess of the Contract Adjustment Payments that would have accrued since the
last Payment Date through the date of substitution on the Income PRIDES being
recreated by such holders, over the same time period on the related Growth
PRIDES. The substituted Trust Preferred Securities or the appropriate
Applicable Ownership Interest of the Treasury Portfolio or a Treasury
Security, as the case may be, will be pledged with the Collateral Agent to
secure the holder's obligation to purchase Common Stock under the related
Purchase Contracts.
CURRENT PAYMENTS
Holders of Income PRIDES are entitled to receive aggregate cash
distributions at a rate of 7.5% of the Stated Amount per annum from and after
March 2, 1998, payable quarterly in arrears. The quarterly payments on the
Income PRIDES will consist of (i) cumulative cash distributions on the
related Trust Preferred Securities or the Treasury Portfolio, as applicable,
payable at the rate of 6.45% of the Stated Amount per annum and (ii) Contract
Adjustment Payments payable by the Company at the rate of 1.05% of the Stated
Amount per annum, subject (in the case of distributions on the Trust
Preferred Securities and the Contract Adjustment Payments) to the Company's
right of deferral as described herein.
Each holder of Growth PRIDES will be entitled to receive quarterly
Contract Adjustment Payments payable by the Company at the rate of 1.3% of
the Stated Amount per annum, subject to the Company's rights of deferral. In
addition, OID will accrue on the related Treasury Securities.
The ability of the Trust to make the quarterly distributions on the Trust
Preferred Securities is solely dependent upon the receipt of corresponding
interest payments from the Company on the Debentures. The Company has the
right at any time, and from time to time, limited to a period not extending
beyond the maturity of the Debentures, to defer the interest payments on the
Debentures. As a consequence of such deferral, quarterly distributions
(unless a Tax Event Redemption has occurred) to holders of Income PRIDES (or
any Trust Preferred Securities outstanding after the Purchase Contract
Settlement Date or after a substitution of collateral resulting in the
creation of Growth PRIDES) would be deferred (but despite such deferral,
would continue to accumulate quarterly and would accrue interest thereon
compounded quarterly at the rate of 6.45% per annum through and including
February 15, 2001, and at the Reset Rate thereafter). The Company also has
the right to defer the payment of Contract Adjustment Payments on the related
Purchase Contracts until the Purchase Contract Settlement Date; however,
deferred Contract Adjustment Payments will bear additional Contract
Adjustment Payments at the rate of 7.5% per annum (such deferred installments
of Contract Adjustment Payments, together with the additional Contract
Adjustment Payments, shall be referred to as the "Deferred Contract
Adjustment Payments"). See "Description of the Purchase Contracts -- Contract
Adjustment Payments" and "Description of the Trust Preferred Securities --
Distributions." If a Tax Event Redemption has occurred and the Treasury
Portfolio has become a component of the Income PRIDES, quarterly
distributions on the Treasury Portfolio, as a portion of the cumulative
quarterly distributions to the holders of Income PRIDES, will not be
deferred.
The Company's obligations with respect to the Debentures will be senior
and unsecured and will rank on a parity in right of payment with all other
senior unsecured obligations of the Company. The Company's obligations with
respect to the Contract Adjustment Payments will be subordinated and junior
in right of payment to the Company's Senior Indebtedness.
VOTING AND CERTAIN OTHER RIGHTS
Holders of Trust Preferred Securities, in their capacities as such
holders, will not be entitled to vote to appoint, remove or replace, or to
increase or decrease the number of Regular Trustees and will generally have
no voting rights except in the limited circumstances described under
"Description of the Trust Preferred Securities -- Voting Rights." Holders of
Purchase Contracts relating to the Income PRIDES or Growth PRIDES, in their
capacities as such holders, will have no voting or other rights in respect of
the Common Stock.
S-48
<PAGE>
LISTING OF THE SECURITIES
The Income PRIDES and the Growth PRIDES have been approved for listing on
the NYSE under the Symbols "CDPrI" and "CDPrG", respectively, subject to
official notice of issuance. The Trust Preferred Securities will not
initially be listed on any exchange.
NYSE SYMBOL OF COMMON STOCK
The Common Stock is listed on the NYSE under the symbol "CD."
MISCELLANEOUS
The Company or its affiliates may from time to time purchase any of the
Securities offered hereby which are then outstanding by tender, in the open
market or by private agreement.
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
Each Purchase Contract underlying a FELINE PRIDES (unless earlier
terminated, or earlier settled at the holder's option) will obligate the
holder of such Purchase Contract to purchase, and the Company to sell, on the
Purchase Contract Settlement Date, for an amount in cash equal to the Stated
Amount of such FELINE PRIDES, a number of newly issued shares of Common Stock
equal to the Settlement Rate. The number of newly issued shares of Common
Stock issuable upon settlement of each Purchase Contract on the Purchase
Contract Settlement Date (the "Settlement Rate") will be calculated as
follows (subject to adjustment under certain circumstances): (a) if the
Applicable Market Value is equal to or greater than $48.10 (the "Threshold
Appreciation Price," which is 30% above the last reported sale price of the
Common Stock set forth on the cover page of this Prospectus Supplement (the
"Reference Price")), the Settlement Rate (which is equal to the Stated Amount
divided by the Threshold Appreciation Price) will be 1.0395; accordingly, if,
between the date of this Prospectus Supplement and the period during which
the Applicable Market Value is measured, the market price for the Common
Stock increases to an amount that is higher than the Threshold Appreciation
Price, the aggregate market value of the shares of Common Stock issued upon
settlement of each Purchase Contract (assuming that such market value is the
same as the Applicable Market Value of such Common Stock) will be higher than
the Stated Amount, and if such market price is the same as the Threshold
Appreciation Price, the aggregate market value of such shares (assuming that
such market value is the same as the Applicable Market Value of such Common
Stock) will be equal to the Stated Amount; (b) if the Applicable Market Value
is less than the Threshold Appreciation price but greater than the Reference
Price, the Settlement Rate will be equal to the Stated Amount divided by the
Applicable Market Value; accordingly, if the market price for the Common
Stock increases between the date of this Prospectus Supplement and the period
during which the Applicable Market Value is measured but such market price is
less than the Threshold Appreciation Price, the aggregate market value of the
shares of Common Stock issued upon settlement of each Purchase Contract
(assuming that such market value is the same as the Applicable Market Value
of such Common Stock) will be equal to the Stated Amount; and (c) if the
Applicable Market Value is less than or equal to the Reference Price, the
Settlement Rate (which is equal to the Stated Amount divided by the Reference
Price) will be 1.3514; accordingly, if the market price for the Common Stock
decreases between the date of this Prospectus Supplement and the period
during which the Applicable Market Value is measured, the aggregate market
value of the shares of Common Stock issued upon settlement of each Purchase
Contract (assuming that such market value is the same as the Applicable
Market Value of such Common Stock) will be less than the Stated Amount, and
if such market price stays the same, the aggregate market value of such
shares (assuming that such market value is the same as the Applicable Market
Value of such Common Stock) will be equal to the Stated Amount. "Applicable
Market Value" means the average of the Closing Prices (as defined herein) per
share of Common Stock on each of the twenty consecutive Trading Days (as
defined herein) ending on the third Trading Day immediately preceding the
Purchase Contract Settlement Date. "Closing Price" of the Common Stock on any
date of determination means the closing sale price (or, if no closing price
is reported, the last reported sale price) of the Common Stock on
S-49
<PAGE>
the NYSE on such date or, if the Common Stock is not listed for trading on
the NYSE on any such date, as reported in the composite transactions for the
principal United States securities exchange on which the Common Stock is so
listed, or if the Common Stock is not so listed on a United States national
or regional securities exchange, as reported by the Nasdaq Stock Market, or,
if the Common Stock is not so reported, the last quoted bid price for the
Common Stock in the over-the-counter market as reported by the National
Quotation Bureau or similar organization, or, if such bid price is not
available, the market value of the Common Stock on such date as determined by
a nationally recognized independent investment banking firm retained for this
purpose by the Company. A "Trading Day" means a day on which the Common Stock
(A) is not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of business
and (B) has traded at least once on the national or regional securities
exchange or association or over-the-counter market that is the primary market
for the trading of the Common Stock.
No fractional shares of Common Stock will be issued by the Company
pursuant to the Purchase Contracts. In lieu of fractional shares otherwise
issuable (calculated on an aggregate basis) in respect of Purchase Contracts
being settled by a holder of Income PRIDES or Growth PRIDES, the holder will
be entitled to receive an amount of cash equal to such fraction of a share
times the Applicable Market Value.
On the Business Day immediately preceding the Purchase Contract Settlement
Date, unless a holder of Income PRIDES or Growth PRIDES (i) has settled the
related Purchase Contracts prior to the Purchase Contract Settlement Date
through the early delivery of cash to the Purchase Contract Agent in the
manner described under "--Early Settlement," (ii) in the case of Income
PRIDES, has settled the related Purchase Contracts with separate cash on the
Business Day immediately preceding the Purchase Contract Settlement Date
pursuant to prior notice in the manner described under "--Notice to Settle
with Cash", (iii) has had the Trust Preferred Securities related to such
holder's Purchase Contracts remarketed in the manner described herein in
connection with settling such Purchase Contracts, or (iv) an event described
under "--Termination" below has occurred, then (A) in the case of Income
PRIDES (unless a Tax Event Redemption has occurred) the Company will exercise
its rights as a secured party to dispose of the Trust Preferred Securities in
accordance with applicable law and (B) in the case of Growth PRIDES or Income
PRIDES (in the event that a Tax Event Redemption has occurred), the principal
amount of the related Treasury Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio, as applicable, when paid at
maturity, will automatically be applied to satisfy in full the holder's
obligation to purchase Common Stock under the related Purchase Contracts.
Such Common Stock will then be issued and delivered to such holder or such
holder's designee, upon presentation and surrender of the certificate
evidencing such FELINE PRIDES (a "FELINE PRIDES Certificate") and payment by
the holder of any transfer or similar taxes payable in connection with the
issuance of the Common Stock to any person other than such holder. In the
event that a holder of either Income PRIDES or Growth PRIDES effects the
early settlement of the related Purchase Contracts through the delivery of
cash or, in the case of Income PRIDES, settles the related Purchase Contracts
with cash on the Business Day immediately preceding the Purchase Contract
Settlement Date, the related Trust Preferred Securities or Treasury
Securities, as the case may be, will be released to the holder as described
herein. The funds received by the Collateral Agent on the Business Day
immediately preceding the Purchase Contract Settlement Date, upon cash
settlement of a Purchase Contract, will be promptly invested in overnight
permitted investments and paid to the Company on the Purchase Contract
Settlement Date. Any funds received by the Collateral Agent in respect of the
interest earned from the overnight investment in permitted investments will
be distributed to the Purchase Contract Agent for payment to the holders.
Prior to the date on which shares of Common Stock are issued in settlement
of Purchase Contracts, the Common Stock underlying the related Purchase
Contracts will not be deemed to be outstanding for any purpose and the
holders of such Purchase Contracts will not have any voting rights, rights to
dividends or other distributions or other rights or privileges of a
stockholder of the Company by virtue of holding such Purchase Contracts. See
"Description of the Trust Preferred Securities -- Voting Rights."
Each holder of Income PRIDES or Growth PRIDES, by acceptance thereof, will
under the terms of the Purchase Contract Agreement and the related Purchase
Contracts be deemed to have (a) irrevocably agreed to be bound by the terms
of the related Purchase Contracts and the Pledge Agreement for so long
S-50
<PAGE>
as such holder remains a holder of such FELINE PRIDES, and (b) duly appointed
the Purchase Contract Agent as such holder's attorney-in-fact to enter into
and perform the related Purchase Contracts on behalf of and in the name of
such holder. In addition, each beneficial owner of Income PRIDES or Growth
PRIDES, by acceptance of such interest, will be deemed to have agreed to
treat (i) itself as the owner of the related Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or
Treasury Securities, as the case may be, and (ii) the Debentures as
indebtedness of the Company, in each case, for United States federal, state
and local income and franchise tax purposes.
REMARKETING
Pursuant to the Remarketing Agreement and subject to the terms of the
Remarketing Underwriting Agreement between the Remarketing Agent, the
Purchase Contract Agent, the Company and the Trust, the Trust Preferred
Securities of Income PRIDES holders' who have failed to notify the Purchase
Contract Agent, on or prior to the fifth Business Day immediately preceding
the Purchase Contract Settlement Date in the manner described under "--Notice
to Settle with Cash" of their intention to settle the related Purchase
Contracts with separate cash on the Business Day immediately preceding the
Purchase Contract Settlement Date, will be remarketed on the third Business
Day immediately preceding the Purchase Contract Settlement Date. The
Remarketing Agent will use its reasonable efforts to remarket such Trust
Preferred Securities on such date at a price of approximately 100.5% of the
aggregate stated liquidation amount of such Trust Preferred Securities, plus
accrued and unpaid distributions (including deferred distributions), if any,
thereon. The portion of the proceeds from such remarketing equal to the
aggregate stated liquidation amount of such Trust Preferred Securities will
automatically be applied to satisfy in full such Income PRIDES holders'
obligations to purchase Common Stock under the related Purchase Contracts. In
addition, after deducting as the Remarketing Fee an amount not exceeding 25
basis points (.25%) of the aggregate stated liquidation amount of the
remarketed securities, from any amount of such proceeds in excess of the
aggregate stated liquidation amount of the remarketed Trust Preferred
Securities plus any accrued and unpaid distributions (including deferred
distributions, if any), the Remarketing Agent will remit the remaining
portion of the proceeds, if any, for the benefit of such holder. Income
PRIDES holders whose Trust Preferred Securities are so remarketed will not
otherwise be responsible for the payment of any Remarketing Fee in connection
therewith. If, in spite of using its reasonable efforts, the Remarketing
Agent cannot remarket the related Trust Preferred Securities of such holders
of Income PRIDES at a price not less than 100% of the aggregate stated
liquidation amount of such Trust Preferred Securities plus accrued and unpaid
distributions (including deferred distributions) and thus resulting in a
Failed Remarketing, the Company will exercise its rights as a secured party
to dispose of the Trust Preferred Securities in accordance with the
applicable law and satisfy in full, from the proceeds of such disposition,
such holder's obligation to purchase Common Stock under the related Purchase
Contracts; provided, that if the Company exercises such rights as a secured
creditor, any accrued and unpaid distributions (including any deferred
distributions) on such Trust Preferred Securities will be paid in cash by the
Company to the holders of record of such Trust Preferred Securities. The
Company will cause a notice of such Failed Remarketing to be published on the
second Business Day immediately preceding the Purchase Contract Settlement
Date by publication in a daily newspaper in the English language of general
circulation in The City of New York, which is expected to be The Wall Street
Journal. In addition, the Company will request, not later than ten nor more
than 15 calendar days prior to the remarketing date, that the Depository
notify its participants holding Trust Preferred Securities, Income PRIDES and
Growth PRIDES of such remarketing and of the procedures that must be followed
if a Trust Preferred Security holder wishes to exercise its right to put its
Trust Preferred Security to the Company as described herein. The Company will
endeavor to ensure that a registration statement with regard to the full
amount of the Trust Preferred Securities to be remarketed shall be effective
in such form as will enable the Remarketing Agent to rely on it in connection
with the remarketing process. It is currently anticipated that Merrill Lynch,
Pierce, Fenner & Smith Incorporated will be the Remarketing Agent.
EARLY SETTLEMENT
A holder of Income PRIDES may settle the related Purchase Contracts on or
prior to the fifth Business Day immediately preceding the Purchase Contract
Settlement Date by presenting and
S-51
<PAGE>
surrendering the FELINE PRIDES Certificate evidencing such Income PRIDES at
the offices of the Purchase Contract Agent with the form of "Election to
Settle Early" on the reverse side of such certificate completed and executed
as indicated, accompanied by payment (payable to the Company in immediately
available funds) of an amount equal to the Stated Amount times the number of
Purchase Contracts being settled; provided, however, if a Tax Event
Redemption has occurred prior to the Purchase Contract Settlement Date and
the Treasury portfolio has become a component of the Income PRIDES, holders
of such Income PRIDES may settle early only in integral multiples of 160,000
Income PRIDES (and the related appropriate Applicable Ownership Interest of
the Treasury Portfolio) at any time on or prior to the second Business Day
immediately preceding the Purchase Contract Settlement Date. A holder of
Growth PRIDES may settle the related Purchase Contracts on or prior to the
second Business Day immediately preceding the Purchase Contract Settlement
Date by presenting and surrendering the FELINE PRIDES Certificate evidencing
such Growth PRIDES at the offices of the Purchase Contract Agent with the
form of "Election to Settle Early" on the reverse side of such certificate
completed and executed as indicated, accompanied by payment in immediately
available funds of an amount equal to the Stated Amount times the number of
Purchase Contracts being settled. So long as the FELINE PRIDES are evidenced
by one or more global security certificates deposited with the Depositary (as
defined herein), procedures for early settlement will also be governed by
standing arrangements between the Depositary and the Purchase Contract Agent.
Upon Early Settlement of the Purchase Contracts related to any Income
PRIDES or Growth PRIDES, (a) the holder will receive newly issued shares of
Common Stock per Income PRIDES or Growth PRIDES having a Stated Amount of $50
(regardless of the market price of the Common Stock on the date of such Early
Settlement), subject to adjustment under the circumstances described in
"--Anti-Dilution Adjustments" below, (b) the Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or
Treasury Securities, as the case may be, related to such Income PRIDES or
Growth PRIDES will thereupon be transferred to the holder free and clear of
the Company's security interest therein, (c) the holder's right to receive
Deferred Contract Adjustment Payments, if any, on the Purchase Contracts
being settled will be forfeited, (d) the holder's right to receive future
Contract Adjustment Payments will terminate and (e) no adjustment will be
made to or for the holder on account of Deferred Contract Adjustment
Payments, if any, or any amounts accrued in respect of Contract Adjustment
Payments.
If the Purchase Contract Agent receives a FELINE PRIDES Certificate,
accompanied by the completed "Election to Settle Early" and requisite
immediately available funds, from a holder of FELINE PRIDES by 5:00 p.m., New
York City time, on a Business Day, that day will be considered the settlement
date. If the Purchase Contract Agent receives the foregoing after 5:00 p.m.,
New York City time, on a Business Day or at any time on a day that is not a
Business Day (other than from Income PRIDES holders after the occurrence of a
Tax Event Redemption), the next Business Day will be considered the
settlement date.
Upon Early Settlement of Purchase Contracts in the manner described above,
presentation and surrender of the FELINE PRIDES Certificate evidencing the
related Income PRIDES or Growth PRIDES and payment of any transfer or similar
taxes payable by the holder in connection with the issuance of the related
Common Stock to any person other than the holder of such Income PRIDES or
Growth PRIDES, the Company will cause the shares of Common Stock being
purchased to be issued, and the related Trust Preferred Securities, the
appropriate Applicable Ownership Interest of the Treasury Portfolio or
Treasury Securities, as the case may be, securing such Purchase Contracts to
be released from the pledge under the Pledge Agreement (described in
"--Pledged Securities and Pledge Agreement") and transferred, within three
Business Days following the settlement date, to the purchasing holder or such
holder's designee.
NOTICE TO SETTLE WITH CASH
A holder of an Income PRIDES or Growth PRIDES wishing to settle the
related Purchase Contract with separate cash on the Business Day immediately
preceding the Purchase Contract Settlement Date must notify the Purchase
Contract Agent by presenting and surrendering the FELINE PRIDES
S-52
<PAGE>
Certificate evidencing such Income PRIDES or Growth PRIDES at the offices of
the Purchase Contract Agent with the form of "Notice to Settle by Separate
Cash" on the reverse side of the certificate completed and executed as
indicated on or prior to 5:00 p.m., New York City time, on the second
Business Day immediately preceding the Purchase Contract Settlement Date in
the case of a Growth PRIDES holder or an Income PRIDES holder (if a Tax Event
Redemption has occurred) and on the fifth Business Day immediately preceding
the Purchase Contract Settlement Date in the case of Income PRIDES holder. If
a holder that has given notice of such holder's intention to settle the
related Purchase Contract with separate cash fails to deliver such cash on
the Business Day immediately preceding the Purchase Contract Settlement Date,
then the Company will exercise its right as a secured party to dispose of, in
accordance with the applicable law, the related Trust Preferred Securities or
Treasury Securities, as the case may be, to satisfy in full, from the
disposition of such Trust Preferred Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio, such holder's obligation to
purchase Common Stock under the related Purchase Contract.
CONTRACT ADJUSTMENT PAYMENTS
Contract Adjustment Payments will be fixed at a rate per annum of 1.05% of
the Stated Amount per Purchase Contract in the case of Income PRIDES, and at
a rate per annum of 1.3% of the Stated Amount per Purchase Contract in the
case of Growth Prides. Contract Adjustment Payments that are not paid when
due (after giving effect to any permitted deferral thereof) will bear
interest thereon at the rate per annum of 7.5% thereof compounded quarterly,
until paid. Contract Adjustment Payments payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months. Contract
Adjustment Payments will accrue from March 2, 1998 and will be payable
quarterly in arrears on February 16, May 16, August 16 and November 16 of
each year, commencing May 16, 1998.
Contract Adjustment Payments will be payable to the holders of Purchase
Contracts as they appear on the books and records of the Purchase Contract
Agent on the relevant record dates, which, as long as the Income PRIDES or
Growth PRIDES remain in book-entry only form, will be one Business Day prior
to the relevant payment dates. Such distributions will be paid through the
Purchase Contract Agent who will hold amounts received in respect of the
Contract Adjustment Payments for the benefit of the holders of the Purchase
Contracts relating to such Income PRIDES or Growth PRIDES. Subject to any
applicable laws and regulations, each such payment will be made as described
under "--Book-Entry System." In the event that the Income PRIDES or Growth
PRIDES do not continue to remain in book-entry only form, the Company shall
have the right to select relevant record dates, which shall be more than one
Business Day but less than 60 Business Days prior to the relevant payment
dates. In the event that any date on which Contract Adjustment Payments are
to be made on the Purchase Contracts related to the Income PRIDES or Growth
PRIDES is not a Business Day, then payment of the Contract Adjustment
Payments payable on such date will be made on the next succeeding day which
is a Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on such
payment date. A "Business Day" shall mean any day other than Saturday, Sunday
or any other day on which banking institutions in New York City (in the State
of New York) are permitted or required by any applicable law to close.
The Company's obligations with respect to Contract Adjustment Payments
will be subordinated and junior in right of payment to the Company's
obligations under the Senior Indebtedness.
OPTION TO DEFER CONTRACT ADJUSTMENT PAYMENTS
The Company may, at its option and upon prior written notice to the
holders of the FELINE PRIDES and the Purchase Contract Agent, defer the
payment of Contract Adjustment Payments on the Purchase Contracts until no
later than the Purchase Contract Settlement Date. However, Deferred Contract
Adjustment Payments, if any, will bear additional Contract Adjustment
Payments at the rate of 7.5% per annum (compounding on each succeeding
Payment Date) until paid. If the Purchase Contracts are terminated (upon the
occurrence of certain events of bankruptcy, insolvency or reorganization with
respect to the Company), the right to receive Contract Adjustment Payments
and Deferred Contract Adjustment Payments, if any, will also terminate.
S-53
<PAGE>
In the event that the Company elects to defer the payment of Contract
Adjustment Payments on the Purchase Contracts until the Purchase Contract
Settlement Date, each holder of FELINE PRIDES will receive on the Purchase
Contract Settlement Date in respect of the Deferred Contract Adjustment
Payments, in lieu of a cash payment, a number of shares of Common Stock equal
to (x) the aggregate amount of Deferred Contract Adjustment Payments payable
to such holder divided by (y) the Applicable Market Value.
In the event the Company exercises its option to defer the payment of
Contract Adjustment Payments, until the Deferred Contract Adjustment Payments
have been paid, the Company shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock or make
guarantee payments with respect to the foregoing (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 or the exchange or conversion
of one class or series of the Company's capital stock for another class or
series of the Company capital stock, (iii) the purchase of fractional
interests in shares of the Company's capital stock pursuant to the conversion
or exchange provisions of the Company 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).
ANTI-DILUTION ADJUSTMENTS
The formula for determining the Settlement Rate will be subject to
adjustment (without duplication) upon the occurrence of certain events,
including: (a) the payment of dividends (and other distributions) of Common
Stock on Common Stock; (b) the issuance to all holders of Common Stock of
rights, warrants or options entitling them, for a period of up to 45 days, to
subscribe for or purchase Common Stock at less than the Current Market Price
(as defined herein) thereof; (c) subdivisions, splits and combinations of
Common Stock; (d) distributions to all holders of Common Stock of evidences
of indebtedness of the Company, shares of capital stock, securities, cash or
property (excluding any dividend or distribution covered by clause (a) or (b)
above and any dividend or distribution paid exclusively in cash); (e)
distributions consisting exclusively of cash to all holders of Common Stock
in an aggregate amount that, together with (i) other all-cash distributions
made within the preceding 12 months and (ii) any cash and the fair market
value, as of the expiration of the tender or exchange offer referred to
below, of consideration payable in respect of any tender or exchange offer by
the Company or a subsidiary thereof for the Common Stock concluded within the
preceding 12 months, exceeds 15% of the Company's aggregate market
capitalization (such aggregate market capitalization being the product of the
Current Market Price of the Common Stock multiplied by the number of shares
of Common Stock then outstanding) on the date of such distribution; and (f)
the successful completion of a tender or exchange offer made by the Company
or any subsidiary thereof for the Common Stock which involves an aggregate
consideration that, together with (i) any cash and the fair market value of
other consideration payable in respect of any tender or exchange offer by the
Company or a subsidiary thereof for the Common Stock concluded within the
preceding 12 months and (ii) the aggregate amount of any all-cash
distributions to all holders of the Company's Common Stock made within the
preceding 12 months, exceeds 15% of the Company's aggregate market
capitalization on the expiration of such tender or exchange offer. The
"Current Market Price" per share of Common Stock on any day means the average
of the daily Closing Prices for the 5 consecutive Trading Days selected by
the Company commencing not more than 30 Trading Days before, and ending not
later than, the earlier of the day in question and the day before the "ex
date" with respect to the issuance or distribution requiring such
computation. For purposes of this paragraph, the term "ex date", when used
with respect to any issuance or distribution, shall mean the first date on
which the Common Stock trades regular way on such exchange or in such market
without the right to receive such issuance or distribution.
S-54
<PAGE>
In the case of certain reclassifications, consolidations, mergers, sales
or transfers of assets or other transactions pursuant to which the Common
Stock is converted into the right to receive other securities, cash or
property, each Purchase Contract then outstanding would, without the consent
of the holders of the related Income PRIDES or Growth PRIDES, as the case may
be, become a contract to purchase only the kind and amount of securities,
cash and other property receivable upon consummation of the transaction by a
holder of the number of shares of Common Stock which would have been received
by the holder of the related Income PRIDES or Growth PRIDES immediately prior
to the date of consummation of such transaction if such holder had then
settled such Purchase Contract.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
United States federal income tax purposes (i.e., distributions of evidences
of indebtedness or assets of the Company, but generally not stock dividends
or rights to subscribe to capital stock) and, pursuant to the Settlement Rate
adjustment provisions of the Purchase Contract Agreement, the Settlement Rate
is increased, such increase may give rise to a taxable dividend to holders of
FELINE PRIDES. See "Certain Federal Income Tax Consequences -- Purchase
Contracts -- Adjustment to Settlement Rate."
In addition, the Company may make such increases in the Settlement Rate as
the Board of Directors of the Company deems advisable to avoid or diminish
any income tax to holders of its capital stock resulting from any dividend or
distribution of capital stock (or rights to acquire capital stock) or from
any event treated as such for income tax purposes or for any other reasons.
Adjustments to the Settlement Rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the Settlement Rate shall be required
unless such adjustment would require an increase or decrease of at least one
percent in the Settlement Rate; provided, however, that any adjustments which
by reason of the foregoing are not required to be made shall be carried
forward and taken into account in any subsequent adjustment.
The Company will be required, within ten Business Days following the
adjustment of the Settlement Rate, to provide written notice to the Purchase
Contract Agent of the occurrence of such event and a statement in reasonable
detail setting forth the method by which the adjustment to the Settlement
Rate was determined and setting forth the revised Settlement Rate.
Each adjustment to the Settlement Rate will result in a corresponding
adjustment to the number of shares of Common Stock issuable upon early
settlement of a Purchase Contract.
TERMINATION OF PURCHASE CONTRACTS
The Purchase Contracts, and the rights and obligations of the Company and
of the holders of the FELINE PRIDES thereunder (including the right
thereunder to receive accrued Contract Adjustment Payments or Deferred
Contract Adjustment Payments and the right and obligation to purchase Common
Stock), will automatically terminate upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to the Company. Upon
such termination, the Collateral Agent will release the related Trust
Preferred Securities, the appropriate Applicable Ownership Interest of the
Treasury Portfolio or Treasury Securities, as the case may be, held by it to
the Purchase Contract Agent for distribution to the holders, subject in the
case of the Treasury Portfolio to the Purchase Contract Agent's disposition
of the subject securities for cash and the payment of such cash to the
holders to the extent that the holders would otherwise have been entitled to
receive less than $1,000 of any such security. Upon such termination,
however, such release and distribution may be subject to a delay. In the
event that the Company becomes the subject of a case under the Bankruptcy
Code, such delay may occur as a result of the automatic stay under the
Bankruptcy Code and continue until such automatic stay has been lifted. The
Company expects any such delay to be limited.
PLEDGED SECURITIES AND PLEDGE AGREEMENT
The Trust Preferred Securities related to the Income PRIDES or the
Treasury Securities related to the Growth PRIDES, or the Treasury Portfolio
if a Tax Event Redemption has occurred prior to the
S-55
<PAGE>
Purchase Contract Settlement Date (collectively, the "Pledged Securities")
will be pledged to the Collateral Agent, for the benefit of the Company,
pursuant to the Pledge Agreement to secure the obligations of holders of
FELINE PRIDES to purchase Common Stock under the related Purchase Contracts.
The rights of holders of FELINE PRIDES to the related Pledged Securities will
be subject to the Company's security interest therein created by the Pledge
Agreement. No holder of Income PRIDES or Growth PRIDES will be permitted to
withdraw the Pledged Securities related to such Income PRIDES or Growth
PRIDES from the pledge arrangement except (i) to substitute Treasury
Securities for the related Trust Preferred Securities or the appropriate
Applicable Ownership Interest of the Treasury Portfolio, as the case may be,
(ii) to substitute Trust Preferred Securities or the appropriate Applicable
Ownership Interest of the Treasury Portfolio, as the case may be, for the
related Treasury Securities (for both (i) and (ii), as provided for under
"Description of the FELINE PRIDES -- Substitution of Pledged Securities" and
"--Recreating Income PRIDES or Growth PRIDES") or (iii) upon the termination
or Early Settlement of the related Purchase Contracts. Subject to such
security interest and the terms of the Purchase Contract Agreement and the
Pledge Agreement, each holder of Income PRIDES (unless a Tax Event Redemption
has occurred) will be entitled through the Purchase Contract Agent and the
Collateral Agent to all of the proportional rights and preferences of the
related Trust Preferred Securities (including distribution, voting,
redemption, repayment and liquidation rights), and each holder of Growth
PRIDES or Income PRIDES (if a Tax Event Redemption has occurred) will retain
beneficial ownership of the related Treasury Securities or the appropriate
Applicable Ownership Interest of the Treasury Portfolio, as applicable,
pledged in respect of the related Purchase Contracts. The Company will have
no interest in the Pledged Securities other than its security interest.
Except as described in "Description of the Purchase Contracts -- General,"
the Collateral Agent will, upon receipt of distributions on the Pledged
Securities, distribute such payments to the Purchase Contract Agent, which
will in turn distribute those payments, together with Contract Adjustment
Payments received from the Company, to the persons in whose names the related
Income PRIDES or Growth PRIDES are registered at the close of business on the
Record Date immediately preceding the date of such distribution.
BOOK ENTRY-SYSTEM
The Depository Trust Company (the "Depositary") will act as securities
depositary for the FELINE PRIDES. The FELINE PRIDES will be issued only as
fully-registered securities registered in the name of Cede & Co. (the
Depositary's nominee). One or more fully-registered global security
certificates ("Global Security Certificates"), representing the total
aggregate number of FELINE PRIDES, will be issued and will be deposited with
the Depositary and will bear a legend regarding the restrictions on exchanges
and registration of transfer thereof referred to below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the FELINE PRIDES
so long as such FELINE PRIDES are represented by Global Security
Certificates.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Depositary holds securities that its participants ("Participants") deposit
with the Depositary. The Depositary also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). The Depositary is owned by a number of
its Direct Participants and by the NYSE, the American Stock Exchange, Inc.,
and the National Association of Securities Dealers, Inc. Access to the
Depositary
S-56
<PAGE>
system is also available to others, such as securities brokers and dealers,
banks and trust companies that clear transactions through or maintain a
direct or indirect custodial relationship with a Direct Participant either
directly or indirectly ("Indirect Participants"). The rules applicable to the
Depositary and its Participants are on file with the Commission.
No FELINE PRIDES represented by Global Security Certificates may be
exchanged in whole or in part for FELINE PRIDES registered, and no transfer
of Global Security Certificates in whole or in part may be registered, in the
name of any person other than the Depositary or any nominee of the Depositary
unless the Depositary has notified the Company that it is unwilling or unable
to continue as depositary for such Global Security Certificates or has ceased
to be qualified to act as such as required by the Purchase Contract Agreement
or there shall have occurred and be continuing a default by the Company in
respect of its obligations under one or more Purchase Contracts. All FELINE
PRIDES represented by one or more Global Security Certificates or any portion
thereof will be registered in such names as the Depositary may direct.
As long as the Depositary or its nominee is the registered owner of the
Global Security Certificates, such Depositary or such nominee, as the case
may be, will be considered the sole owner and holder of the Global Security
Certificates and all FELINE PRIDES represented thereby for all purposes under
the FELINE PRIDES and the Purchase Contract Agreement. Except in the limited
circumstances referred to above, owners of beneficial interests in Global
Security Certificates will not be entitled to have such Global Security
Certificates or the FELINE PRIDES represented thereby registered in their
names, will not receive or be entitled to receive physical delivery of FELINE
PRIDES Certificates in exchange therefor and will not be considered to be
owners or holders of such Global Security Certificates or any FELINE PRIDES
represented thereby for any purpose under the FELINE PRIDES or the Purchase
Contract Agreement. All payments on the FELINE PRIDES represented by the
Global Security Certificates and all transfers and deliveries of Trust
Preferred Securities, Treasury Portfolio, Treasury Securities and Common
Stock with respect thereto will be made to the Depositary or its nominee, as
the case may be, as the holder thereof.
Ownership of beneficial interests in the Global Security Certificates will
be limited to Participants or persons that may hold beneficial interests
through institutions that have accounts with the Depositary or its nominee.
Ownership of beneficial interests in Global Security Certificates will be
shown only on, and the transfer of those ownership interests will be effected
only through, records maintained by the Depositary or its nominee (with
respect to Participants' interests) or any such Participant (with respect to
interests of persons held by such Participants on their behalf). Procedures
for settlement of Purchase Contracts on the Purchase Contract Settlement Date
or upon Early Settlement will be governed by arrangements among the
Depositary, Participants and persons that may hold beneficial interests
through Participants designed to permit such settlement without the physical
movement of certificates. Payments, transfers, deliveries, exchanges and
other matters relating to beneficial interests in Global Security
Certificates may be subject to various policies and procedures adopted by the
Depositary from time to time. None of the Company, the Purchase Contract
Agent or any agent of the Company or the Purchase Contract Agent will have
any responsibility or liability for any aspect of the Depositary's or any
Participant's records relating to, or for payments made on account of,
beneficial interests in Global Security Certificates, or for maintaining,
supervising or reviewing any of the Depositary's records or any Participant's
records relating to such beneficial ownership interests.
The information in this section concerning the Depositary and its
book-entry system has been obtained from sources that the Company and the
Trust believe to be reliable, but neither the Company nor the Trust takes
responsibility for the accuracy thereof.
S-57
<PAGE>
CERTAIN PROVISIONS OF THE PURCHASE CONTRACT
AGREEMENT AND THE PLEDGE AGREEMENT
GENERAL
Distributions on the FELINE PRIDES will be payable, Purchase Contracts
(and documents related thereto) will be settled and transfers of the FELINE
PRIDES will be registrable at the office of the Purchase Contract Agent in
the Borough of Manhattan, The City of New York. In addition, in the event
that the FELINE PRIDES do not remain in book-entry form, payment of
distributions on the FELINE PRIDES may be made, at the option of the Company,
by check mailed to the address of the person entitled thereto as shown on the
Security Register.
Shares of Common Stock will be delivered on the Purchase Contract
Settlement Date (or earlier upon Early Settlement), or, if the Purchase
Contracts have terminated, the related Pledged Securities will be delivered
potentially after a delay as a result of the imposition of the automatic stay
under the Bankruptcy Code (see "Description of the Purchase Contracts --
Termination"), in each case upon presentation and surrender of the FELINE
PRIDES Certificate at the office of the Purchase Contract Agent. The Company
expects any such delay to be limited.
If a holder of outstanding Income PRIDES or Growth PRIDES fails to present
and surrender the FELINE PRIDES Certificate evidencing such Income PRIDES or
Growth PRIDES to the Purchase Contract Agent on the Purchase Contract
Settlement Date, the shares of Common Stock issuable in settlement of the
related Purchase Contract and in payment of any Deferred Contract Adjustment
Payments will be registered in the name of the Purchase Contract Agent and,
together with any distributions thereon, shall be held by the Purchase
Contract Agent as agent for the benefit of such holder, until such FELINE
PRIDES Certificate is presented and surrendered or the holder provides
satisfactory evidence that such certificate has been destroyed, lost or
stolen, together with any indemnity that may be required by the Purchase
Contract Agent and the Company.
If the Purchase Contracts have terminated prior to the Purchase Contract
Settlement Date, the related Pledged Securities have been transferred to the
Purchase Contract Agent for distribution to the holders entitled thereto and
a holder fails to present and surrender the FELINE PRIDES Certificate
evidencing such holder's Income PRIDES or Growth PRIDES to the Purchase
Contract Agent, the related Pledged Securities delivered to the Purchase
Contract Agent and payments thereon shall be held by the Purchase Contract
Agent as agent for the benefit of such holder, until such FELINE PRIDES
Certificate is presented or the holder provides the evidence and indemnity
described above.
The Purchase Contract Agent will have no obligation to invest or to pay
interest on any amounts held by the Purchase Contract Agent pending
distribution, as described above.
No service charge will be made for any registration of transfer or
exchange of the FELINE PRIDES, except for any tax or other governmental
charge that may be imposed in connection therewith.
MODIFICATION
The Purchase Contract Agreement and the Pledge Agreement will contain
provisions permitting the Company and the Purchase Contract Agent or
Collateral Agent, as the case may be, with the consent of the holders of not
less than a majority of the Purchase Contracts at the time outstanding, to
modify the terms of the Purchase Contracts, the Purchase Contract Agreement
and the Pledge Agreement, except that no such modification may, without the
consent of the holder of each outstanding Purchase Contract affected thereby,
(a) change any Payment Date, (b) change the amount or type of Pledged
Securities related to such Purchase Contract, impair the right of the holder
of any Pledged Securities to receive distributions on such Pledged Securities
(except for the rights of holders of Income PRIDES to substitute Treasury
Securities for the related Trust Preferred Securities or Treasury Portfolio,
as the case may be, or the rights of holders of Growth PRIDES to substitute
Trust Preferred Securities or Treasury Portfolio, as the case may be, for the
related Treasury Securities) or otherwise adversely affect the holder's
rights in or to such Pledged Securities, (c) change the place or currency of
payment or reduce any Contract
S-58
<PAGE>
Adjustment Payments or any Deferred Contract Adjustment Payments, (d) impair
the right to institute suit for the enforcement of such Purchase Contract,
(e) reduce the amount of Common Stock purchasable under such Purchase
Contract, increase the price to purchase Common Stock on settlement of such
Purchase Contract, change the Purchase Contract Settlement Date or otherwise
adversely affect the holder's rights under such Purchase Contract or (f)
reduce the above-stated percentage of outstanding Purchase Contracts the
consent of whose holders is required for the modification or amendment of the
provisions of the Purchase Contracts, the Purchase Contract Agreement or the
Pledge Agreement; provided, that if any amendment or proposal referred to
above would adversely affect only the Income PRIDES or the Growth PRIDES,
then only the affected class of holder will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the consent of the holders of not less than a majority of such
class.
NO CONSENT TO ASSUMPTION
Each holder of Income PRIDES or Growth PRIDES, by acceptance thereof, will
under the terms of the Purchase Contract Agreement and the Income PRIDES or
Growth PRIDES, as applicable, be deemed expressly to have withheld any
consent to the assumption (i.e., affirmance) of the related Purchase
Contracts by the Company or its trustee in the event that the Company becomes
the subject of a case under the Bankruptcy Code.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company will covenant in the Purchase Contract Agreement that it will
not merge or consolidate with any other entity or sell, assign, transfer,
lease or convey all or substantially all of its properties and assets to any
person, firm or corporation unless the Company is the continuing corporation
or the successor corporation is a corporation organized under the laws of the
United States of America or a state thereof and such corporation expressly
assumes the obligations of the Company under the Purchase Contracts, the
Debentures, the Purchase Contract Agreement and the Pledge Agreement, and the
Company or such successor corporation is not, immediately after such merger,
consolidation, sale, assignment, transfer, lease or conveyance, in default in
the performance of any of its obligations thereunder.
TITLE
The Company, the Purchase Contract Agent and the Collateral Agent may
treat the registered owner of any FELINE PRIDES as the absolute owner thereof
for the purpose of making payment and settling the related Purchase Contracts
and for all other purposes.
REPLACEMENT OF FELINE PRIDES CERTIFICATES
In the event that physical certificates have been issued, any mutilated
FELINE PRIDES Certificate will be replaced by the Company at the expense of
the holder upon surrender of such certificate to the Purchase Contract Agent.
FELINE PRIDES Certificates that become destroyed, lost or stolen will be
replaced by the Company at the expense of the holder upon delivery to the
Company and the Purchase Contract Agent of evidence of the destruction, loss
or theft thereof satisfactory to the Company and the Purchase Contract Agent.
In the case of a destroyed, lost or stolen FELINE PRIDES Certificate, an
indemnity satisfactory to the Purchase Contract Agent and the Company may be
required at the expense of the holder of the FELINE PRIDES evidenced by such
certificate before a replacement will be issued.
Notwithstanding the foregoing, the Company will not be obligated to issue
any Income PRIDES or Growth PRIDES on or after the Purchase Contract
Settlement Date (or after Early Settlement) or after the Purchase Contracts
have terminated. The Purchase Contract Agreement will provide that in lieu of
the delivery of a replacement FELINE PRIDES Certificate following the
Purchase Contract Settlement Date, the Purchase Contract Agent, upon delivery
of the evidence and indemnity described above, will deliver the Common Stock
issuable pursuant to the Purchase Contracts included in the Income PRIDES
S-59
<PAGE>
or Growth PRIDES evidenced by such certificate, or, if the Purchase Contracts
have terminated prior to the Purchase Contract Settlement Date, transfer the
principal amount of the Pledged Securities included in the Income PRIDES or
Growth PRIDES evidenced by such certificate.
GOVERNING LAW
The Purchase Contract Agreement, the Pledge Agreement and the Purchase
Contracts will be governed by, and construed in accordance with, the laws of
the State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
The First National Bank of Chicago will be the Purchase Contract Agent.
The Purchase Contract Agent will act as the agent for the holders of Income
PRIDES and Growth PRIDES from time to time. The Purchase Contract Agreement
will not obligate the Purchase Contract Agent to exercise any discretionary
actions in connection with a default under the terms of the Income PRIDES and
Growth PRIDES or the Purchase Contract Agreement.
The Purchase Contract will contain provisions limiting the liability of
the Purchase Contract Agent. The Purchase Contract Agreement will contain
provisions under which the Purchase Contract Agent may resign or be replaced.
Such resignation or replacement would be effective upon the appointment of a
successor.
INFORMATION CONCERNING THE COLLATERAL AGENT
The Chase Manhattan Bank will be the Collateral Agent. The Collateral
Agent will act solely as the agent of the Company and will not assume any
obligation or relationship of agency or trust for or with any of the holders
of the Income PRIDES and Growth PRIDES except for the obligations owed by a
pledgee of property to the owner thereof under the Pledge Agreement and
applicable law.
The Pledge Agreement will contain provisions limiting the liability of the
Collateral Agent. The Pledge Agreement will contain provisions under which
the Collateral Agent may resign or be replaced. Such resignation or
replacement would be effective upon the appointment of a successor.
The Chase Manhattan Bank maintains commercial banking relationships with
the Company.
MISCELLANEOUS
The Purchase Contract Agreement will provide that the Company will pay all
fees and expenses related to (i) the offering of the FELINE PRIDES, (ii) the
retention of the Collateral Agent and (iii) the enforcement by the Purchase
Contract Agent of the rights of the holders of the FELINE PRIDES; provided,
however, that holders who elect to substitute the related Pledged Securities,
thereby creating Growth PRIDES or Income PRIDES or recreating Income PRIDES
or Growth PRIDES, shall be responsible for any fees or expenses payable in
connection with such substitution, as well as any commissions, fees or other
expenses incurred in acquiring the Pledged Securities to be substituted, and
the Company shall not be responsible for any such fees or expenses.
S-60
<PAGE>
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities, a certain portion of which form a
component of the Income PRIDES, and a certain portion of which will trade
separately, will be issued pursuant to the terms of the Declaration. See
"Description of the FELINE PRIDES -- Substitution of Pledged Securities." The
Declaration will be qualified as an indenture under the Trust Indenture Act.
The Institutional Trustee, Wilmington Trust Company, an independent trustee,
will act as indenture trustee for the Trust Preferred Securities under the
Declaration for purposes of compliance with the provisions of the Trust
Indenture Act. The terms of the Trust Preferred Securities will include those
stated in the Declaration and those made part of the Declaration by the Trust
Indenture Act. The following summary of certain provisions of the Trust
Preferred Securities and the Declaration is not necessarily complete, and
reference is hereby made to the copy of the Declaration (including the
definitions therein of certain terms) which is filed as an exhibit to the
Registration Statement relating to this Prospectus Supplement, the Trust Act
and the Trust Indenture Act. Whenever particular defined terms are referred
to in this Prospectus Supplement, such defined terms are incorporated herein
by reference. The following descriptions of certain terms of the Trust
Preferred Securities offered hereby supplements and, to the extent
inconsistent with, replaces the description of the general terms and
provisions of the Trust Preferred Securities set forth in the accompanying
Prospectus, to which reference is hereby made.
GENERAL
The Declaration authorizes the Regular Trustees to issue on behalf of the
Trust the Trust Securities, which represent undivided beneficial ownership
interests in the assets of the Trust. All of the Common Securities will be
owned, directly or indirectly, by the Company. The Common Securities rank on
a parity, and payments will be made thereon on a pro rata basis, with the
Trust Preferred Securities, except that upon the occurrence and during the
continuance of an Indenture Event of Default, the rights of the holders of
the Common Securities to receive payment of periodic distributions and
payments upon liquidation, redemption and otherwise will be subordinated to
the rights of the holders of the Trust Preferred Securities. The Declaration
does not permit the issuance by the Trust of any securities other than the
Trust Securities or the incurrence of any indebtedness by the Trust. Pursuant
to the Declaration, the Institutional Trustee will own the Debentures
purchased by the Trust for the benefit of the holders of the Trust
Securities. The payment of distributions out of money held by the Trust, and
payments upon redemption of the Trust Preferred Securities or liquidation of
the Trust, are guaranteed by the Company to the extent described under
"Description of the Guarantee." The Guarantee, when taken together with the
Company's obligations under the Debentures and the Indenture and its
obligations under the Declaration, including the obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust Preferred Securities), provides a full and unconditional guarantee of
amounts due on the Trust Preferred Securities. The Guarantee will be held by
the Wilmington Trust Company, the Guarantee Trustee, for the benefit of the
holders of the Trust Preferred Securities. The Guarantee does not cover
payment of distributions when the Trust does not have sufficient available
funds to pay such distributions. In such event, the remedy of a holder of
Trust Preferred Securities is to vote to direct the Institutional Trustee to
enforce the Institutional Trustee's rights under the Debentures (except in
the limited circumstances in which the holder may take direct action). See
"--Declaration Events of Default" and "--Voting Rights."
DISTRIBUTIONS
Distributions on the Trust Preferred Securities will be fixed initially at
a rate per annum of 6.45% of the stated liquidation amount of $50 per Trust
Preferred Security. Distributions applicable on the Trust Preferred
Securities that remain outstanding on and after the Purchase Contract
Settlement Date will be reset on the third Business Day immediately preceding
the Purchase Contract Settlement Date. See "--Market Rate Reset."
Distributions in arrears for more than one quarter will bear interest thereon
at the rate of 6.45% per annum through and including February 15, 2001 and at
the Reset Rate thereafter, compounded quarterly. The term "distribution" as
used herein includes any such interest payable unless otherwise stated. The
amount of distributions payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months.
S-61
<PAGE>
Distributions on the Trust Preferred Securities will be cumulative and
will accrue from March 2, 1998 and will be payable quarterly in arrears on
February 16, May 16, August 16, and November 16 of each year, commencing May
16, 1998, when, as and if funds are available for payment. Distributions will
be made by the Institutional Trustee, except as otherwise described below.
The Company has the right under the Indenture to defer payments of
interest on the Debentures by extending the interest payment period from time
to time on the Debentures, which right, if exercised, would defer quarterly
distributions on the Trust Preferred Securities (though such distributions
would continue to accrue with interest at the rate of 6.45% per annum through
and including February 15, 2001, and at the Reset Rate thereafter) during any
such extended interest payment period. Such right to extend the interest
payment period for the Debentures is limited to a period, in the aggregate,
not extending beyond the maturity date of the Debentures. In the event that
the Company exercises this right, then (a) the Company shall not declare or
pay dividends on, make distributions with respect to, or redeem, purchase or
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 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 that rank on a
parity with or junior to such Debentures, and (c) the Company shall not make
any guarantee payments with respect to the foregoing other than pursuant to
the Guarantee or the Common Securities Guarantee. Prior to the termination of
any such Extension Period, the Company may further extend the interest
payment period; provided, that such Extension Period, together with all such
previous and further extensions thereof, may not extend beyond the maturity
date of the Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may select a new Extension
Period, subject to the above requirements. See "Description of the Debentures
- -- Interest" and "--Option to Extend Interest Payment Period." If
distributions are deferred, the deferred distributions and accrued interest
thereon shall be paid to holders of record of the Trust Preferred Securities
as they appear on the books and records of the Trust on the record date next
following the termination of such Extension Period.
Distributions on the Trust Preferred Securities must be paid on the dates
payable to the extent that the Trust has funds available in the Property
Account for the payment of such distributions. The Trust's funds available
for distribution to the holders of the Trust Preferred Securities will be
limited to payments received from the Company on the Debentures. See
"Description of the Debentures." The payment of distributions out of moneys
held by the Trust is guaranteed by the Company to the extent set forth under
"Description of the Guarantee." Distributions on the Trust Preferred
Securities will be payable to the holders thereof, including the Collateral
Agent, as they appear on the books and records of the Trust on the relevant
record dates, which, as long as the Trust Preferred Securities remain in
book-entry only form, will be one Business Day prior to the relevant payment
dates. Such distributions will be paid through the Institutional Trustee who
will hold amounts received in respect of the Debentures in the Property
Account for the benefit of the holders of the Trust Preferred Securities.
Subject to any applicable laws and regulations and the provisions of the
Declaration, each such payment will be made as described under "--Book-Entry
Only Issuance -- The Depository Trust Company" below. With respect to Trust
Preferred Securities not in book-entry form, the Regular Trustees shall have
the right to select relevant record dates, which shall be more than one
Business Day but less than 60 Business Days prior to the relevant payment
dates. In the event that any date on which distributions are to be made on
the Trust Preferred Securities is not a Business Day, then payment of the
distributions payable on such date will be made on the next
S-62
<PAGE>
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is
in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and
effect as if made on such record date.
MARKET RATE RESET
The applicable quarterly distribution rate on the Trust Preferred
Securities and the interest rate on the related Debentures that remain
outstanding on and after the Purchase Contract Settlement Date will be reset
on the third Business Day immediately preceding the Purchase Contract
Settlement Date to the Reset Rate, which will be equal to the sum of the
Reset Spread and the rate on the Two-Year Benchmark Treasury in effect on the
third Business Day immediately preceding the Purchase Contract Settlement
Date and will be determined by the Reset Agent as the rate the Trust
Preferred Securities should bear in order for a Trust Preferred Security to
have an approximate market value on the third Business Day immediately
preceding the Purchase Contract Settlement Date of 100.5% of the Stated
Amount; provided that the Company may limit such Reset Rate to be no higher
than the rate on the Two-Year Benchmark Treasury on the Purchase Contract
Settlement Date plus 200 basis points (2%). Such market value may be less
than 100.5% if the Reset Spread is limited to a maximum of 2%. The "Two-Year
Benchmark Treasury" shall mean direct obligations of the United States (which
may be obligations traded on a when-issued basis only) having a maturity
comparable to the remaining term to maturity of the Trust Preferred
Securities, as agreed upon by the Company and the Reset Agent. The rate for
the Two-Year Benchmark Treasury will be the bid side rate displayed at 10:00
A.M., New York City time, on the third Business Day immediately preceding the
Purchase Contract Settlement Date in the Telerate system (or if the Telerate
system is (a) no longer available on the third Business Day immediately
preceding the Purchase Contract Settlement Date or (b) in the opinion of the
Reset Agent (after consultation with the Company) no longer an appropriate
system from which to obtain such rate, such other nationally recognized
quotation system as, in the opinion of the Reset Agent (after consultation
with the Company) is appropriate). If such rate is not so displayed, the rate
for the Two-Year Benchmark Treasury shall be, as calculated by the Reset
Agent, the yield to maturity for the Two-Year Benchmark Treasury, expressed
as a bond equivalent on the basis of a year of 365 or 366 days, as
applicable, and applied on a daily basis, and computed by taking the
arithmetic mean of the secondary market bid rates, as of 10:30 A.M., New York
City time, on the third Business Day immediately preceding the Purchase
Contract Settlement Date of three leading United States government securities
dealers selected by the Reset Agent (after consultation with the Company)
(which may include the Reset Agent or an affiliate thereof). The Company may
limit the Reset Rate to be no higher than the rate on the Two-Year Benchmark
Treasury on the third Business Day immediately preceding the Purchase
Contract Settlement Date plus 200 basis points (2%). It is currently
anticipated that Merrill Lynch, Pierce, Fenner & Smith Incorporated will be
the investment banking firm acting as the Reset Agent.
On the tenth Business Day immediately preceding the Purchase Contract
Settlement Date, the Two-Year Benchmark Treasury to be used to determine the
Reset Rate on the Purchase Contract Settlement Date will be selected and the
Reset Spread to be added to the rate on the Two-Year Benchmark Treasury in
effect on the third Business Day immediately preceding the Purchase Contract
Settlement Date will be established by the Reset Agent, and the Reset Spread
and the Two-Year Benchmark Treasury will be announced by the Company (the
"Reset Announcement Date"). The Company will cause a notice of the Reset
Spread and such Two-Year Benchmark Treasury to be published on the Business
Day following the Reset Announcement Date by publication in a daily newspaper
in the English language of general circulation in The City of New York, which
is expected to be The Wall Street Journal. The Company will request, not
later than ten nor more than 15 calendar days prior to the Reset Announcement
Date, that the Depositary notify its participants holding Trust Preferred
Securities, Income PRIDES or Growth PRIDES of such Reset Announcement Date
and of the procedures that must be followed if any owner of FELINE PRIDES
wishes to settle the related Purchase Contract with cash on the Business Day
immediately preceding the Purchase Contract Settlement Date.
S-63
<PAGE>
OPTIONAL REMARKETING
Pursuant to the Remarketing Agreement and subject to the terms of the
Remarketing Underwriting Agreement, on or prior to the fifth Business Day
immediately preceding the Purchase Contract Settlement Date, but no earlier
than the Payment Date immediately preceding the Purchase Contract Settlement
Date, holders of separate Trust Preferred Securities which are not components
of Income PRIDES may elect to have their Trust Preferred Securities
remarketed, by delivering their Trust Preferred Securities along with a
notice of such election to the Custodial Agent. The Custodial Agent will hold
such Trust Preferred Securities in an account separate from the collateral
account in which the Pledged Securities will be held. Holders of Trust
Preferred Securities electing to have their Trust Preferred Securities
remarketed will also have the right to withdraw such election on or prior to
the fifth Business Day immediately preceding the Purchase Contract Settlement
Date. On the fourth Business Day immediately preceding the Purchase Contract
Settlement Date, the Custodial Agent will deliver such Trust Preferred
Securities to the Remarketing Agent for remarketing. The Remarketing Agent
will use its reasonable efforts to remarket such Trust Preferred Securities
on such date at a price of approximately 100.5% of the aggregate stated
liquidation amount of such Trust Preferred Securities, plus accrued and
unpaid distributions (including deferred distributions), if any, thereon. The
portion of the proceeds from such remarketing equal to the aggregate stated
liquidation amount of such Trust Preferred Securities will automatically be
remitted by the Remarketing Agent to the Custodial Agent for the benefit of
such Trust Preferred Securities holders. In addition, after deducting as the
Remarketing Fee an amount not exceeding 25 basis points (.25%) of the
aggregate stated liquidation amount of the remarketed securities, from any
amount of such proceeds in excess of the aggregate stated liquidation amount
of the remarketed Trust Preferred Securities plus any accrued and unpaid
distributions (including deferred distributions, if any), the Remarketing
Agent will remit to the Custodial Agent the remaining portion of the
proceeds, if any, for the benefit of such holder. If, despite using its
reasonable efforts, the Remarketing Agent cannot remarket the related Trust
Preferred Securities of such holders at a price not less than 100% of the
aggregate stated liquidation amount of such Trust Preferred Securities plus
accrued and unpaid distributions (including deferred distributions) and thus
resulting in a Failed Remarketing, the Custodial Agent will promptly return
such Trust Preferred Securities to the Custodial Agent to release to such
holders. The Company will cause a notice of such Failed Remarketing to be
published on the second Business Day immediately preceding the Purchase
Contract Settlement Date by publication in a daily newspaper in the English
language of general circulation in The City of New York, which is expected to
be The Wall Street Journal. In addition, the Company will request, not later
than ten nor more than 15 calendar days prior to the remarketing date, that
the Depository notify its participants holding Trust Preferred Securities,
Income PRIDES and Growth PRIDES of such remarketing and of the procedures
that must be followed if a Trust Preferred Security holder wishes to exercise
its right to put its Trust Preferred Security to the Company as described
herein. The Company will endeavor to ensure that a registration statement
with regard to the full amount of the Trust Preferred Securities to be
remarketed shall be effective in such form as will enable the Remarketing
Agent to rely on it in connection with the remarketing process. It is
currently anticipated that Merrill Lynch, Pierce, Fenner & Smith Incorporated
will be the Remarketing Agent.
OPTIONAL REDEMPTION
The Debentures are redeemable at the option of the Company, in whole but
not in part, on not less than 30 days nor more than 60 days notice, upon the
occurrence and continuation of a Tax Event under the circumstances described
under "Description of the Debentures -- Tax Event Redemption". If the Company
redeems the Debentures upon the occurrence and continuation of a Tax Event,
the proceeds from such repayment shall simultaneously be applied on a pro
rata basis to redeem Trust Preferred Securities having an aggregate stated
liquidation amount equal to the aggregate principal amount of the Debentures
so redeemed at a Redemption Price, per Trust Preferred Security, equal to the
Redemption Amount plus accrued and unpaid interest thereon to the date of
such redemption. Such proceeds will be payable in cash to the holders of such
Trust Preferred Securities. If a Tax Event Redemption occurs prior to the
Purchase Contract Settlement Date, the Redemption Price payable to the
Collateral Agent, in liquidation of the Income PRIDES holders' interests in
the Trust, will be simultaneously applied by the
S-64
<PAGE>
Collateral Agent to purchase on behalf of the holders' of the Income PRIDES
the Treasury Portfolio. The Treasury Portfolio will be pledged with the
Collateral Agent to secure the obligation of Income PRIDES holders' to
purchase Common Stocks under the related Purchase Contracts.
If a Failed Remarketing has occurred, holders of Trust Securities
(including, following the distribution of the Debentures upon a dissolution
of the Trust as described herein, such Debenture holders) holding such Trust
Securities or Debentures, as the case may be, following the Purchase Contract
Settlement Date will have the right, in the case of Trust Securities, to
require the Trust to put to the Company the related Debentures or, in the
case of the Debentures, to put such Debentures directly to the Company on
March 2, 2001, upon at least three Business Days' prior notice, at a price
per Debenture equal to $50, plus accrued and unpaid interest (including
deferred interest), if any, thereon. Upon the repurchase of such Debentures
by the Company, (i) the proceeds from such repurchase shall simultaneously be
applied (in the case of the Trust Securities) to redeem such Trust Securities
of such holder in an aggregate stated liquidation amount equal to the
aggregate principal amount of the Debentures so repurchased and (ii) any
accrued and unpaid distributions, including deferred distributions, with
respect to such Trust Securities will be paid to such holder in cash.
REDEMPTION PROCEDURES
If the Trust gives a notice of redemption (which notice will be
irrevocable) in respect of all of the Trust Preferred Securities, then, by
12:00 noon, New York City time, on the redemption date, provided that the
Company has paid to the Institutional Trustee sufficient amount of cash in
connection with the related redemption or maturity of the Debentures, the
Trust will irrevocably deposit with the Depositary, the Purchase Contract
Agent or the Collateral Agent, as applicable, funds sufficient to pay the
applicable Redemption Price and will give the Depositary, the Purchase
Contract Agent or the Collateral Agent, as applicable, irrevocable
instructions and authority to pay the Redemption Price to the holders of the
Trust Preferred Securities so called for redemption. If notice of redemption
shall have been given and funds deposited as required, then, immediately
prior to the close of business on the date of such deposit, distributions
will cease to accrue and all rights of holders of such Trust Preferred
Securities so called for redemption will cease, except the right of the
holders of such Trust Preferred Securities to receive the Redemption Price
but without interest on such Redemption Price. In the event that any date
fixed for redemption of Trust Preferred Securities is not a Business Day,
then payment of the Redemption Price payable on such date will be made on the
next succeeding day that is a Business Day (without any interest or other
payment in respect of any such delay), except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day.
DISTRIBUTION OF THE DEBENTURES
"Investment Company Event" means that the Regular Trustees shall have
received an opinion from independent counsel experienced in practice under
the 1940 Act (as defined below) to the effect that, as a result of the
occurrence of a change in law or regulation or a written change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act
Law"), which Change in 1940 Act Law becomes effective on or after the date of
this Prospectus Supplement, there is more than an insubstantial risk that the
Trust is or will be considered an "investment company" which is required to
be registered under the Investment Company Act of 1940, as amended (the "1940
Act").
If, at any time, an Investment Company Event shall occur and be
continuing, the Trust shall be dissolved, with the result that Debentures
with an aggregate principal amount equal to the aggregate stated liquidation
amount of, with an interest rate identical to the distribution rate of, and
accrued and unpaid interest equal to accrued and unpaid distributions on, the
Trust Securities, would be distributed to the holders of the Trust Securities
in liquidation of such holders' interests in the Trust on a pro rata basis
within 90 days following the occurrence of such Investment Company Event;
provided, however, that such dissolution and distribution shall be
conditioned on the Company being unable to avoid such Investment Company
Event within such 90-day period by taking some ministerial action or pursuing
some other similar reasonable measure that will have no adverse effect on the
Trust, the Company or the holders of
S-65
<PAGE>
the Trust Securities and will involve no material cost. If an Investment
Company Event occurs, Debentures distributed to the Collateral Agent in
liquidation of such holders' interests in the Trust would be pledged (in lieu
of the Trust Preferred Securities) to secure Income PRIDES holders'
obligations to purchase Common Stock under the Purchase Contracts.
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities of creditors of the Trust as provided by
applicable law, cause the Debentures to be distributed to the holders of the
Trust Securities. As of the date of any distribution of Debentures upon
dissolution of the Trust, (i) the Trust Preferred Securities will no longer
be deemed to be outstanding, (ii) the Depositary or its nominee, as the
record holder of the Trust Preferred Securities, will receive a registered
global certificate or certificates representing the Debentures to be
delivered upon such distribution, and (iii) any certificates representing
Trust Preferred Securities not held by the Depositary or its nominee will be
deemed to represent Debentures having an aggregate principal amount equal to
the aggregate stated liquidation amount of, with an interest rate identical
to the distribution rate of, and accrued and unpaid interest equal to accrued
and unpaid distributions on, such Trust Preferred Securities until such
certificates are presented to the Company or its agent for transfer or
reissuance. Debentures distributed to the Collateral Agent in liquidation of
the interest of the holders of the Trust Preferred Securities in the Trust
would be substituted for the Trust Preferred Securities and pledged to secure
Income PRIDES holders' obligations to purchase Common Stock under the
Purchase Contracts.
There can be no assurance as to the market prices for either the Trust
Preferred Securities or the Debentures that may be distributed in exchange
for the Trust Preferred Securities if a dissolution of the Trust were to
occur. Accordingly, the Trust Preferred Securities or such Debentures that an
investor may receive if a dissolution of the Trust were to occur may trade at
a discount to the price that the investor paid to purchase the Trust
Preferred Securities forming a part of the Income PRIDES offered hereby.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution of the Trust
(unless a Tax Event Redemption has occurred), the then holders of the Trust
Preferred Securities will be entitled to receive out of the assets of the
Trust, after satisfaction of liabilities to creditors, Debentures in an
aggregate principal amount equal to the aggregate stated liquidation amount
of, with an interest rate identical to the distribution rate of, and accrued
and unpaid interest equal to accrued and unpaid distributions on, the Trust
Preferred Securities on a pro rata basis in exchange for such Trust Preferred
Securities.
The holders of the Common Securities will be entitled to receive
distributions upon any such dissolution pro rata with the holders of the
Trust Preferred Securities, except that if a Declaration Event of Default has
occurred and is continuing, the Trust Preferred Securities shall have a
preference over the Common Securities with regard to such distributions.
Pursuant to the Declaration, the Trust shall dissolve (i) on March 2,
2005, the expiration of the term of the Trust, (ii) upon the bankruptcy of
the Company or the holder of the Common Securities, (iii) upon the filing of
a certificate of dissolution or its equivalent with respect to the Company or
the revocation of the charter of the Company and the expiration of 90 days
after the date of revocation without a reinstatement thereof, (iv) after the
receipt by the Institutional Trustee of written direction from the Company to
dissolve the Trust or the filing of a certificate of dissolution or its
equivalent with respect to the Trust, (v) upon the distribution of
Debentures, (vi) upon the occurrence and continuation of a Tax Event
Redemption or (vii) upon the entry of a decree of a judicial dissolution of
the holder of the Common Securities, the Company or the Trust.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the
Trust Securities (a "Declaration Event of Default"); provided, that pursuant
to the Declaration, the holder of the Common Securities will be deemed to
have waived any Declaration Event of Default with respect to the Common
Securities until all Declaration Events of Default with respect to the Trust
Preferred Securities have been cured, waived or otherwise
S-66
<PAGE>
eliminated. Until such Declaration Events of Default with respect to the
Trust Preferred Securities have been so cured, waived or otherwise
eliminated, the Institutional Trustee will be deemed to be acting solely on
behalf of the holders of the Trust Preferred Securities and only the holders
of the Trust Preferred Securities will have the right to direct the
Institutional Trustee with respect to certain matters under the Declaration
and, therefore, the Indenture. If a Declaration Event of Default with respect
to the Trust Preferred Securities is waived by holders of Trust Preferred
Securities, such waiver will also constitute the waiver of such Declaration
Event of Default with respect to the Common Securities without any further
act, vote or consent of the holders of the Common Securities. If the
Institutional Trustee fails to enforce its rights under the Debentures in
respect of an Indenture Event of Default after a holder of record of Trust
Preferred Securities has made a written request, such holder of record of
Trust Preferred Securities may, to the fullest extent permitted by applicable
law, institute a legal proceeding against the Company to enforce the
Institutional Trustee's rights under the Debentures without first proceeding
against the Institutional Trustee or any other person or entity.
Notwithstanding the foregoing, if a Declaration Event of Default has occurred
and is continuing and such event is attributable to the failure of the
Company to pay interest or principal on the Debentures on the date such
interest or principal is otherwise payable (after giving effect to any right
of deferral), then a holder of Trust Preferred Securities may directly
institute a proceeding after the respective due date specified in the
Debentures for enforcement of payment (a "Direct Action") to such holder
directly of the principal of or interest on the Debentures having a principal
amount equal to the aggregate liquidation amount of the Trust Preferred
Securities of such holder. In connection with such Direct Action, the Company
shall have the right under the Indenture to set off any payment made to such
holder of the Company. The holders of Trust Preferred Securities will not be
able to exercise directly any other remedy available to the holders of the
Debentures. See "Effect of Obligations under the Debentures and the
Guarantee."
Upon the occurrence of a Declaration Event of Default, the Institutional
Trustee as the sole holder of the Debentures will have the right under the
Indenture to declare the principal of and interest on the Debentures to be
immediately due and payable. The Company and the Trust are each required to
file annually with the Institutional Trustee an officer's certificate as to
its compliance with all conditions and covenants under the Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act and the Trust Indenture
Act and under "Description of the Guarantee -- Modification of the Guarantee;
Assignment," and as otherwise required by law and the Declaration, the
holders of the Trust Preferred Securities will have no voting rights.
Subject to the requirement of the Institutional Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of this
paragraph, the holders of a majority in aggregate stated liquidation amount
of the Trust Preferred Securities have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Institutional Trustee, or direct the exercise of any trust or power conferred
upon the Institutional Trustee under the Declaration, including the right to
direct the Institutional Trustee, as holder of the Debentures, to (i)
exercise the remedies available under the Indenture with respect to the
Debentures, (ii) waive any past Indenture Event of Default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Debentures shall be due and payable
or (iv) consent to any amendment, modification or termination of the
Indenture or the Debentures where such consent shall be required; provided,
however, that, where a consent or action under the Indenture would require
the consent or act of holders of more than a majority in principal amount of
the Debentures (a "Super-Majority") affected thereby, only the holders of at
least such Super-Majority in aggregate stated liquidation amount of the Trust
Preferred Securities may direct the Institutional Trustee to give such
consent or take such action. The Institutional Trustee shall notify all
holders of the Trust Preferred Securities of any notice of default received
from the Debt Trustee (as defined herein) with respect to the Debentures.
Such notice shall state that such Indenture Event of Default also constitutes
a Declaration Event of Default. Except with respect to directing the time,
method and place of conducting a proceeding for a remedy, the Institutional
Trustee
S-67
<PAGE>
shall not take any of the actions described in clauses (i), (ii) or (iii)
above unless the Institutional Trustee has obtained an opinion of tax counsel
experienced in such matters to the effect that, as a result of such action,
the Trust will not fail to be classified as a grantor trust for federal
income tax purposes.
In the event the consent of the Institutional Trustee, as the holder of
the Debentures, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture or the Debentures,
the Institutional Trustee shall request the direction of the holders of the
Trust Preferred Securities and the Common Securities with respect to such
amendment, modification or termination and shall vote with respect to such
amendment, modification or termination as directed by a majority in stated
liquidation amount of the Trust Preferred Securities and the Common
Securities voting together as a single class; provided, however, that where a
consent under the Indenture would require the consent of a Super-Majority,
the Institutional Trustee may only give such consent at the direction of the
holders of at least the proportion in stated liquidation amount of the Trust
Preferred Securities and the Common Securities which the relevant
Super-Majority represents of the aggregate principal amount of the Debentures
outstanding. The Institutional Trustee shall not take any such action in
accordance with the directions of the holders of the Trust Preferred
Securities and the Common Securities unless the Institutional Trustee has
obtained an opinion of tax counsel experienced in such matters to the effect
that, as a result of such action, the Trust will not fail to be classified as
a grantor trust for United States federal income tax purposes.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Trust Preferred
Securities may be given at a separate meeting of holders of Trust Preferred
Securities convened for such purpose, at a meeting of all of the holders of
Trust Securities or pursuant to written consent. The Regular Trustees will
cause a notice of any meeting at which holders of Trust Preferred Securities
are entitled to vote, or of any matter upon which action by written consent
of such holders is to be taken, to be mailed to each holder of record of
Trust Preferred Securities. Each such notice will include a statement setting
forth the following information: (i) the date of such meeting or the date by
which such action is to be taken; (ii) a description of any resolution
proposed for adoption at such meeting on which such holders are entitled to
vote or of such matter upon which written consent is sought; and (iii)
instructions for the delivery of proxies or consents. No vote or consent of
the holders of Trust Preferred Securities will be required for the Trust to
cancel Trust Preferred Securities or distribute Debentures in accordance with
the Declaration.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Trust Preferred Securities that are owned at such time by the Company or any
entity directly or indirectly controlling or controlled by, or under direct
or indirect common control with, the Company, shall not be entitled to vote
or consent and shall, for purposes of such vote or consent, be treated as if
such Trust Preferred Securities were not outstanding.
The procedures by which holders of Trust Preferred Securities may exercise
their voting rights are described below. See "--Book-Entry Only Issuance --
The Depository Trust Company."
Holders of the Trust Preferred Securities will have no rights to appoint
or remove the Cendant Trustees, who may be appointed, removed or replaced
solely by the Company as the indirect or direct holder of all of the Common
Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Regular
Trustees (and in certain circumstances the Institutional Trustee or the
Delaware Trustee), provided, that if any proposed amendment provides for, or
the Regular Trustees otherwise propose to effect, (i) any action that would
adversely affect the powers, preferences or special rights of the Trust
Securities, whether by way of amendment to the Declaration or otherwise or
(ii) the dissolution of the Trust other than pursuant to the terms of the
Declaration, then the holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of at
least a majority in such stated liquidation amount of the Trust Securities
S-68
<PAGE>
affected thereby; provided further, that if any amendment or proposal
referred to in clause (i) above would adversely affect only the Trust
Preferred Securities or the Common Securities, then only the affected class
will be entitled to vote on such amendment or proposal and such amendment or
proposal shall not be effective except with the approval of a majority in
stated liquidation amount of such class of securities. In addition, the
Declaration may be amended without the consent of the holders of the Trust
Securities to, among other things, cause the Trust to continue to be
classified for United States federal income tax purposes as a grantor trust.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust
to be classified as other than a grantor trust for purposes of United States
federal income taxation, (ii) reduce or otherwise adversely affect the powers
of the Institutional Trustee or (iii) cause the Trust to be deemed an
"investment company" which is required to be registered under the 1940 Act.
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other body, except as
described below or as described in "Liquidation Distribution Upon
Dissolution". The Trust may, with the consent of the Regular Trustees and
without the consent of the holders of the Trust Securities, consolidate,
amalgamate, merge with or into, or be replaced by a trust organized as such
under the laws of any State; provided, that (i) if the Trust is not the
surviving entity, such successor entity either (x) expressly assumes all of
the obligations of the Trust under the Trust Securities or (y) substitutes
for the Trust Securities other securities having substantially the same terms
as the Trust Securities (the "Successor Securities"), so long as the
Successor Securities rank the same as the Trust Securities with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii)
the Company expressly acknowledges a trustee of such successor entity
possessing the same powers and duties as the Institutional Trustee as the
holder of the Debentures, (iii) if the Trust Preferred Securities are listed,
any Successor Securities will be listed upon notification of issuance, on any
national securities exchange or with another organization on which the Trust
Preferred Securities are then listed or quoted, (iv) such merger,
consolidation, amalgamation or replacement does not cause the Trust Preferred
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation or replacement does not adversely affect the
rights, preferences and privileges of the holders of the Trust Securities
(including any Successor Securities) in any material respect (other than with
respect to any dilution of the holders' interest in the new entity), (vi)
such successor entity has a purpose substantially identical to that of the
Trust, (vii) prior to such merger, consolidation, amalgamation or
replacement, the Company has received an opinion of a nationally recognized
independent counsel to the Trust experienced in such matters to the effect
that, (A) such merger, consolidation, amalgamation or replacement does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Securities (including any Successor Securities) in any material respect
(other than with respect to any dilution of the holders' interest in the new
entity), (B) following such merger, consolidation, amalgamation or
replacement, neither the Trust nor such successor entity will be required to
register as an investment company under the 1940 Act and (C) following such
merger, consolidation, amalgamation or replacement, the Trust (or the
successor entity) will continue to be classified as a grantor trust for
federal income tax purposes, and (viii) the Company guarantees the
obligations of such successor entity under the Successor Securities at least
to the extent provided by the Guarantee and the Common Securities Guarantee
(as defined herein). Notwithstanding the foregoing the Trust shall not,
except with the consent of holders of 100% in stated liquidation amount of
the Trust Securities, consolidate, amalgamate, merge with or into, or be
replaced by any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it, if such consolidation,
amalgamation, merger or replacement would cause the Trust or the successor
entity to be classified as other than a grantor trust for federal income tax
purposes.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
In the event that the Trust Preferred Securities are issued as one or more
fully-registered global Trust Preferred Securities certificates representing
the total aggregate number of Trust Preferred Securities, the
S-69
<PAGE>
Depositary will act as securities depositary for any Trust Preferred
Securities that are held separately from the Income PRIDES. In such event,
the Trust Preferred Securities will be issued only as fully-registered
securities registered in the name of Cede & Co. (the Depositary's nominee).
However, under certain circumstances, the Regular Trustees with the consent
of the Company may decide not to use the system of book-entry transfers
through the DTC with respect to the Trust Preferred Securities. In that
event, certificates of the Trust Preferred Securities will be printed and
delivered to the holders.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Trust
Preferred Securities as represented by a global certificate.
Purchases of Trust Preferred Securities within the Depositary's system
must be made by or through Direct Participants, which will receive a credit
for the Trust Preferred Securities on the Depositary's records. The ownership
interest of each actual purchaser of each Trust Preferred Security (a
"Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written
confirmation from the Depositary of their purchases, but Beneficial Owners
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Direct or Indirect Participants through which the Beneficial Owners purchased
Trust Preferred Securities. Transfers of ownership interests in the Trust
Preferred Securities are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners will
not receive certificates representing their ownership interests in the Trust
Preferred Securities, except in the event that use of the book-entry system
for the Trust Preferred Securities is discontinued.
To facilitate subsequent transfers, all the Trust Preferred Securities
deposited by Participants with the Depositary will be registered in the name
of the Depositary's nominee, Cede & Co. The deposit of Trust Preferred
Securities with the Depositary and their registration in the name of Cede &
Co. effect no change in beneficial ownership. The Depositary has no knowledge
of the actual Beneficial Owners of the Trust Preferred Securities. The
Depositary's records reflect only the identity of the Direct Participants to
whose accounts such Trust Preferred Securities are credited, which may or may
not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
So long as the Depositary or its nominee is the registered owner or holder
of a global certificate, the Depositary or such nominee, as the case may be,
will be considered the sole owner or holder of the Trust Preferred Securities
represented thereby for all purposes under the Declaration and the Trust
Preferred Securities. No beneficial owner of an interest in a global
certificate will be able to transfer that interest except in accordance with
the Depositary applicable procedures, in addition to those provided for under
the Declaration.
The Depositary has advised the Company that it will take any action
permitted to be taken by a holder of Trust Preferred Securities (including
the presentation of Trust Preferred Securities for exchange as described
below) only at the direction of one or more Participants to whose account the
Depositary's interests in the global certificates are credited and only in
respect of such portion of the stated liquidation amount of Trust Preferred
Securities as to which such Participant or Participants has or have given
such directions. However, if there is a Declaration Event of Default under
the Trust Preferred Securities, the Depositary will exchange the global
certificates for certificated securities, which it will distribute to its
Participants.
Conveyance of notices and other communications by the Depositary to Direct
Participants and Indirect Participants and by Direct Participants and
Indirect Participants to Beneficial Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements that may be
in effect from time to time.
Although voting with respect to the Trust Preferred Securities is limited,
in those cases where a vote is required, neither the Depositary nor Cede &
Co. will itself consent or vote with respect to Trust Preferred Securities.
Under its usual procedures, the Depositary would mail an omnibus proxy to the
S-70
<PAGE>
Trust as soon as possible after the record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Trust Preferred Securities are credited on the record date
(identified in a listing attached to the omnibus proxy). The Company and the
Trust believe that the arrangements among the Depositary, Direct and Indirect
Participants, and Beneficial Owners will enable the Beneficial Owners to
exercise rights equivalent in substance to the rights that can be directly
exercised by a record holder of a beneficial interest in the Trust.
Distribution payments on the Trust Preferred Securities issued in the form
of one or more global certificates will be made to the Depositary in
immediately available funds. The Depositary's practice is to credit Direct
Participants' accounts on the relevant payment date in accordance with their
respective holdings shown on the Depositary's records unless the Depositary
has reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the account of customers in bearer form or registered in "street name," and
such payments will be the responsibility of such Participant and not of the
Depositary, the Trust or the Company, subject to any statutory or regulatory
requirements to the contrary that may be in effect from time to time. Payment
of distributions to the Depositary is the responsibility of the Trust,
disbursement of such payments to Direct Participants is the responsibility of
the Depositary, and disbursement of such payments to the Beneficial Owners is
the responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a global Trust Preferred
Security certificate will not be entitled to receive physical delivery of
Trust Preferred Securities. Accordingly, each Beneficial Owner must rely on
the procedures of the Depositary to exercise any rights under the Trust
Preferred Securities.
Although the Depositary has agreed to the foregoing procedure in order to
facilitate transfer of interests in the global certificates among
Participants, the Depositary is under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the Company, the Trust or any Cendant Trustee will have any
responsibility for the performance by the Depositary or its Participants or
Indirect Participants under the rules and procedures governing the
Depositary. The Depositary may discontinue providing its services as
securities depositary with respect to the Trust Preferred Securities at any
time by giving reasonable notice to the Trust. Under such circumstances, in
the event that a successor securities depositary is not obtained, Trust
Preferred Securities certificates are required to be printed and delivered to
holders. Additionally, the Regular Trustees (with the consent of the Company)
may decide to discontinue use of the system of book-entry transfers through
the Depositary (or any successor depositary) with respect to the Trust
Preferred Securities. In that event, certificates for the Trust Preferred
Securities will be printed and delivered to holders. In each of the above
circumstances, the Company will appoint a paying agent with respect to the
Trust Preferred Securities.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the
Company and the Trust believe to be reliable, but neither the Company nor the
Trust takes responsibility for the accuracy hereof.
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
Payments in respect of the Trust Preferred Securities represented by the
global certificates shall be made to the Depositary, which shall credit the
relevant accounts at the Depositary on the applicable distribution dates, or,
in the case of certificated securities, such payments shall be made by check
mailed to the address of the holder entitled thereto as such address shall
appear on the Register. The Paying Agent shall be permitted to resign as
Paying Agent upon 30 days' written notice to the Cendant Trustees. In the
event that First National Bank of Chicago shall no longer be the Paying
Agent, the Regular Trustees shall appoint a successor to act as Paying Agent
(which shall be a bank or trust company).
The First National Bank of Chicago will act as registrar, transfer agent
and paying agent for the Trust Preferred Securities.
S-71
<PAGE>
Registration of transfers of Trust Preferred Securities will be effected
without charge by or on behalf of the Trust, but upon payment (and the giving
of such indemnity as the Trust or the Company may require) in respect of any
tax or other government charge which may be imposed in relation to it.
INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
The Institutional Trustee prior to the occurrence of a default with
respect to the Trust Securities and after the curing of any defaults that may
have occurred, undertakes to perform only such duties as are specifically set
forth in the Declaration and, after default, 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 provisions, the Institutional Trustee is under
no obligation to exercise any of the powers vested in it by the Declaration
at the request of any holder of Trust Preferred Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The holders of Trust Preferred
Securities will not be required to offer such indemnity in the event such
holders, by exercising their voting rights, direct the Institutional Trustee
to take any action it is empowered to take under the Declaration following a
Declaration Event of Default. The Institutional Trustee also serves as
trustee under the Guarantee.
The Institutional Trustee maintains commercial banking relationships with
the Company.
GOVERNING LAW
The Declaration and the Trust Preferred Securities will be governed by,
and construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to operate the Trust in
such a way so that the Trust will not be required to register as an
"investment company" under the 1940 Act or be characterized as other than a
grantor trust for federal income tax purposes. The Company is authorized and
directed to conduct its affairs so that the Debentures will be treated as
indebtedness of the Company for federal income tax purposes. In this
connection, the Company and the Regular Trustees are authorized to take any
action not inconsistent with applicable law, the Declaration of Trust, the
certificate of trust of the Trust or the certificate of incorporation of the
Company, that each of the Company and the Regular Trustees determines in its
discretion to be necessary or desirable to achieve such end, as long as such
action does not adversely affect the interests of the holders of the Trust
Preferred Securities or vary the terms thereof.
Holders of the Trust Preferred Securities have no preemptive or similar
rights.
S-72
<PAGE>
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
will be executed and delivered by the Company for the benefit of the holders
from time to time of Trust Preferred Securities. The Guarantee will be
qualified as an indenture under the Trust Indenture Act. Wilmington Trust
Company will act as the Guarantee Trustee for the purposes of compliance with
the provisions of the Trust Indenture Act. The terms of the Guarantee will be
those set forth in the Guarantee and those made part of the Guarantee by the
Trust Indenture Act. The following summary is not necessarily complete, and
reference is hereby made to the copy of the form of Guarantee (including the
definitions therein of certain terms) which is filed as an exhibit to the
Registration Statement relating to this Prospectus Supplement, and to the
Trust Indenture Act. Whenever particular defined terms of the Guarantee are
referred to in this Prospectus Supplement, such defined terms are
incorporated herein by reference. The Guarantee will be held by the Guarantee
Trustee for the benefit of the holders of the Trust Preferred Securities. The
following descriptions of certain terms of the Guarantee supplements and, to
the extent inconsistent with, replaces the description of the general terms
and provisions of the Guarantee set forth in the accompanying Prospectus, to
which reference is hereby made.
GENERAL
Pursuant to the Guarantee, the Company will irrevocably and
unconditionally agree, to the extent set forth therein, to pay in full on a
senior unsecured basis, to the holders of the Trust Preferred Securities
issued by the Trust, the Guarantee Payments (as defined herein) (except to
the extent paid by the Trust), as and when due, regardless of any defense,
right of set-off or counterclaim which the Trust may have or assert. The
following payments or distributions with respect to Trust Preferred
Securities issued by the Trust to the extent not paid by or on behalf of the
Trust (the "Guarantee Payments"), will be subject to the Guarantee thereon
(without duplication): (i) any accrued and unpaid distributions which are
required to be paid on the Trust Preferred Securities, to the extent the
Trust shall have funds available therefor; (ii) the redemption price,
including all accumulated and unpaid distributions to the date of redemption,
of Trust Preferred Securities in respect of which the related Debentures have
been redeemed by the Company upon the occurrence of a Tax Event Redemption,
to the extent the Trust shall have funds available therefor; and (iii) upon a
voluntary or involuntary dissolution of the Trust (other than in connection
with the distribution of Debentures to the holders of Trust Preferred
Securities), the lesser of (a) the aggregate of the stated liquidation amount
and all accrued and unpaid distributions on such Trust Preferred Securities
to the date of payment, to the extent the Trust has funds available therefor,
and (b) the amount of assets of the Trust remaining available for
distribution to holders of the Trust Preferred Securities in liquidation of
the 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 Trust Preferred Securities or by causing the Trust to pay such
amounts to such holders.
The Guarantee will be a full and unconditional guarantee on a senior
unsecured basis with respect to the Trust Preferred Securities issued by the
Trust, but will not apply to any payment of distributions except to the
extent the Trust shall have funds available therefor. If the Company does not
make interest payments on the Debentures purchased by the Trust, the Trust
will not pay distributions on the Trust Preferred Securities and will not
have funds available therefor. See "Effect of Obligations under the
Debentures and the Guarantee."
The Guarantee, when taken together with the Company's obligations under
the Debentures, the Indenture, and the Declaration, will have the effect of
providing a full and unconditional guarantee on a senior unsecured basis by
the Company of payments due on the Trust Preferred Securities.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as the Guarantee,
except that upon an Indenture Event of Default, holders of Trust Preferred
Securities shall have priority over holders of Common Securities with respect
to distributions and payments on liquidation, redemption or otherwise.
S-73
<PAGE>
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company will covenant that, so long as any Trust
Preferred Securities issued by the Trust remain outstanding, if there shall
have occurred any event that would constitute an event of default under the
Guarantee or the Declaration, then (a) the Company shall 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 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 on
a parity with or junior to the Debentures and (c) the Company shall not make
any guarantee payments with respect to the foregoing (other than payments
pursuant to the Guarantee or the Common Securities Guarantee).
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes which do not adversely affect the
rights of holders of Trust Preferred Securities (in which case no vote will
be required), the Guarantee may be amended only with the prior approval of
the holders of not less than a majority in stated liquidation amount of the
outstanding Trust Preferred Securities issued by the Trust. All guarantees
and agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Trust Preferred Securities then outstanding.
TERMINATION
The Guarantee will terminate (a) upon distribution of the Debentures held
by the Trust to the holders of the Trust Preferred Securities, (b) upon full
payment of the redemption price of all the Trust Preferred Securities in the
event that all of the Debentures are repurchased by the Company upon the
occurrence of a Tax Event Redemption or (c) upon full payment of the amounts
payable in accordance with the Declaration upon liquidation of the Trust. The
Guarantee will continue to be effective or will be reinstated, as the case
may be, if at any time any holder of Trust Preferred Securities must return
payment of any sums paid under the Trust Preferred Securities or the
Guarantee.
EVENTS OF DEFAULT
An event of default under the 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 stated liquidation amount of the Trust
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee
in respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee. If the Guarantee
Trustee fails to enforce such Guarantee, any holder of Trust Preferred
Securities may institute a legal proceeding directly against the Company to
enforce such holder's rights under the Guarantee, without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity. The Company waives any right or remedy to require that any action
be brought first against the Trust or any other person or entity before
proceeding directly against the Company.
S-74
<PAGE>
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank on a parity with all of the Company's other senior unsecured
obligations.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect
to the Guarantee, undertakes to perform only such duties as are specifically
set forth in the Guarantee and, after default, 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 provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Trust Preferred Securities, unless offered
reasonable indemnity against the costs, expenses and liabilities which might
be incurred thereby; but the foregoing shall not relieve the Guarantee
Trustee, upon the occurrence of an event of default under the Guarantee, from
exercising the rights and powers vested in it by the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
internal laws of the State of New York.
DESCRIPTION OF THE DEBENTURES
Set forth below is a description of the specific terms of the Debentures
in which the Trust will invest the proceeds from the issuance and sale of the
Trust Securities. The following description is not necessarily complete, and
reference is hereby made to the copy of the form of the Indenture to be
entered into between the Company and The Bank of Nova Scotia Trust Company of
New York , as trustee (the "Debt Trustee"), as supplemented or amended from
time to time (as so supplemented and amended, the "Indenture") which is filed
as an exhibit to the Registration Statement relating to this Prospectus
Supplement, and to the Trust Indenture Act. Certain capitalized terms used
herein are defined in the Indenture.
Under certain circumstances involving the dissolution of the Trust,
Debentures may be distributed to the holders of the Trust Securities in
liquidation of the Trust. See "Description of the Trust Preferred Securities
- -- Distribution of the Debentures." The following descriptions of certain
terms of the Debentures supplement and, to the extent inconsistent with,
replaces the description of the general terms and provisions of the Debt
Securities set forth in the accompanying Prospectus, to which reference is
hereby made.
GENERAL
The Debentures will be issued as senior unsecured debt under the Indenture
and will rank on a parity in right of payment with all of the Company's other
senior unsecured debt obligations. The Debentures will be limited in
aggregate principal amount to $1,542 million.
The Debentures will not be subject to a sinking fund provision. Unless a
Tax Event Redemption has occurred prior to the Purchase Contract Settlement
Date, the entire principal amount of the Debentures will mature and become
due and payable, together with any accrued and unpaid interest thereon
including Compound Interest (as defined herein) and expenses and taxes of the
Trust, if any, on February 16, 2003.
The Company will have the right at any time to dissolve the Trust and
cause the Debentures to be distributed to the holders of the Trust
Securities. If Debentures are distributed to holders of Trust Securities in
liquidation of such holders' interests in the Trust, such Debentures will
initially be issued as a Global Security (as defined herein). As described
herein, under certain limited circumstances, Debentures may be issued in
certificated form in exchange for a Global Security. See "--Book-Entry and
Settlement" below. In the event that Debentures are issued in certificated
form, such Debentures will be in denominations of $50 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Payments on Debentures issued as a Global Security will be made to the
Depositary, a successor depositary or, in the event that no depositary is
used, to a Paying Agent for the Debentures. In
S-75
<PAGE>
the event Debentures are issued in certificated form, principal and interest
will be payable, the transfer of the Debentures will be registrable and
Debentures will be exchangeable for Debentures of other denominations of a
like aggregate principal amount, at the corporate trust office or agency of
the Institutional Trustee in Wilmington, Delaware; provided, that at the
option of the Company, payment of interest may be made by check mailed to the
address of the holder entitled thereto or by wire transfer to an account
appropriately designated by the holder entitled thereto. Notwithstanding the
foregoing, so long as the holder of any Debentures is the Institutional
Trustee, the payment of principal and interest on the Debentures held by the
Institutional Trustee will be made at such place and to such account as may
be designated by the Institutional Trustee.
The Indenture does not contain provisions that afford holders of the
Debentures protection in the event of a highly leveraged transaction or other
similar transaction involving the Company that may adversely affect such
holders.
INTEREST
Each Debenture shall bear interest initially at the rate of 6.45% per
annum from the original date of issuance, payable quarterly in arrears on
February 16, May 16, August 16 and November 16 of each year (each an
"Interest Payment Date"), commencing May 16, 1998, to the person in whose
name such Debenture is registered, subject to certain exceptions, at the
close of business on the Business Day next preceding such Interest Payment
Date. The applicable interest rate on the Debentures and the distribution
rate on the related Trust Preferred Securities outstanding on and after the
Purchase Contract Settlement Date will be reset on the third Business Day
immediately preceding the Purchase Contract Settlement Date to the Reset
Rate, which will be equal to the sum of the Reset Spread and the rate on the
Two-Year Benchmark Treasury in effect on the third Business Day immediately
preceding the Purchase Contract Settlement Date, and will be determined by
the Reset Agent as the rate the Trust Preferred Securities should bear in
order for a Trust Preferred Security to have an approximate market value on
the third Business Day immediately preceding the Purchase Contract Settlement
Date of 100.5% of the Stated Amount; provided that the Company may limit such
Reset Rate to be no higher than the rate on the Two-Year Benchmark Treasury
on the third Business Day immediately preceding the Purchase Contract
Settlement Date plus 200 basis points (2%). Such market value may be less
than 100.5% if the Reset Spread is limited to a maximum of 2%.
On the Reset Announcement Date, the Two-Year Benchmark Treasury will be
selected and the Reset Spread to be added to the rate on the Two-Year
Benchmark Treasury in effect on the third Business Day immediately preceding
the Purchase Contract Settlement Date will be established by the Reset Agent,
and the Reset Spread and the Two-Year Benchmark Treasury will be announced by
the Company. The Company will cause a notice of the Reset Spread and such
Two-Year Benchmark Treasury to be published on the Business Day following the
Reset Announcement Date by publication in a daily newspaper in the English
language of general circulation in The City of New York, which is expected to
be The Wall Street Journal. In the event the Debentures shall not continue to
remain in book-entry only form, the Company shall have the right to select
record dates, which shall be more than fifteen Business Days but less than 60
Business Days prior to the Interest Payment Date.
The amount of interest payable for any period will be computed on the
basis of a 360-day year consisting of twelve 30-day months. The amount of
interest payable for any period shorter than a full quarterly period for
which interest is computed will be computed on the basis of the actual number
of days elapsed in such 90-day period. In the event that any date on which
interest is payable on the Debentures is not a Business Day, then payment of
the interest payable on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect
of any such delay), except that, if such Business Day is in the next
succeeding calendar year, then such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if
made on such date.
TAX EVENT REDEMPTION
If a Tax Event shall occur and be continuing, the Company may, at its
option, redeem Debentures in whole (but not in part) at any time prior to the
Purchase Contract Settlement Date, at a Redemption Price
S-76
<PAGE>
equal to, for each Debenture, the Redemption Amount plus accrued and unpaid
interest thereon, including Compound Interest and expenses and taxes of the
Trust, if any, to the date of redemption (the "Tax Event Redemption Date").
If, following the occurrence of a Tax Event, the Company exercises its option
to redeem the Debentures, then the proceeds of such redemption will be
applied to redeem Trust Securities having a liquidation amount equal to the
principal amount of Debentures to be paid in accordance with their terms, at
the Redemption Price. Such Redemption Price will be payable in cash to the
holders of such Trust Securities. If such Tax Event Redemption occurs prior
to the Purchase Contract Settlement Date, the Redemption Price payable in
liquidation of the Income PRIDES holders' interest in the Trust will be
distributed to the Collateral Agent, who in turn will apply an amount equal
to the Redemption Amount of such Redemption Price to purchase the Treasury
Portfolio on behalf of the holders of Income PRIDES and remit the remaining
portion, if any, of such Redemption Price to the Purchase Contract Agent for
payment to the holders of such Income PRIDES. Such Treasury Portfolio will be
substituted for the Trust Preferred Securities and will be pledged with the
Collateral Agent to secure such Income PRIDES holders' obligation to purchase
the Company's Common Stock under the Purchase Contracts; provided, that if
the Tax Event Redemption occurs after the Purchase Contract Settlement Date,
such Treasury Portfolio will not be purchased.
"Tax Event" means the receipt by the Trust of an opinion of a nationally
recognized independent tax counsel experienced in such matters to the effect
that, as a result of (a) any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the
United States or any political subdivision or taxing authority thereof or
therein affecting taxation, (b) any amendment to or change in an
interpretation or application of such laws or regulations by any legislative
body, court, governmental agency or regulatory authority or (c) any
interpretation or pronouncement that provides for a position with respect to
such laws or regulations that differs from the generally accepted position on
the date the Trust Securities are issued, which amendment or change is
effective or which interpretation or pronouncement is announced on or after
the date of issuance of the Trust Securities under the Declaration, there is
more than an insubstantial risk that (i) interest payable by the Company on
the Debentures would not be deductible, in whole or in part, by the Company
for federal income tax purposes or (ii) the Trust would be subject to more
than a de minimis amount of other taxes, duties or other governmental
charges.
"Treasury Portfolio" means, with respect to the Applicable Principal
Amount of Debentures (a) if the Tax Event Redemption Date occurs prior to the
Purchase Contract Settlement Date, a portfolio of zero-coupon U.S. Treasury
Securities consisting of (i) interest or principal strips of U.S. Treasury
Securities which mature on or prior to February 15, 2001 in an aggregate
amount equal to the Applicable Principal Amount and (ii) with respect to each
scheduled interest payment date on the Debentures that occurs after the Tax
Event Redemption Date interest or principal strips of U.S. Treasury
Securities which mature on or prior to such date in an aggregate amount equal
to the aggregate interest payment that would be due on the Applicable
Principal Amount of the Debentures on such date, and (b) if the Tax Event
Redemption Date occurs after the Purchase Contract Settlement Date, a
portfolio of zero-coupon U.S. Treasury Securities consisting of (i) principal
or interest strips of U.S. Treasury Securities which mature on or prior to
February 15, 2003 in an aggregate amount equal to the Applicable Principal
Amount and (ii) with respect to each scheduled interest payment date on the
Debentures that occurs after the Tax Event Redemption Date interest or
principal strips of such U.S. Treasury Securities which mature on or prior to
such date in an aggregate amount equal to the aggregate interest payment that
would be due on the Applicable Principal Amount of the Debentures on such
date.
"Applicable Principal Amount" means either (i) if the Tax Event Redemption
Date occurs prior to the Purchase Contract Settlement Date, the aggregate
principal amount of the Debentures corresponding to the aggregate stated
liquidation amount of the Trust Preferred Securities which are components of
Income PRIDES on the Tax Event Redemption Date or (ii) if the Tax Event
Redemption occurs on or after the Purchase Contract Settlement Date, the
aggregate principal amount of the Debentures corresponding to the aggregate
stated liquidation amount of the Trust Preferred Securities outstanding on
such Tax Event Redemption Date.
S-77
<PAGE>
"Redemption Amount" means for each Debenture, the product of (i) the
principal amount of such Debenture and (ii) a fraction whose numerator is the
Treasury Portfolio Purchase Price and whose denominator is the Applicable
Principal Amount.
"Treasury Portfolio Purchase Price" means the lowest aggregate price
quoted by a primary U.S. government securities dealer in New York City (a
"Primary Treasury Dealer") to the Quotation Agent on the third Business Day
immediately preceding the Tax Event Redemption Date for the purchase of the
Treasury Portfolio for settlement on the Tax Event Redemption Date.
"Quotation Agent" means (i) Merrill Lynch Government Securities, Inc. and
its respective successors, provided, however, that if the foregoing shall
cease to be a Primary Treasury Dealer, the Company shall substitute therefor
another Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer
selected by the Company.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each registered holder of Debentures to
be prepaid at its registered address. Unless the Company defaults in payment
of the Redemption Price, on and after the redemption date interest shall
cease to accrue on such Debentures.
PUT OPTION
If a Failed Remarketing has occurred, holders of Debentures (including the
Institutional Trustee, and following the distribution of the Debentures upon
a dissolution of the Trust as described herein, such Debenture holders) will
have the right to put their Debentures to the Company on March 2, 2001, upon
at least three Business Days' prior notice, at a price per Debenture equal to
$50, plus accrued and unpaid interest, if any, thereon. Upon the repurchase
of such Debentures by the Company, the proceeds from such repurchase shall
simultaneously be applied to redeem (in the case of Trust Securities) any
outstanding Trust Preferred Securities of such holders having an aggregate
stated liquidation amount equal to the aggregate principal amount of the
Debentures so repurchased plus accrued and unpaid distributions, including
deferred distributions, if any.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company shall have the right at any time, and from time to time,
during the term of the Debentures, to defer payments of interest by extending
the interest payment period for a period not extending beyond the maturity
date of the Debentures, at the end of which Extension Period, the Company
shall pay all interest then accrued and unpaid (including any expenses and
taxes of the Trust, as herein defined) together with interest thereon
compounded quarterly at the rate of 6.45% per annum through and including
February 15, 2001, and at the Reset Rate thereafter, to the extent permitted
by applicable law ("Compound Interest"); provided, that during any such
Extension Period, (a) the Company shall not declare or pay dividends or make
any distribution 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 or the exchange
or conversion of one class or series of the Company's capital stock for
another class or series of the Company 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 that rank on a parity with or junior to
the Debentures, and (c) the Company shall not make any guarantee payments
with respect to the foregoing (other than payments pursuant to the Guarantee
or the Common Securities Guarantee).
S-78
<PAGE>
Prior to the termination of any such Extension Period, the Company may
further defer payments of interest by extending the interest payment period;
provided, however, that such Extension Period, including all such previous
and further extensions, may not extend beyond the maturity of the Debentures.
Upon the termination of any Extension Period and the payment of all amounts
then due, the Company may commence a new Extension Period, subject to the
terms set forth in this section. No interest during an Extension Period,
except at the end thereof, shall be due and payable, but the Company, at its
option, may prepay on any Interest Payment Date all of the interest accrued
during the then elapsed portion of an Extension Period. The Company has no
present intention of exercising its right to defer payments of interest by
extending the interest payment period on the Debentures. If the Institutional
Trustee shall be the sole holder of the Debentures, the Company shall give
the Regular Trustees and the Institutional Trustee notice of its selection of
such Extension Period one Business Day prior to the earlier of (i) the date
distributions on the Trust Preferred Securities are payable or (ii) the date
the Regular Trustees are required to give notice, if applicable, to the NYSE
(or other applicable self-regulatory organization) or to holders of the Trust
Preferred Securities of the record or payment date of such distribution. The
Regular Trustees shall give notice of the Company's selection of such
Extension Period to the holders of the Trust Preferred Securities. If the
Institutional Trustee shall not be the sole holder of the Debentures, the
Company shall give the holders of the Debentures notice of its selection of
such Extension Period ten Business Days prior to the earlier of (i) the
Interest Payment Date or (ii) the date upon which the Company is required to
give notice, if applicable, to the NYSE (or other applicable self-regulatory
organization) or to holders of the Debentures of the record or payment date
of such related interest payment.
EXPENSES AND TAXES OF THE TRUST
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Trust Securities) and
all costs and expenses of the Trust (including the costs and expenses
relating to the organization of the Trust, the fees and expenses of the
Trustees and the costs and expenses relating to the operation of the Trust)
and to pay any and all taxes and all costs and expenses with respect thereto
(other than United States withholding taxes) to which the Trust might become
subject. The Company also has agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give full effect to
the foregoing.
INDENTURE EVENTS OF DEFAULT
If any Indenture Event of Default shall occur and be continuing, the
Institutional Trustee, as the holder of the Debentures, will have the right
to declare the principal of and the interest on the Debentures (including any
Compound Interest and expenses and taxes of the Trust, if any) and any other
amounts payable under the Indenture to be forthwith due and payable and to
enforce its other rights as a creditor with respect to the Debentures.
The following are Events of Default under the Indenture with respect to
the Debentures: (1) failure to pay interest on the Debentures when due,
continued for 30 days; provided, however, that if the Company is permitted by
the terms of the Debentures to defer the payment in question, then the date
on which such payment is due and payable shall be the date on which the
Company is required to make payment following such deferral, if such deferral
has been elected pursuant to the terms of the Debentures; (2) failure to pay
the principal of (or premium, if any, on) the Debentures when due and payable
at the stated maturity date, upon redemption or otherwise; provided, however,
if the Company is permitted by the terms of the Debentures to defer the
payment in question, the date on which such payment is due and payable shall
be the date on which the Company is required to make payment following such
deferral, if such deferral has been elected pursuant to the terms of the
Debentures; (3) failure to observe or perform in any material respect certain
other covenants contained in the Indenture, continued for a period of 90 days
after written notice has been given to the Company by the Debt Trustee or
holders of at least 25% in aggregate principal amount of the outstanding
Debentures; and (4) certain events of bankruptcy, insolvency or
reorganization relating to the Company.
The Indenture provides that the Debt Trustee shall, within 90 days after
the occurrence of any Default or Event of Default with respect to the
Debentures, give the holders of the Debentures notice of
S-79
<PAGE>
all uncured Defaults or Events of Default known to it (the term "Default"
includes any event which after notice or passage of time or both would be an
Event of Default); 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; provided, however, that,
except in the case of an Event of Default or a Default in a payment on the
Debentures, the Debt Trustee shall be protected in withholding such notice so
long as the board of directors, the executive committee or directors or
responsible officers of the Debt Trustee in good faith determine that the
withholding of such notice is in the interest of the holders of the
Debentures.
If an Event of Default with respect to the Debentures occurs and is
continuing, the Debt Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Debentures, by notice in writing to the
Company (and to the Debt Trustee if given by the holders of at least 25% in
aggregate principal amount of the Debentures), may declare the unpaid
principal of and accrued interest to the date of acceleration on all the
outstanding Debentures to be due and payable immediately and, upon any such
declaration, the Debentures shall become immediately due and payable.
In addition, in the case of the Debentures held by the Trust, if an Event
of Default has occurred and is continuing and such event is attributable to
the failure of the Company to pay interest or principal, then a holder of
Trust Preferred Securities may directly institute a proceeding against the
Company for payment.
Any such declaration with respect to the Debentures may be annulled and
past Events of Default and Defaults (except, unless theretofore cured, an
Event of Default or a Default in payment of principal of or interest on the
Debentures) may be waived by the holders of a majority of the principal
amount of the outstanding Debentures, upon the conditions provided in the
Indenture.
The Indenture provides that the Company shall periodically file statements
with the Debt Trustee regarding compliance by the Company with certain of the
respective covenants thereof and shall specify any Event of Default or
Defaults with respect to the Debentures, in performing such covenants, of
which the signers may have knowledge.
An Indenture Event of Default also constitutes a Declaration Event of
Default. The holders of Trust Preferred Securities in certain circumstances
have the right to direct the Institutional Trustee to exercise its rights as
the holder of the Debentures. See "Description of the Trust Preferred
Securities -- Declaration Events of Default" and "--Voting Rights."
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Company to
pay interest or principal on the Debentures on the date such interest or
principal is otherwise payable, the Company acknowledges that a holder of
Trust Preferred Securities may directly institute a proceeding for
enforcement of payment to such holder directly of the principal of and
interest on the Debentures having a principal amount equal to the aggregate
stated liquidation amount of the Trust Preferred Securities of such holder
after the respective due date specified in the Debentures. In connection with
such action, the Company shall have the right under the Indenture to set-off
any payment made to such holder by the Company. The holders of Trust
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Debentures.
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of Trust Preferred Securities in connection with
the involuntary or voluntary dissolution of the Trust, the Debentures will be
issued in the form of one or more global certificates (each a "Global
Security") registered in the name of the Depositary or its nominee. Except
under the limited circumstances described below, Debentures represented by
the Global Security will not be exchangeable
S-80
<PAGE>
for, and will not otherwise be issuable as, Debentures in certificated form.
The Global Securities described above may not be transferred except 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 to a successor
depositary or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in certificated form.
Such laws may impair the ability to transfer beneficial interests in such a
Global Security.
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Debentures in
certificated form and will not be considered the holders (as defined in the
Indenture) thereof for any purpose under the Indenture, and no Global
Security representing Debentures shall be exchangeable, except for another
Global Security of like denomination and tenor to be registered in the name
of the Depositary or its nominee or to a successor Depositary or its nominee.
Accordingly, each Beneficial Owner must rely on the procedures of the
Depositary or if such person is not a Participant, on the procedures of the
Participant through which such person owns its interest to exercise any
rights of a holder under the Indenture.
THE DEPOSITARY
If Debentures are distributed to holders of Trust Preferred Securities in
liquidation of such holders' interests in the Trust, the Depositary will act
as securities depositary for the Debentures. For a description of the
Depositary and the specific terms of the depositary arrangements, see
"Description of the Trust Preferred Securities -- Book-Entry Only Issuance --
The Depository Trust Company." As of the date of this Prospectus Supplement,
the description therein of the Depositary's book-entry system and the
Depositary's practices as they relate to purchases, transfers, notices and
payments with respect to the Trust Preferred Securities apply in all material
respects to any debt obligations represented by one or more Global Securities
held by the Depositary. The Company may appoint a successor to the Depositary
or any successor depositary in the event the Depositary or such successor
depositary is unable or unwilling to continue as a depositary for the Global
Securities.
None of the Company, the Trust, the Institutional Trustee, any paying
agent and any other agent of the Company or the Debt Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global
Security for such Debentures or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
A Global Security shall be exchangeable for Debentures registered in the
names of persons other than the Depositary or its nominee only if (i) the
Depositary notifies the Company that it is unwilling or unable to continue as
a depositary for such Global Security and no successor depositary shall have
been appointed, (ii) the Depositary at any time, ceases to be a clearing
agency registered under the Exchange Act at which time the depositary is
required to be so registered to act as such depositary and no successor
depositary shall have been appointed, (iii) the Company, in its sole
discretion, determines that such Global Security shall be so exchangeable or
(iv) there shall have occurred an Indenture Event of Default with respect to
such Debentures. Any Global Security that is exchangeable pursuant to the
preceding sentence shall be exchangeable for Debentures registered in such
names as the Depositary shall direct. It is expected that such instructions
will be based upon directions received by the Depositary from its
Participants with respect to ownership of beneficial interests in such Global
Security.
GOVERNING LAW
The Indenture and the Debentures will be governed by, and construed in
accordance with, the internal laws of the State of New York.
MISCELLANEOUS
The Company will pay all fees and expenses related to (i) the offering of
the Trust Securities and the Debentures, (ii) the organization, maintenance
and dissolution of the Trust, (iii) the retention of the Cendant Trustees and
(iv) the enforcement by the Institutional Trustee of the rights of the
holders of the Trust Preferred Securities.
S-81
<PAGE>
EFFECT OF OBLIGATIONS UNDER THE
DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial interests in the assets
of the Trust, and to invest the proceeds from such issuance and sale in the
Debentures and engage in only those other activities necessary or incidental
thereto.
As long as payments of interest and other payments are made when due on
the Debentures, such payments will be sufficient to cover distributions and
payments due on the Trust Securities because of the following factors: (i)
the aggregate principal amount of Debentures will be equal to the sum of the
aggregate stated liquidation amount of the Trust Securities; (ii) the
interest rate and the interest and other payment dates on the Debentures will
match the distribution rate and distribution and other payment dates for the
Trust Securities; (iii) the Company shall pay, and the Trust shall not be
obligated to pay, directly or indirectly, all costs, expenses, debts, and
obligations of the Trust (other than with respect to the Trust Securities);
and (iv) the Declaration further provides that the Cendant Trustees shall not
take or cause or permit the Trust to, among other things, engage in any
activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Trust Preferred Securities (to the extent funds
therefor are available) are guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." If the Company does not make
interest payments on the Debentures purchased by the Trust, the Trust will
not have sufficient funds to pay distributions on the Trust Preferred
Securities. The Guarantee does not apply to any payment of distributions
unless and until the Trust has sufficient funds for the payment of such
distributions.
If the Company fails to make interest or other payments on the Debentures
when due (taking account of any Extension Period), the Declaration provides a
mechanism whereby the holders of the Trust Preferred Securities, using the
procedures described in "Description of the Trust Preferred Securities --
Book-Entry Only Issuance -- The Depository Trust Company" and "--Voting
Rights," may direct the Institutional Trustee to enforce its rights under the
Indenture. If the Institutional Trustee fails to enforce its rights under the
Indenture in respect of an Indenture Event of Default, such holder of record
of Trust Preferred Securities may, to the fullest extent permitted by
applicable law, institute a legal proceeding against the Company to enforce
the Institutional Trustee's rights under the Indenture without first
instituting any legal proceeding against the Institutional Trustee or any
other person or entity. Notwithstanding the foregoing, if a Declaration Event
of Default has occurred and is continuing and such event is attributable to
the failure of the Company to pay interest or principal on the Debentures on
the date such interest or principal is otherwise payable, then a holder of
Trust Preferred Securities may directly institute a proceeding against the
Company for payment. The Company, under the Guarantee, acknowledges that the
Guarantee Trustee shall enforce the Guarantee on behalf of the holders of the
Trust Preferred Securities. If the Company fails to make payments under the
Guarantee, the Guarantee provides a mechanism whereby the holders of the
Trust Preferred Securities may direct the Guarantee Trustee to enforce its
rights thereunder. Notwithstanding the foregoing, if the Company has failed
to make a payment under the Guarantee, any holder of Trust Preferred
Securities may institute a legal proceeding directly against the Company to
enforce its rights under the Guarantee without first instituting a legal
proceeding against the Trust, the Guarantee Trustee, or any other person or
entity.
The Guarantee, when taken together with the Company's obligations under
the Debentures and the Indenture and its obligations under the Declaration,
including its obligations to pay costs, expenses, debts and liabilities of
the Trust (other than with respect to the Trust Securities), has the effect
of providing a full and unconditional guarantee of amounts due on the Trust
Preferred Securities. See "Description of the Guarantee."
S-82
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the material United States
federal income tax consequences of the purchase, ownership and disposition of
FELINE PRIDES, Trust Preferred Securities and Common Stock acquired under a
Purchase Contract. Unless otherwise stated, this summary applies only to
"U.S. Holders" who purchase Income PRIDES, Growth PRIDES or Trust Preferred
Securities upon original issuance for an amount equal to the initial offering
price thereof. A "U.S. Holder" is (i) a person who is a citizen or resident
of the United States, (ii) a corporation or partnership created or organized
in or under the laws of the United States or any state thereof or the
District of Columbia, (iii) an estate the income of which is subject to
United States federal income taxation, regardless of its source, or (iv) a
trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United
States persons have the authority to control all substantial decisions of
such trust. The tax treatment of a holder may vary depending on such holder's
particular situation. This summary does not deal with special classes of
holders such as banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or
currencies, tax-exempt investors, certain U.S. expatriates, or persons that
will hold FELINE PRIDES, Trust Preferred Securities or Common Stock acquired
under a Purchase Contract as a position in a "straddle," as part of a
"synthetic security" or "hedge," as part of a "conversion transaction" or
other integrated investment, or as other than a capital asset. This summary
does not address the tax consequences to persons that have a functional
currency other than the U.S. dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of FELINE PRIDES, Trust Preferred
Securities or Common Stock acquired pursuant to a Purchase Contract. Further,
it does not include any description of any alternative minimum tax
consequences or the tax laws of any state, local or foreign government that
may be applicable. PROSPECTIVE INVESTORS THAT ARE NOT UNITED STATES PERSONS
(WITHIN THE MEANING OF SECTION 7701(a)(30) OF THE CODE) ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN FELINE PRIDES OR TRUST PREFERRED SECURITIES,
INCLUDING THE POTENTIAL APPLICATION OF UNITED STATES WITHHOLDING TAXES.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations (including proposed Treasury regulations)
issued thereunder, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions now in effect, all of which are subject
to change, possibly on a retroactive basis. Any such changes may be applied
retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below, possibly adversely
affecting a U.S. Holder.
No statutory, administrative or judicial authority directly addresses the
treatment of FELINE PRIDES or instruments similar to FELINE PRIDES for United
States federal income tax purposes. As a result, no assurance can be given
that the IRS will agree with the tax consequences described herein.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE FELINE PRIDES OR TRUST PREFERRED SECURITIES IN LIGHT OF
THEIR OWN PARTICULAR CIRCUMSTANCES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
FELINE PRIDES
Allocation of Purchase Price. A U.S. Holder's acquisition of FELINE PRIDES
will be treated as an acquisition of a unit consisting of two components--in
the case of an Income PRIDES, the Trust Preferred Security and the Purchase
Contract constituting such Income PRIDES and, in the case of a Growth PRIDES,
the Treasury Security interest and the Purchase Contract comprising such
Growth PRIDES. The purchase price of each FELINE PRIDES will be allocated
between the two components in proportion to their respective fair market
values at the time of purchase. Such allocation will establish the U.S.
Holder's initial tax basis in the Trust Preferred Security or Treasury
Security interest and the Purchase Contract. The Company will report the fair
market value of each Trust Preferred Security and
S-83
<PAGE>
Treasury Security interest so that the entire purchase price of a FELINE
PRIDES will be allocable to the Trust Preferred Security or Treasury Security
interest, as the case may be, and no amount will be allocable to the Purchase
Contract. This position will be binding upon each U.S. Holder (but not on the
IRS) unless such U.S. Holder explicitly discloses a contrary position on a
statement attached to such U.S. Holder's timely filed United States federal
income tax return for the taxable year in which a FELINE PRIDES is acquired.
Thus, absent such disclosure, a U.S. Holder should allocate the purchase
price for a FELINE PRIDES in accordance with the foregoing. The remainder of
this discussion assumes that this allocation of purchase price will be
respected for United States federal income tax purposes.
Ownership of Trust Preferred Securities or Treasury Securities. A U.S.
Holder will be treated as owning the Trust Preferred Securities or Treasury
Securities constituting a part of the Income PRIDES or Growth PRIDES,
respectively. The Company and, by acquiring FELINE PRIDES, each U.S. Holder
agree to treat such U.S. Holder as the owner, for United States federal,
state and local income and franchise tax purposes, of the Trust Preferred
Securities or Treasury Securities constituting a part of the FELINE PRIDES
beneficially owned by such U.S. Holder. The remainder of this summary will
assume that U.S. Holders of FELINE PRIDES will be treated as the owners of
the Trust Preferred Securities or Treasury Securities constituting a part of
such FELINE PRIDES for United States federal, state and local income and
franchise tax purposes. The United States federal income tax consequences of
owning the Trust Preferred Securities or Treasury Securities are discussed
below (see "--Trust Preferred Securities," "--Treasury Securities" and "--Tax
Event Redemption of Trust Preferred Securities.").
TRUST PREFERRED SECURITIES
Classification of the Trust. In connection with the issuance of the FELINE
PRIDES, Skadden, Arps, Slate, Meagher & Flom LLP ("Tax Counsel"), will
deliver an opinion that, under current law and assuming compliance with the
terms of the Declaration, and based on certain facts and assumptions
contained in such opinion, the Trust will be classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes. As a result, each U.S. Holder of Trust Preferred
Securities will be treated as owning an undivided beneficial ownership
interest in the Debentures. Accordingly, each U.S. Holder of Trust Preferred
Securities will be required to include in its gross income its pro rata share
of the interest income or OID that is paid or accrued on the Debentures. See
"--Interest Income and Original Issue Discount."
Classification of the Debentures. The Company, the Trust and, by acquiring
Income PRIDES or Trust Preferred Securities, each U.S. Holder agree to treat
the Debentures as indebtedness of the Company for all United States tax
purposes. In connection with the issuance of the Debentures, Tax Counsel will
deliver an opinion that, under current law, and based on certain
representations, facts and assumptions set forth in such opinion, the
Debentures will be classified as indebtedness for United States federal
income tax purposes.
Interest Income and Original Issue Discount. Subject to the discussion
below regarding the Company's right to defer payments of interest on the
Debentures, the Debentures should be treated as "reset bonds" under
applicable Treasury regulations, and interest on the Debentures should not
constitute contingent interest for purposes of the OID rules. Under the
Treasury regulations applicable to reset bonds, the Debentures should be
treated, solely for purposes of calculating the accrual of OID, as maturing
on the day immediately preceding the Purchase Contract Settlement Date for an
amount equal to 100.5% of the Stated Amount (the "Reset Amount") and as
having been reissued on the Purchase Contract Settlement Date for the Reset
Amount. If the amount of the initial purchase price for the FELINE PRIDES
allocated to the Trust Preferred Securities is less than the Reset Amount, as
is anticipated, the Debentures should be treated as having been issued with
OID equal to the difference between the Reset Amount and the amount so
allocated to the Trust Preferred Securities, unless such difference is less
than three-fourths of one-percent of the Reset Amount, as would likely occur,
in which case the Debentures would not be treated as having been issued with
OID. If the Debentures were, however, treated as issued with OID, a U.S.
Holder would be required to include such OID in income on an economic accrual
basis over the period between the issue date and the day immediately
preceding the Purchase Contract Settlement Date regardless of such U.S.
Holder's method of tax accounting.
S-84
<PAGE>
Consequently, each U.S. Holder (including those using the cash basis of
accounting) would be required to include OID in its gross income even though
the Company would not actually make current cash payments with respect to
such OID. Any amount of OID included in a U.S. Holder's gross income would
increase such U.S. Holder's tax basis in its Trust Preferred Securities. In
addition, a U.S. Holder will include stated interest on the Debentures in
income as ordinary income when paid to the Trust or accrued, in accordance
with such U.S. Holder's regular method of accounting, whether or not such
U.S. Holder is required to accrue OID.
Under the Indenture, the Company has the right to defer payments of
interest on the Debentures. The Company's right to defer payments of interest
could cause the Debentures to be subject to the OID rules. The Company,
however, believes, and intends to take the position, that as of the issue
date, the terms and conditions of the Debentures make the likelihood that the
Company would exercise its option to defer the payment of interest a "remote"
contingency for these purposes. If so treated, except as provided below, the
Debentures would not be subject to the OID rules as a result of the Company's
right to defer payments of interest on the Debentures.
If the Company were to exercise its right to defer payments of interest,
the Debentures would at that time be treated, solely for purposes of the OID
rules, as reissued with OID. In such event, all of a U.S. Holder's taxable
interest income with respect to the Debentures would thereafter be accounted
for on an economic accrual basis regardless of such U.S. Holder's method of
tax accounting, and actual distributions of stated interest would not be
reported as taxable income. Consequently, each U.S. Holder (including those
using the cash basis of accounting) would be required to include OID in its
gross income even though the Company would not make actual cash payments
during an Extension Period. Any amount of OID included in a U.S. Holder's
gross income would increase such U.S. Holder's tax basis in its Trust
Preferred Securities, and the amount of distributions received by a U.S.
Holder with respect to such Trust Preferred Securities would reduce the tax
basis of such Trust Preferred Securities.
The IRS could take the position that the likelihood that the Company would
exercise its right to defer payments of interest is not a "remote"
contingency for these purposes, in which case U.S. Holders would be required
to accrue OID on the Debentures on an economic accrual basis under the OID
rules described in the preceding paragraph during the entire term of the
Debentures.
U.S. Holders that are corporations will not be entitled to a dividends
received deduction with respect to any income recognized with respect to the
Trust Preferred Securities.
Distribution of Debentures to U.S. Holders of Trust Preferred Securities.
A distribution by the Trust of the Debentures as described under the caption
"Description of the Trust Preferred Securities -- Liquidation Distribution
Upon Dissolution" would be non-taxable to U.S. Holders. In such event, a U.S.
Holder would have an aggregate tax basis in the Debentures received in the
liquidation equal to the aggregate tax basis such U.S. Holder had in its
Trust Preferred Securities surrendered therefor, and the holding period of
such Debentures would include the period during which such U.S. Holder had
held the Trust Preferred Securities. Also, a U.S. Holder would continue to
include interest (or OID) in respect of Debentures received from the Trust in
the manner described under "--Interest Income and Original Issue Discount."
Sales, Exchanges or Other Dispositions of Trust Preferred Securities.
Gain or loss will be recognized by a U.S. Holder on a sale, exchange,
redemption or other taxable disposition (collectively, a "disposition") of a
Trust Preferred Security (including a redemption for cash or the remarketing
thereof) in an amount equal to the difference between the amount realized by
the U.S. Holder on the disposition of the Trust Preferred Securities (except
to the extent that such amount realized is characterized as a payment in
respect of accrued but unpaid interest on such U.S. Holder's allocable share
of the Debentures that such U.S. Holder has not included in gross income
previously, which amount will be taxable as ordinary interest income) and the
U.S. Holder's adjusted tax basis in the Trust Preferred Security. Selling
expenses incurred by a U.S. Holder, including the remarketing fee, will
reduce the amount of gain or increase the amount of loss recognized by such
U.S. Holder upon the sale, exchange or other disposition of the Trust
Preferred Securities. Gain or loss realized by a U.S. Holder on a disposition
of a Trust
S-85
<PAGE>
Preferred Security may be long-term capital gain depending on the holding
period of the Trust Preferred Securities. Capital gains of individuals are
eligible for reduced rates of taxation depending upon the holding period of
such capital assets. The deductibility of capital losses is subject to
limitations.
TREASURY SECURITIES
Original Issue Discount. A U.S. Holder of Growth PRIDES will be required
to treat the Treasury Security interest comprising the Growth PRIDES as an
interest in a bond originally issued on the date such Growth PRIDES is
purchased and having OID equal to the excess of the Stated Amount of the
Growth PRIDES over the purchase price of the Growth PRIDES. A U.S. Holder
will be required to include such OID in income on an economic accrual basis
over the period between the issue date of the Growth PRIDES and the day
immediately preceding the Purchase Contract Settlement Date, regardless of
such U.S. Holder's method of tax accounting. Amounts of OID included in a
U.S. Holder's gross income will increase such U.S. Holder's tax basis in its
Treasury Security interest.
Sales, Exchanges or Other Dispositions of Treasury Securities. In the
event that a U.S. Holder obtains the release of Treasury Securities by
delivering Trust Preferred Securities to the Collateral Agent, gain or loss
will be recognized by the U.S. Holder on a subsequent sale, exchange or other
taxable disposition of the Treasury Securities in an amount equal to the
difference between the amount realized by the U.S. Holder on such disposition
and the U.S. Holder's adjusted tax basis in the Treasury Securities. Such
gain or loss may be long-term capital gain or loss depending on the holding
period of the Treasury Securities. Capital gains of individuals are eligible
for reduced rates of taxation depending upon the holding period of such
capital assets. The deductibility of capital losses is subject to
limitations.
PURCHASE CONTRACTS
Income From Contract Adjustment Payments and Deferred Contract Adjustment
Payments; Delivery of Cash. There is no direct authority addressing the
treatment, under current law, of the Contract Adjustment Payments and
Deferred Contract Adjustment Payments (if any), or the delivery of cash in
respect of excess accrued Contract Adjustment Payments (if any) by a U.S.
Holder of Income PRIDES or Growth PRIDES upon the creation of Growth PRIDES
or Income PRIDES, respectively, and such treatment is unclear. Contract
Adjustment Payments and Deferred Contract Adjustment Payments, if any, may
constitute taxable income to a U.S. Holder of FELINE PRIDES when received or
accrued, in accordance with the U.S. Holder's method of tax accounting. To
the extent the Company is required to file information returns with respect
to Contract Adjustment Payments or Deferred Contract Adjustment Payments, it
intends to report such payments as taxable income to each U.S. Holder. U.S.
Holders should consult their own tax advisors concerning the treatment of
Contract Adjustment Payments and Deferred Contract Adjustment Payments and
the delivery of cash upon creation of Growth PRIDES, including the
possibility that any Contract Adjustment Payment or Deferred Contract
Adjustment Payment may be treated as a loan, purchase price adjustment,
rebate or payment analogous to an option premium, rather than being
includible in income on a current basis, and that the delivery of cash upon
creation of Growth PRIDES or Income PRIDES may be treated as an offset to
Contract Adjustment Payments or Deferred Contract Adjustment Payments or as a
purchase price adjustment. The treatment of Contract Adjustment Payments,
Deferred Contract Adjustment Payments and the delivery of cash upon creation
of Growth PRIDES or Income PRIDES could affect a U.S. Holder's tax basis in a
Purchase Contract or Common Stock received under a Purchase Contract or the
amount realized by a U.S. Holder upon the sale or disposition of a FELINE
PRIDES or the termination of a Purchase Contract. See "--Acquisition of
Common Stock under a Purchase Contract," "--Sale or Disposition of FELINE
PRIDES" and "--Termination of Purchase Contract."
Acquisition of Common Stock Under a Purchase Contract. A U.S. Holder of
FELINE PRIDES generally will not recognize gain or loss on the purchase of
Common Stock under a Purchase Contract, except with respect to any cash paid
in lieu of a fractional share of Common Stock. Subject to the following
discussion, a U.S. Holder's aggregate initial tax basis in the Common Stock
received under a Purchase Contract generally should equal the purchase price
paid for such Common Stock plus such U.S. Holder's tax basis in the Purchase
Contract (if any), less the portion of such purchase price and tax basis
S-86
<PAGE>
allocable to the fractional share. Payments of Contract Adjustment Payments
or Deferred Contract Adjustment Payments that have been received in cash by a
U.S. Holder but not included in income by such U.S. Holder should reduce such
U.S. Holder's tax basis in the Purchase Contract or the Common Stock to be
received thereunder; payments in cash that have been made by a U.S. Holder to
create Growth PRIDES or Income PRIDES but not offset against payments of
Contract Adjustment Payments or Deferred Contract Adjustment Payments may
increase such U.S. Holder's tax basis in the Purchase Contract or the Common
Stock to be received thereunder (see "--Income from Contract Adjustment
Payments and Deferred Contract Adjustment Payments; Delivery of Cash" above).
The holding period for Common Stock received under a Purchase Contract will
commence on the day after the acquisition of such Common Stock.
Ownership of Common Stock Acquired Under the Purchase Contract. Any
dividend on Common Stock paid by the Company out of its current or
accumulated earnings and profits (as determined for United States federal
income tax purposes) will be includible in income by a U.S. Holder when
received. Any such dividend will be eligible for the dividends received
deduction if received by an otherwise qualifying corporate U.S. Holder that
meets the holding period and other requirements for the dividends received
deduction.
Upon a disposition of Common Stock, a U.S. Holder generally will recognize
capital gain or loss equal to the difference between the amount realized and
such U.S. Holder's adjusted tax basis in the Common Stock. Such gain or loss
may be long-term capital gain or loss depending on the holding period of the
Common Stock. Capital gains of individuals are eligible for reduced rates of
taxation depending upon the holding period of such capital assets. The
deductibility of capital losses is subject to limitations.
Early Settlement of Purchase Contract. A U.S. Holder of FELINE PRIDES will
not recognize gain or loss on the receipt of such U.S. Holder's proportionate
share of Trust Preferred Securities or Treasury Securities upon Early
Settlement of a Purchase Contract and will have the same tax basis in such
Trust Preferred Securities or Treasury Securities as before such Early
Settlement.
Termination of Purchase Contract. If a Purchase Contract terminates, a
U.S. Holder of FELINE PRIDES will recognize gain or loss equal to the
difference between the amount realized (if any) upon such termination and
such U.S. Holder's adjusted tax basis (if any) in the Purchase Contract at
the time of such termination. Payments of Contract Adjustment Payments or
Deferred Contract Adjustment Payments, if any, received by a U.S. Holder but
not included in income by such U.S. Holder should either reduce such U.S.
Holder's tax basis in the Purchase Contract or result in an amount realized
on the termination of the Purchase Contract. Any Contract Adjustment Payments
or Deferred Contract Adjustment Payments included in a U.S. Holder's income
but not paid should increase such U.S. Holder's tax basis in the Purchase
Contract; payments in cash that have been made by a U.S. Holder to create
Growth PRIDES or Income PRIDES but not offset against payments of Contract
Adjustment Payments or Deferred Contract Adjustment Payments may increase
such U.S. Holder's tax basis in the Purchase Contract or result in a
deduction on the termination of the Purchase Contract (see "--Income from
Contract Adjustment Payments and Deferred Contract Adjustment Payments;
Delivery of Cash" above). Any such gain or loss may be long-term capital gain
or loss depending upon the holding period of the Purchase Contract. Capital
gains of individuals are eligible for reduced rates of taxation depending
upon the holding period of such capital assets. The deductibility of capital
losses is subject to limitations. A U.S. Holder will not recognize gain or
loss on the receipt of such U.S. Holder's proportionate share of the Trust
Preferred Securities, Treasury Securities or Treasury Portfolio upon
termination of the Purchase Contract and will have the same tax basis in such
Trust Preferred Securities, Treasury Securities or Treasury Portfolio as
before such distribution.
Adjustment to Settlement Rate. U.S. Holders of FELINE PRIDES might be
treated as receiving a constructive distribution from the Company if (i) the
Settlement Rate is adjusted and as a result of such adjustment the
proportionate interest of U.S. Holders of FELINE PRIDES in the assets or
earnings and profits of the Company is increased and (ii) the adjustment is
not made pursuant to a bona fide, reasonable anti-dilution formula. An
adjustment in the Settlement Rate would not be considered made pursuant to
such a formula if the adjustment were made to compensate a U.S. Holder for
certain taxable
S-87
<PAGE>
distributions with respect to the Common Stock. Thus, under certain
circumstances, an increase in the Settlement Rate might give rise to a
taxable dividend to U.S. Holders of FELINE PRIDES even though such U.S.
Holders would not receive any cash related thereto.
SUBSTITUTION OF TREASURY SECURITIES TO CREATE OR RECREATE GROWTH PRIDES
A U.S. Holder of an Income PRIDES that delivers Treasury Securities to the
Collateral Agent in substitution for Trust Preferred Securities generally
will not recognize gain or loss upon the delivery of such Treasury Securities
or the release of the Trust Preferred Securities to such U.S. Holder. Such
U.S. Holder will continue to take into account items of income or deduction
otherwise includible or deductible, respectively, by such U.S. Holder with
respect to such Treasury Securities and Trust Preferred Securities, and such
U.S. Holder's tax basis in the Treasury Securities, the Trust Preferred
Securities and the Purchase Contract will not be affected by such delivery
and release.
SUBSTITUTION OF TRUST PREFERRED SECURITIES TO CREATE OR RECREATE INCOME
PRIDES
A U.S. Holder of a Growth PRIDES that delivers Trust Preferred Securities
to the Collateral Agent in substitution for Treasury Securities generally
will not recognize gain or loss upon the delivery of such Trust Preferred
Securities or the release of the Treasury Securities to the U.S. Holder. Such
U.S. Holder will continue to take into account items of income or deduction
otherwise includible or deductible, respectively, by such U.S. Holder with
respect to such Treasury Securities and Trust Preferred Securities, and such
U.S. Holder's tax basis in the Treasury Securities, the Trust Preferred
Securities and the Purchase Contract will not be affected by such delivery
and release.
TAX EVENT REDEMPTION OF TRUST PREFERRED SECURITIES
A Tax Event Redemption will be a taxable event for U.S. Holders of Trust
Preferred Securities. Gain or loss will be recognized by a U.S. Holder in an
amount equal to the difference between the Redemption Price (whether paid
directly to such U.S. Holder or applied by the Collateral Agent to the
purchase of the Treasury Portfolio on behalf of holders of Income PRIDES),
except to the extent of amounts paid in respect of accrued but unpaid
interest not previously included in income, which will be taxable as ordinary
interest income, and the U.S. Holder's adjusted tax basis in the Trust
Preferred Securities. Gain or loss realized by a U.S. Holder upon a Tax Event
Redemption will be capital gain or loss and may be long-term capital gain or
loss depending upon the holding period of the Trust Preferred Securities.
Capital gains of individuals are eligible for reduced rates of taxation
depending upon the holding period of such capital assets. The deductibility
of capital losses is subject to limitations.
Ownership of Treasury Portfolio. The Company, the Trust and, by acquiring
Income PRIDES, each U.S. Holder agree to treat such U.S. Holder as the owner,
for United States federal, state and local income and franchise tax purposes,
of the Applicable Ownership Interest of the Treasury Portfolio constituting a
part of the Income PRIDES beneficially owned by such U.S. Holder in the event
of a Tax Redemption prior to the Purchase Contract Settlement Date. Each U.S.
Holder will include in income any amount earned on such pro rata portion of
the Treasury Portfolio for all United States federal, state and local income
and franchise tax purposes. Based on such agreement, the remainder of this
summary assumes that U.S. Holders of Income PRIDES will be treated as the
owners of the Applicable Ownership Interest of the Treasury Portfolio
constituting a part of such Income PRIDES for United States federal, state
and local income and franchise tax purposes.
Interest Income and Original Issue Discount. The Treasury Portfolio will
consist of stripped U.S. Treasury securities. Following a Tax Redemption
prior to the Purchase Contract Settlement Date, a U.S. Holder of Income
PRIDES will be required to treat its pro rata portion of each U.S. Treasury
security in the Treasury Portfolio as a bond that was originally issued on
the date the Collateral Agent acquired the relevant U.S. Treasury securities
and will include OID in income over the life of the U.S. Treasury securities
in an amount equal to the U.S. Holder's pro rata portion of the excess of the
amounts payable on such U.S. Treasury securities over the value of the U.S.
Treasury securities at the time the Collateral Agent acquires them on behalf
of holders of Income PRIDES. The amount of such excess will constitute
S-88
<PAGE>
only a portion of the total amounts payable in respect of the Treasury
Portfolio. Consequently, a substantial portion of each scheduled interest
payment to U.S. Holders will be treated as a tax-free return of the U.S.
Holder's investment in the Treasury Portfolio and will not be considered
current income for federal income tax purposes.
A U.S. Holder, whether on the cash or accrual method of tax accounting,
will be required to include OID (other than OID on short-term U.S. Treasury
securities as defined below) in income for federal income tax purposes as it
accrues on a constant yield to maturity basis. See "--Interest Income and
Original Issue Discount" above. In the case of any U.S. Treasury security
with a maturity of one year or less from the date it is purchased (a
"short-term U.S. Treasury security"), in general only accrual basis taxpayers
will be required to include OID in income as it is accrued. Unless such an
accrual basis U.S. Holder elects to accrue the OID on a short-term U.S.
Treasury security according to the constant-yield-to-maturity method, such
OID will be accrued on a straight-line basis.
Tax Basis of the Treasury Portfolio. A U.S. Holder's initial tax basis in
such U.S. Holder's Applicable Ownership Interest of the Treasury Portfolio
will equal such U.S. Holder's pro rata portion of the amount paid by the
Collateral Agent for the Treasury Portfolio. A U.S. Holder's tax basis in the
Treasury Portfolio will be increased by the amount of OID included in income
with respect thereto and decreased by the amount of cash received in respect
of the Treasury Portfolio.
SALE OR DISPOSITION OF FELINE PRIDES
Upon a disposition of FELINE PRIDES, a U.S. Holder will be treated as
having sold, exchanged or disposed of the Purchase Contract and the Trust
Preferred Securities, Treasury Portfolio or, in the case of Growth PRIDES,
the Treasury Securities, that constitute such FELINE PRIDES and generally
will have gain or loss equal to the difference between the portion of the
proceeds to such U.S. Holder allocable to the Purchase Contract and the Trust
Preferred Securities, Treasury Portfolio or Treasury Securities, as the case
may be, and such U.S. Holder's respective adjusted tax bases in the Purchase
Contract and the Trust Preferred Securities, Treasury Portfolio or Treasury
Securities. Such gain or loss generally will be capital gain or loss, except
to the extent that such U.S. Holder is treated as having received an amount
with respect to accrued interest on the Trust Preferred Securities, which
will be treated as ordinary interest income, or to the extent such U.S.
Holder is treated as having received an amount with respect to accrued
Contract Adjustment Payments or Deferred Contract Adjustment Payments, which
may be treated as ordinary income, in each case to the extent not previously
included in income. Such capital gain or loss may be long-term capital gain
or loss depending on the holding period of the FELINE PRIDES. Capital gains
of individuals are eligible for reduced rates of taxation depending upon the
holding period of such capital assets. The deductibility of capital losses is
subject to limitations. If the disposition of FELINE PRIDES occurs when the
Purchase Contract has negative value, the U.S. Holder should be considered to
have received additional consideration for the Trust Preferred Securities,
Treasury Portfolio or Treasury Securities in an amount equal to such negative
value and to have paid such amount to be released from the U.S. Holder's
obligation under the Purchase Contract. U.S. Holders should consult their tax
advisors regarding a disposition of the FELINE PRIDES at a time when the
Purchase Contract has negative value.
Payments to a U.S. Holder of Contract Adjustment Payments or Deferred
Contract Adjustment Payments that have not previously been included in the
income of such U.S. Holder should either reduce such U.S. Holder's tax basis
in the Purchase Contract or result in an increase in the amount realized on
the disposition of the Purchase Contract. Any Contract Adjustment Payments or
Deferred Contract Adjustment Payments included in a U.S. Holder's income but
not paid should increase such U.S. Holder's tax basis in the Purchase
Contract. Payments in cash that have been made by a U.S. Holder to create
Growth PRIDES or Income PRIDES but not offset against payments of Contract
Adjustment Payments or Deferred Contract Adjustment Payments may increase
such U.S. Holder's tax basis in the Purchase Contract or result in a decrease
in the amount realized on the disposition of the Purchase Contract (see
"--Income from Contract Adjustment Payments and Deferred Contract Adjustment
Payments; Delivery of Cash" above).
S-89
<PAGE>
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Payments under the FELINE PRIDES, Trust Preferred Securities or Common
Stock acquired under a Purchase Contract, the proceeds received with respect
to a fractional share of Common Stock upon the settlement of a Purchase
Contract, and the sale of FELINE PRIDES, Trust Preferred Securities or Common
Stock acquired under a Purchase Contract, may be subject to information
reporting and United States federal backup withholding tax at the rate of 31%
if the U.S. Holder thereof fails to supply an accurate taxpayer
identification number or otherwise fails to comply with applicable United
States information reporting or certification requirements. Any amounts so
withheld will be allowed as a credit against such U.S. Holder's United States
federal income tax liability.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Trust and Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Chase Securities Inc. (the
"Underwriters"), the Company and the Trust have agreed to sell to the
Underwriters, and the Underwriters severally have agreed to purchase from the
Company and the Trust, the number of Income PRIDES, Growth PRIDES and Trust
Preferred Securities set forth below opposite each Underwriter's name. In the
Underwriting Agreement, the Underwriters have agreed, subject to the terms
and conditions set forth therein, to purchase all of the Income PRIDES,
Growth PRIDES and Trust Preferred Securities offered hereby if any of the
Income PRIDES, Growth PRIDES or Trust Preferred Securities are purchased.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
INCOME GROWTH TRUST
UNDERWRITERS PRIDES PRIDES PREFERRED SECURITIES
------------ ------ ------ --------------------
<S> <C> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................... 21,600,000 1,800,000 1,800,000
Chase Securities Inc. ................. 2,400,000 200,000 200,000
---------- --------- ---------
Total............................ 24,000,000 2,000,000 2,000,000
========== ========= =========
</TABLE>
The Underwriters have advised the Company and the Trust that they propose
initially to offer the Income PRIDES, Growth PRIDES and Trust Preferred
Securities 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 $.90 per Income PRIDES, $.75 per Growth PRIDES
and $.20 per Trust Preferred Security. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $.10 per Income PRIDES, $.10
per Growth PRIDES and $.125 per Trust Preferred Security on sales to certain
other dealers. After the initial public offering, the public offering prices,
concessions and discounts may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriters and any selling group
members to bid for and purchase the Securities or shares of Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Securities or the Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Securities or the Common
Stock.
If the Underwriters create a short position in the Securities in
connection with the Offering, i.e., if they sell more Securities than are set
forth on the cover page of this Prospectus Supplement, the Underwriters may
reduce that short position by purchasing Securities in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment options described below.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Securities in the open
market to reduce the Underwriters' short position or to stabilize the price
of the Securities, they may reclaim the amount of the selling concession from
any Underwriter and selling group members who sold those Securities as part
of the Offering.
S-90
<PAGE>
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security and the
Common Stock of the Company to be higher than it might be in the absence of
such purchases. The imposition of a penalty bid might also have an effect on
the price of a security to the extent that it were to discourage resales of
the security.
Neither the Company, the Trust nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Securities
or the Common Stock. In addition, neither the Company, the Trust nor any of
the Underwriters makes any representation that the Underwriters will engage
in such transaction or that such transactions, once commenced, will not be
discontinued without notice.
The Company and the Trust have granted to the Underwriters options,
exercisable for 30 days following the date of this Prospectus Supplement, to
purchase up to an aggregate of an additional 3,600,000 Income PRIDES, 300,000
Growth PRIDES and 300,000 Trust Preferred Securities from the Company and the
Trust at the Price to Public set forth on the cover page of this Prospectus
Supplement less the underwriting discount. The Underwriters may exercise
these options only to cover over-allotments, if any, made on the sale of the
Income PRIDES, Growth PRIDES and Trust Preferred Securities offered hereby.
The option to purchase Trust Preferred Securities may also be exercised in
connection with the exercise of the option to purchase Growth PRIDES.
If the Underwriters exercise their over-allotment options, each of the
Underwriters has severally agreed, subject to certain conditions, to effect
the foregoing transactions with respect to approximately the same percentage
of such Income PRIDES, Growth PRIDES and Trust Preferred Securities that the
respective number of Income PRIDES, Growth PRIDES and Trust Preferred
Securities set forth opposite its name in the foregoing table bears to the
Income PRIDES, Growth PRIDES and Trust Preferred Securities offered hereby.
The Company and the Trust have agreed, for a period of 90 days after the
date of this Prospectus Supplement, to not, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or
otherwise dispose of, or enter into any agreement to sell, any Income PRIDES,
Growth PRIDES, Purchase Contracts, Trust Preferred Securities or Common
Stock, as the case may be, or any securities of the Company similar to the
Income PRIDES, Growth PRIDES, Purchase Contracts, Trust Preferred Securities
or Common Stock or any security convertible into or exchangeable or
exercisable for Income PRIDES, Growth PRIDES, Purchase Contracts, Trust
Preferred Securities or Common Stock other than (i) to the Underwriters
pursuant to the Underwriting Agreement, (ii) shares of Common Stock or
options for shares of Common Stock issued pursuant to or sold in connection
with any employee benefit, dividend reinvestment and stock option and stock
purchase plans of the Company and its subsidiaries, (iii) any securities
issued pursuant to or sold in connection with any securities of the Company
and its subsidiaries, outstanding as of the date hereof, which are
convertible into or exchangeable or exercisable for any securities of the
Company and its subsidiaries, (iv) any securities issued pursuant to a merger
or acquisition, (v) the Growth PRIDES or Income PRIDES to be created or
recreated upon substitution of Pledged Securities, or shares of Common Stock
issuable upon early settlement of the Income PRIDES or Growth PRIDES, (vi)
upon exercise of stock options or (vii) in connection with certain medium
term note issuances.
Prior to this offering, there has been no public market for the Income
PRIDES, Growth PRIDES and the Trust Preferred Securities. The public offering
price for the Income PRIDES, Growth PRIDES and the Trust Preferred Securities
was determined in negotiations between the Company, the Trust and the
Underwriters. In determining the terms of the Income PRIDES, Growth PRIDES
and the Trust Preferred Securities including the public offering price, the
Company, the Trust and the Underwriters considered the market price of the
Common Stock and also considered the Company's recent results of operations,
the future prospects of the Company and the industry in general, market
prices and terms of, and yields on, U.S. Treasury securities and securities
of other companies considered to be comparable to the Company and prevailing
conditions in the securities markets. The Income PRIDES and the Growth PRIDES
have been approved for listing on the NYSE, subject to official notice of
issuance. The Trust Preferred Securities will not initially be listed on any
exchange. There can be no assurance that an active trading market will
develop for the Income PRIDES, the Growth PRIDES or the Trust Preferred
Securities or that the Income PRIDES, Growth PRIDES or Trust Preferred
Securities will trade in the public market subsequent to the offering at or
above the initial public offering price.
S-91
<PAGE>
The Company and the Trust 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 of 1933, as amended.
This Prospectus Supplement, as amended or stickered, may be used by the
Remarketing Agent for remarketing the Trust Preferred Securities at such time
as is necessary.
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 the Company. The Treasury Securities component of the 2,000,000 Growth
PRIDES was purchased from an affiliate of an Underwriter. Chase Securities
Inc. is an affiliate of The Chase Manhattan Bank, which currently serves as
Lender and Administrative Agent under the Revolving Credit Facilities and as
Collateral Agent and as Custodial Agent. The Chase Manhattan Bank will
receive a portion of the amounts repaid under the Revolving Credit Facilities
with the proceeds from the sale of the Debentures. See "Use of Proceeds."
LEGAL OPINIONS
The validity of the Purchase Contracts, the Common Stock issuable upon
settlement thereof and the Debentures will be passed upon for the Company by
Eric J. Bock, Esq., Vice President-Legal of the Company, and Skadden, Arps,
Slate, Meagher & Flom LLP, and certain matters of Delaware law with respect
to the validity of the Trust Preferred Securities offered hereby will be
passed upon for the Company and the Trust by Skadden, Arps, Slate, Meagher &
Flom LLP. The validity of the Purchase Contracts, the Common Stock issuable
upon settlement thereof, the Debentures and the Trust Preferred Securities
will be passed upon for the Underwriters by Shearman & Sterling. Mr. Bock
owns Common Stock and options to acquire shares of Common Stock of the
Company.
S-92
<PAGE>
INDEX OF TERMS FOR PROSPECTUS SUPPLEMENT
1940 Act ........................................................ S-65
Applicable Market Value ......................................... S-17, S-49
Applicable Ownership Interest ................................... S-45
Applicable Principal Amount ..................................... S-77
Bankruptcy Code ................................................. S-18
Beneficial Owner ................................................ S-70
Business Day .................................................... S-53
Cendant Trustees ................................................ S-7
Change in 1940 Act Law .......................................... S-65
Closing Price ................................................... S-49
Code ............................................................ S-83
Collateral Agent ................................................ S-10
Common Securities ............................................... S-2
Common Securities Guarantee ..................................... S-73
Common Stock .................................................... S-2
Compound Interest ............................................... S-78
Contract Adjustment Payments .................................... S-2
Current Market Price ............................................ S-54
Custodial Agent ................................................. S-20
Debentures ...................................................... S-2
Debt Trustee .................................................... S-75
Declaration ..................................................... S-7
Declaration Event of Default .................................... S-66
Default ......................................................... S-80
Deferred Contract Adjustment Payments ........................... S-13, S-48
Delaware Trustee ................................................ S-41
Depositary ...................................................... S-56
Direct Action ................................................... S-34, S-67
Direct Participants ............................................. S-56
Early Settlement ................................................ S-17
Exchange Act .................................................... S-56
Extension Periods ............................................... S-21
Failed Remarketing .............................................. S-4
FELINE PRIDES ................................................... S-1
FELINE PRIDES Certificate ....................................... S-50
Global Security ................................................. S-80
Global Security Certificates .................................... S-56
Growth PRIDES ................................................... S-2
Guarantee ....................................................... S-3, S-23
Guarantee Payments .............................................. S-73
Guarantee Trustee ............................................... S-33
Income PRIDES ................................................... S-2
Indenture ....................................................... S-75
Indenture Event of Default ...................................... S-66
Indirect Participants ........................................... S-57
Institutional Trustee ........................................... S-41
Interest Payment Date ........................................... S-76
Investment Company Event ........................................ S-65
IRS ............................................................. S-83
S-93
<PAGE>
NYSE ............................................................ S-1
OID ............................................................. S-2
Participants .................................................... S-56
Payment Date .................................................... S-14
Pledge Agreement ................................................ S-10
Pledged Securities .............................................. S-31, S-56
Primary Treasury Dealer ......................................... S-78
Property Account ................................................ S-41
Purchase Contract ............................................... S-2
Purchase Contract Agent ......................................... S-10
Purchase Contract Agreement ..................................... S-10
Purchase Contract Settlement Date ............................... S-2
Quotation Agent ................................................. S-78
Redemption Amount ............................................... S-78
Redemption Price ................................................ S-6
Reference Price ................................................. S-16, S-49
Regular Trustees ................................................ S-41
Remarketing Agent ............................................... S-14
Remarketing Agreement ........................................... S-14
Remarketing Fee ................................................. S-3
Remarketing Underwriting Agreement .............................. S-14
Reset Agent ..................................................... S-9
Reset Amount .................................................... S-84
Reset Announcement Date ......................................... S-63
Reset Rate ...................................................... S-3
Reset Spread .................................................... S-3
Securities ...................................................... S-1
Senior Indebtedness ............................................. S-3
Settlement Rate ................................................. S-16, S-49
Sponsor ......................................................... S-7
Stated Amount ................................................... S-2
Successor Securities ............................................ S-69
Super-Majority .................................................. S-67
Tax Counsel ..................................................... S-84
Tax Event ....................................................... S-77
Tax Event Redemption ............................................ S-6
Tax Event Redemption Date ....................................... S-77
Threshold Appreciation Price .................................... S-16, S-49
Trading Day ..................................................... S-50
Treasury Portfolio .............................................. S-77
Treasury Portfolio Purchase Price ............................... S-78
Treasury Securities ............................................. S-2
Trust ........................................................... S-1
Trust Act ....................................................... S-41
Trust Indenture Act ............................................. S-7
Trust Preferred Securities ...................................... S-1
Trust Securities ................................................ S-2
Underwriters .................................................... S-90
Underwriting Agreement .......................................... S-90
U.S. Holders .................................................... S-83
S-94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CENDANT CORPORATION
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets for the years ended December 31, 1996 and
1995 ................................................................... F-3
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994 .................................................... F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ....................................... F-9
Notes to Consolidated Financial Statements............................... F-11
Consolidated Balance Sheets at September 30, 1997 and December 31, 1996.. F-55
Consolidated Statements of Income for the three months ended
September 30, 1997 and 1996 and for the nine months ended
September 30, 1997 and 1996............................................. F-57
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997, and 1996............................................ F-58
Notes to Consolidated Financial Statements............................... F-59
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... F-66
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, 1996 and 1995, and the related
supplemental consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger of CUC International Inc. with HFS
Incorporated to form Cendant Corporation, which has been accounted for as a
pooling of interests as described in Note 2 to the consolidated financial
statements. We did not audit the balance sheets of CUC International Inc. as of
January 31, 1997 and 1996, or the related statements of income, shareholders'
equity, and cash flows of CUC International Inc. for the years ended January
31, 1997, 1996 and 1995, which statements reflect total assets of approximately
$2.5 billion and $2.1 billion as of January 31, 1997 and 1996, respectively,
and net income of approximately $164.1 million, $145.0 million and $164.1
million for the years ended January 31, 1997, 1996 and 1995, respectively. Nor
did we audit the balance sheets of PHH Corporation (a consolidated subsidiary
of HFS Incorporated) as of December 31, 1996 and January 31, 1996, or the
related statements of income, shareholders' equity, and cash flows of PHH
Corporation for the years ended December 31, 1996, January 31, 1996 and 1995,
which statements reflect total assets of approximately $6.6 billion and $5.8
billion as of December 31, 1996 and January 31, 1996, respectively, and net
income of approximately $87.6 million, $78.1 million and $69.0 million for the
years ended December 31, 1996, January 31, 1996 and 1995, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for CUC
International Inc. and PHH Corporation for such periods, is based solely on the
reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights", in the year ended December 31,
1995.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
December 17, 1997
F-2
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 633,903 $ 355,959
Marketable securities 94,200 97,164
Receivables, net of allowance for doubtful accounts
of $85,640 and $66,059 1,290,625 1,028,976
Deferred income taxes 141,251 50,563
Other current assets 369,614 271,483
----------- -----------
Total current assets 2,529,593 1,804,145
----------- -----------
Deferred membership acquisition costs 401,564 404,655
Franchise agreements - net 995,947 517,218
Goodwill - net 2,302,226 700,375
Other intangibles - net 636,230 38,845
Other assets 993,574 573,537
----------- -----------
Total assets exclusive of assets under programs 7,859,134 4,038,775
----------- -----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,418,666 3,243,236
Relocation receivables 773,326 736,038
Mortgage loans held for sale 1,248,299 784,901
Mortgage servicing rights and fees 288,943 191,434
----------- -----------
5,729,234 4,955,609
----------- -----------
TOTAL ASSETS $13,588,368 $ 8,994,384
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
Accounts payable, accrued expenses and other
current liabilities $ 1,664,946 $ 919,057
------------ ------------
Deferred income 1,099,393 747,414
Long-term debt 1,004,584 353,977
Deferred income taxes 46,770 59,899
Other noncurrent liabilities 78,115 102,601
------------ ------------
Total liabilities exclusive of liabilities under programs 3,893,808 2,182,948
------------ ------------
Liabilities under management and mortgage programs
Debt 5,089,943 4,427,872
Deferred income taxes 281,948 234,918
------------ ------------
5,371,891 4,662,790
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized
10 million shares; none issued and outstanding -- --
Common stock, $.01 par value - authorized
2 billion shares; issued 804,655,850
and 700,361,629 shares 8,047 7,004
Additional paid-in capital 2,870,422 994,814
Retained earnings 1,556,300 1,202,589
Net unrealized gain on marketable securities 4,334 593
Currency translation adjustment (12,452) (25,356)
Restricted stock, deferred compensation (28,212) --
Treasury stock, at cost, 6,911,757 and 5,115,947 shares (75,770) (30,998)
------------ ------------
Total shareholders' equity 4,322,669 2,148,646
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,588,368 $ 8,994,384
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Membership and service fees - net $ 3,433,917 $ 2,606,196 $ 2,178,984
Fleet leasing (net of depreciation and
interest costs of $1,132,408, $1,088,993
and $976,244, respectively) 56,660 52,079 47,860
Other 418,203 333,847 219,887
----------- ----------- -----------
Net revenues 3,908,780 2,992,122 2,446,731
----------- ----------- -----------
EXPENSES
Operating 1,392,788 1,110,928 921,832
Marketing and reservation 1,089,482 875,155 742,933
General and administrative 339,543 279,500 221,745
Depreciation and amortization 167,907 112,914 97,175
Interest - net 25,445 13,264 10,553
Merger and related costs and other unusual charges 179,945 97,029 7,900
Gain on sale of the ImagiNation Network -- -- (19,739)
----------- ----------- -----------
Total expenses 3,195,110 2,488,790 1,982,399
----------- ----------- -----------
Income before income taxes 713,670 503,332 464,332
Provision for income taxes 290,059 200,507 179,742
----------- ----------- -----------
Net income before cumulative effect of
accounting change for income taxes 423,611 302,825 284,590
Cumulative effect of accounting change for
income taxes -- -- 2,000
----------- ----------- -----------
Net income $ 423,611 $ 302,825 $ 286,590
=========== =========== ===========
PER SHARE INFORMATION
Net income per share
Primary $ 0.53 $ 0.42 $ 0.42
Fully diluted $ 0.52 $ 0.41 $ 0.41
Weighted average shares
Primary 814,292 734,624 690,547
Fully diluted 820,586 748,704 702,209
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 643,258 $ 6,433 $ 533,807 $ 822,399 $ -- $ (26,481) $ -- $(7,160) $(9,745)
Issuance of common stock 10,592 106 62,043 -- -- -- -- -- --
Exercise of stock options
by payment of cash and
common stock 7,732 76 53,649 (10,140) -- -- -- -- (760)
Tax benefit from exercise
of stock options and
vesting of restricted
stock -- -- 44,151 -- -- -- -- -- --
Amortization of
restricted stock -- -- 303 -- -- -- -- -- --
Amortization of ESOP
obligation -- -- -- -- -- -- -- 2,331 --
Adjustment to reflect
change in GETKO and
NAOG fiscal years -- -- -- (4,067) -- -- -- 3,071 --
Cash dividends declared -- -- -- (29,199) -- -- -- -- --
Conversion of convertible
notes 4,484 45 22,650 -- -- -- -- -- --
Net unrealized loss on
marketable securities -- -- -- -- (748) -- -- -- --
Purchase of common stock -- -- -- -- -- -- -- -- (25,885)
Retirement of treasury
stock (2,832) (28) (25,873) -- -- -- -- -- 25,885
Currency translation
adjustment -- -- -- -- -- 4,529 -- -- --
Distribution of Chartwell
Leisure Inc. -- -- (18,445) (79,775) -- -- -- -- --
Net income -- -- -- 286,590 -- -- -- -- --
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance, December 31, 1994 663,234 6,632 672,285 985,808 (748) (21,952) -- (1,758) (10,505)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 663,234 $6,632 $672,285 $985,808 $ (748) $(21,952) $ -- $(1,758) $(10,505)
Issuance of common
stock 20,810 208 183,384 -- -- -- -- -- --
Exercise of stock
options by
payment of cash
and common stock 12,435 124 64,421 -- -- -- -- -- (20,493)
Tax benefit from
exercise of
stock options -- -- 54,842 -- -- -- -- -- --
Amortization of
ESOP obligation -- -- 1,242 -- -- -- -- 1,758 --
Exercise of stock
warrants 2,381 24 14,872 -- -- -- -- -- --
Cash dividends
declared and
other equity
distributions -- -- 175 (36,005) -- -- -- -- --
Adjustment to
reflect change
in Advance Ross
and Ideon fiscal
years -- -- -- (50,039) -- -- -- -- --
Conversion of
convertible notes 2,126 21 13,670 -- -- -- -- -- --
Net unrealized gain
on marketable
securities -- -- -- -- 1,341 -- -- -- --
Purchase of common
stock -- -- -- -- -- -- -- -- (10,083)
Retirement of
treasury stock (624) (5) (10,077) -- -- -- -- -- 10,083
Currency
translation
adjustment -- -- -- -- -- (3,404) -- -- --
Net income -- -- -- 302,825 -- -- -- -- --
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance,
December 31, 1995 700,362 7,004 994,814 1,202,589 593 (25,356) -- -- (30,998)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 700,362 $7,004 $ 994,814 $1,202,589 $ 593 $(25,356) $ -- $ -- $(30,998)
Hebdo Mag
adjustment 14,203 142 16,705 718 -- 1,612 -- -- --
Issuance of common
stock 70,961 710 1,654,009 (34,137) -- -- -- -- --
Exercise of stock
options by
payment of cash
and common stock 14,010 140 78,161 -- -- -- -- -- (25,620)
Restricted stock
issuance 1,365 13 30,472 -- -- -- (30,485) -- --
Amortization of
restricted stock -- -- -- -- -- -- 2,273 -- --
Tax benefit from
exercise of
stock options -- -- 78,844 -- -- -- -- -- --
Cash dividends
declared -- -- -- (29,402) -- -- -- -- --
Adjustment to
reflect change
in Davidson,
Sierra & Ideon
fiscal years -- -- -- (4,674) -- -- -- -- --
Adjustment to
reflect change
in PHH fiscal
year (67) (1) (634) (2,405) -- 2,380 -- -- --
Conversion of
convertible
notes 3,822 39 18,051 -- -- -- -- -- --
Net unrealized
gain on
marketable
securities -- -- -- -- 3,741 -- -- -- --
Purchase of
common stock -- -- -- -- -- -- -- -- (19,152)
Currency
translation
adjustment -- -- -- -- -- 8,912 -- -- --
Net income -- -- -- 423,611 -- -- -- -- --
------- ------ ---------- ---------- ------ -------- -------- ------- --------
Balance,
December 31, 1996 804,656 $8,047 $2,870,422 $1,556,300 $4,334 $(12,452) $(28,212) $ -- $(75,770)
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
OPERATING ACTIVITIES 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 423,611 $ 302,825 $ 286,590
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 177,725 117,031 103,667
Membership acquisition costs (638,182) (605,058) (508,807)
Amortization of membership costs 641,272 556,548 467,019
Gain on sales of mortgage servicing rights (5,194) (17,400) (28,076)
Deferred income taxes 56,523 22,632 58,387
Increase (decrease) from changes in:
Receivables (162,566) (184,801) (103,688)
Accounts payable, accrued expenses and other current liabilities 149,387 136,595 (33,804)
Deferred income 23,386 83,533 60,220
Other 28,127 (55,027) (100,004)
----------- ----------- -----------
694,089 356,878 201,504
----------- ----------- -----------
Increase (decrease) from changes in assets
under management and mortgage programs:
Depreciation and amortization under management and
mortgage programs 1,021,761 960,913 869,807
Mortgage loans held for sale (73,308) (139,520) 42,562
----------- ----------- -----------
948,453 821,393 912,369
----------- ----------- -----------
Net cash provided by operating activities 1,642,542 1,178,271 1,113,873
----------- ----------- -----------
INVESTING ACTIVITIES
Assets under management and mortgage programs:
Investment in leases and leased vehicles (1,738,426) (2,008,559) (1,703,690)
Payments received on investment in leases and leased vehicles 595,852 576,670 593,155
Proceeds from sales and transfers of leases and
leased vehicles to third parties -- 109,859 105,087
Additions to originated mortgage servicing rights (164,393) (130,135) (41,920)
Proceeds from sales of mortgage servicing rights 7,113 21,742 36,836
Repayment of advances on homes under management 4,348,857 6,070,490 5,059,017
Equity advances on homes under management (4,307,978) (6,238,538) (4,989,953)
----------- ----------- -----------
(1,258,975) (1,598,471) (941,468)
Property and equipment additions (140,626) (108,702) (73,804)
Proceeds from sales of marketable securities 137,277 255,916 136,977
Purchases of marketable securities (125,551) (138,198) (161,585)
Loans and investments (12,721) (33,783) (42,524)
Net assets acquired, exclusive of cash acquired (1,688,294) (145,789) (63,437)
Funding of grantor trusts (89,849) -- --
Other 33,634 (23,821) 27,355
----------- ----------- -----------
Net cash used in investing activities (3,145,105) (1,792,848) (1,118,486)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 2,150,404 $ 1,858,826 $ 1,413,699
Principal payments on borrowings (1,649,040) (1,282,911) (1,252,979)
Net change in short term borrowings under
management and mortgage programs 231,819 17,419 27,852
Issuance of common stock 1,222,199 100,806 46,401
Purchases of common stock (19,152) (10,083) (25,885)
Redemption of warrants -- 14,877 --
Payment of dividends of pooled entities (27,782) (30,971) (29,199)
Other (81,620) -- (50,043)
----------- ----------- -----------
Net cash provided by financing activities 1,826,828 667,963 129,846
----------- ----------- -----------
Effect of changes in exchange rates
on cash and cash equivalents (46,321) 6,545 2,665
----------- ----------- -----------
Net increase in cash and cash equivalents 277,944 59,931 127,898
Cash and cash equivalents, beginning of period 355,959 296,028 168,130
----------- ----------- -----------
Cash and cash equivalents, end of period $ 633,903 $ 355,959 $ 296,028
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 307,600 $ 285,400 $ 207,900
=========== =========== ===========
Taxes $ 89,400 $ 90,700 $ 87,600
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Cendant Corporation (formerly CUC International
Inc. ("CUC")), together with its subsidiaries and its joint ventures (the
"Company") is a leading global provider of services to businesses serving
consumer industries. On December 17, 1997, the Company merged with HFS
Incorporated ("HFS"), which has been accounted for as a pooling of
interests. The Company primarily engages in three business segments:
membership services, travel and real estate.
MEMBERSHIP SERVICES SEGMENT BUSINESSES:
o Membership. The Company provides individual, wholesale and discount
program membership services to consumers which are distributed through
various channels, including through 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, distributes welcoming packages which provide new
homeowners with discounts from local merchants, and provides travelers
with value-added tax refunds.
TRAVEL SEGMENT BUSINESSES:
o Lodging franchise. The Company franchises guest lodging facilities and
provides operational and administrative services to its franchisees.
As franchisor, the Company licenses the owners and operators of
independent hotels to use the Company's brand names. Services include
access to a national reservation system, national advertising and
promotional campaigns, co-marketing programs and volume purchasing
discounts.
o Car rental. The Company licenses the Avis trademark to Avis
Rent A Car, Inc. ("ARAC"). 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. The Company also
provides similar franchise services to licensees other than ARAC.
o Timeshare. The Company is a provider of timeshare exchange programs,
publications and other travel related services to the timeshare
industry.
o Fleet management. The Company provides services which 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.
F-11
<PAGE>
REAL ESTATE SEGMENT BUSINESSES:
o Real estate franchise. The Company franchises residential real estate
brokerage offices and provides operational and administrative services
to its franchisees. As franchisor, the Company licenses the owners and
operators of independent real estate brokerage offices to use the
Company's brand names. The Company provides services designed to
increase franchisee revenue and profitability including national
advertising and promotions, referrals, training and volume purchasing
discounts.
o Relocation. The Company provides relocation services to client
corporations which include the responsibility of selling transferee
residences, providing equity advances on transferee residences for the
purchase of new homes and certain home management services. 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.
o Mortgage services. The Company provides services which primarily
include the origination, sale and servicing of residential first
mortgage loans. The Company 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.
OTHER SEGMENT BUSINESSES: The Company develops, publishes and distributes
educational and entertainment software for home and school use and provides
marketing and other services to casino gaming facilities. Also included in
other segment businesses is the equity in the earnings from its investment
in ARAC.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts and transactions of the Company together
with its joint ventures and its wholly owned and majority owned
subsidiaries except for the Company's ownership of ARAC, which is accounted
for under the equity method. The accompanying consolidated financial
statements have been restated for the business combinations accounted for
as poolings of interests (as discussed in Note 2) as if such combined
companies had operated as one entity since inception. All material
intercompany balances and transactions have been eliminated in
consolidation.
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 amortized on a straight-line basis over
the estimated period to be benefited, ranging from 12 to 40 years. At
December 31, 1996 and 1995, accumulated amortization amounted to $87.9
million and $65.9 million, respectively.
GOODWILL: Goodwill, which represents the excess of cost over fair value of
net assets acquired is being amortized on a straight-line basis over the
estimated useful lives, ranging from 5 to 40 years. At December
F-12
<PAGE>
31, 1996 and 1995, accumulated amortization amounted to $168.6 million and
$74.1 million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company periodically evaluates the
recoverability of its long-lived assets, comparing the respective carrying
values to the current and expected future cash flows to be generated from
such assets. Property and equipment is evaluated separately within each
business segment. The recoverability of franchise agreements and goodwill
are evaluated on a separate basis for each acquisition and each respective
franchise brand.
MEMBERSHIP ACQUISITION COSTS: Membership acquisition costs are deferred and
charged to operations as membership fees are recognized. These costs, which
relate directly to membership solicitations (direct response advertising
costs), principally include: postage, printing, kits, mailings,
publications (including coupon books) and telemarketing costs.
Substantially all of these costs are incurred for services performed by
outside sources. Such costs are amortized on a straight-line basis as
revenues are realized over the average membership period (generally one to
three years). The membership acquisition costs incurred, applicable to
obtaining a new member, for memberships other than coupon book memberships,
generally approximate the initial membership fee. Initial membership fees
for coupon book memberships generally exceed the membership acquisition
costs incurred applicable to obtaining a new member. However, if membership
acquisitions costs were to exceed the membership fee, an appropriate
adjustment would be made for any significant impairment.
Amortization of membership acquisition costs, including deferred renewal
costs, which consist principally of charges from sponsoring institutions
and publications, amounted to $641.3 million, $556.5 million and $467.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
All advertising costs other than direct response advertising costs are
expensed in the period incurred. Such amounts, exclusive of amounts
recorded as part of marketing and reservation expense, were $273.9 million,
$172.3 million and $133.8 million for the years ended December 31, 1996,
1995 and 1994, respectively.
Membership fees are generally billed through financial institutions and
other cardholder based institutions and are recorded as deferred membership
income upon acceptance of membership, net of estimated cancellations, and
pro-rated over the membership period.
SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE:
Capitalization of software development costs begins upon the establishment
of technological feasibility of the product. Costs meeting this criteria
are insignificant and, therefore, most costs related to designing,
development and testing new software products are charged to operating
expenses as incurred. Software research and development costs aggregated
$66.2 million, $52.9 million and $36.3 million for the years ended December
31, 1996, 1995 and 1994, respectively. Software net revenue included in
other was $375.2 million, $291.9 million and $191.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively. Costs of software
revenue include material costs, manufacturing labor and overhead and
royalties paid to developers and affiliated label publishers. Costs of
software revenue are included in operating expenses and aggregated $109.6
million, $115.3 million and $73.3 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company has a history of working closely with all of its distributors
and retailers with respect to selling consumer software. As a result, the
Company monitors the sales of its consumer software at all of its
significant points of sale on a regular basis. Therefore, the Company has
extensive data on returns by product on an on-going basis and does not have
any significant obligations for future performance. Accordingly, the
Company has the ability to estimate the amount of future returns and
accurately determine the amount of revenue that should be recognized in
accordance with Statement of Position 91-1 "Software Revenue Recognition"
at any point in time.
REVENUE RECOGNITION: Revenue primarily consists of fees for providing
services to businesses in consumer industries.
Membership revenue: Membership fees are generally billed through financial
institutions and other cardholder based institutions and are recorded as
deferred membership income upon acceptance of membership, net of estimated
cancellations. Membership fees are recognized over the average membership
period, generally one to three years. Deferred membership income is
classified as non-current in the supplemental consolidated balance sheet
since working capital will not be required as the deferred income is
recognized over future periods.
Franchise revenue: Franchise revenue principally consists of royalty,
marketing and reservation fees which are based on a percentage of
franchised lodging properties' gross room sales and franchised real estate
F-13
<PAGE>
brokerage offices' gross commissions earned on sales of residential real
estate properties. 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.
Relocation revenue: Relocation revenue primarily consists of the purchase,
management and resale of homes and fee based home related services for
transferred employees of corporate clients, members of affinity group
clients and government agencies. Although the Company acquires the home of
client employees, the client corporation reimburses the Company for
carrying costs until the home is sold and for home sale losses.
Accordingly, the Company earns a fee for services with minimal real estate
risk. Revenues associated with the resale of a residence are recognized
when services are performed.
Timeshare revenue: 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 revenue: 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 "net 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.
Mortgage services revenue: Loan origination fees and direct loan
origination costs are deferred until the loan is sold. Servicing fees are
credited to income when received. 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 records mortgage servicing rights at the time a loan is sold
by allocating cost based on the relative fair value of assets acquired, as
long as the recorded amount is less than the servicing rights' fair value.
The carrying value of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing income.
Gains or losses on the sale of mortgage servicing rights are recognized
when title and all risks and rewards have irrevocably passed to the buyer
and there are no significant unresolved contingencies.
The Company reviews the recoverability of mortgage servicing rights based
on their fair value, and records impairment to individual strata. For
measuring impairment, the interest rate bands of the underlying loans are
the risk characteristic used to stratify the capitalized servicing
portfolio. To determine the fair value of mortgage servicing rights, the
Company uses market prices for comparable mortgage servicing, when
available, or alternatively uses a valuation model that calculates a
present value for mortgage servicing rights with assumptions that market
participants would use in estimating future net servicing income.
INCOME TAXES: The Company uses the liability method of recording deferred
income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and
income tax purposes as well as differences between the fair value of
assets acquired in business combinations accounted for as purchases and
their respective tax bases. The Company and its subsidiaries file a
consolidated federal income tax return for periods subsequent to each
acquisition.
F-14
<PAGE>
NET INCOME PER SHARE: Net income per share has been computed based upon
the weighted average number of common and common equivalent shares
outstanding during the respective periods after giving effect to the
mergers and acquisitions accounted for in accordance with the pooling of
interests method of accounting (See Note 2) and stock splits (See Note
15). The $240 million 4-3/4% Convertible Senior Notes issued in February
1996 are antidilutive for all respective periods and, accordingly, are not
included in the computations of earnings per share. In addition, the $150
million 4-1/2% Convertible Senior Notes issued in October 1994 are
antidilutive for the year ended December 31, 1994 and, accordingly, are
not included in the computation of earnings per share for 1994.
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.
STOCK-BASED COMPENSATION: The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("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 (See Note 16).
DERIVATIVE FINANCIAL INSTRUMENTS: As a matter of policy, the Company does
not engage in derivatives trading or market-making activities. Rather,
derivative financial instruments including interest rate swaps and forward
exchange contracts are used by the Company principally in the management
of its interest rate exposures and foreign currency exposures on
intercompany borrowings. Additionally, the Company enters into forward
delivery contracts, financial futures programs and options to reduce the
risks of adverse price fluctuation with respect to both mortgage loans
held for sale and anticipated mortgage loan closings arising from
commitments issued.
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. The fair values of
the swap agreements are not recognized in the consolidated financial
statements since they are accounted for as hedges. Market value gains and
losses on the Company's foreign currency transaction hedges are recognized
in income and substantially offset by the related foreign exchange
transaction gains and losses. Market value gains and losses on positions
used as hedges in the mortgage banking services operations are deferred
and considered in the valuation of lower of cost or market value of
mortgage loans held for sale.
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
in shareholders' equity. Gains and losses resulting from the change in
exchange rates realized upon settlement of foreign currency transactions
are substantially offset by gains and losses realized upon settlement of
forward exchange contracts. Therefore, the resulting net income effect of
transaction gains and losses in the years ended December 31, 1996, 1995
and 1994, was not significant.
RECLASSIFICATIONS: Certain reclassifications have been made to the
historical financial statements of the Company and HFS to conform to the
restated presentation.
F-15
<PAGE>
2. 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
On December 17, 1997, the Company completed a merger with HFS (the
"Cendant Merger") by 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 Company common stock for each share of HFS common stock.
Upon consummation of the Cendant Merger, the Company changed its name from
CUC International Inc. to Cendant Corporation. In connection with the
Cendant Merger, the Company changed its fiscal year end from January 31 to
December 31. HFS had a calendar year end and, accordingly, the HFS
statements of income for the years ended December 31, 1996, 1995 and 1994
have been combined with the Company's statements of income for the fiscal
years ended January 31, 1997, 1996 and 1995, respectively.
On October 3, 1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag") pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440.0 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information. In connection with
the merger, Hebdo Mag's statement of income for the twelve month period
ended December 31, 1996 has been combined with the Company's statement of
income for the fiscal year ended January 31, 1997.
On April 30, 1997, prior to being merged with and into the Company, HFS
acquired PHH Corporation ("PHH") by merger (the "HFS/PHH Merger") which
was satisfied by the issuance of 72.8 million equivalent shares of Company
common stock in exchange for all of the outstanding common stock of PHH.
PHH is the world's largest provider of corporate relocation services and
also provides mortgage services and fleet management services. Prior to
the HFS/PHH Merger, PHH had an April 30 fiscal year end. In connection
with the HFS/PHH Merger, PHH prepared financial statements for the twelve
month periods ended December 31, 1996, January 31, 1996 and January 31,
1995. To conform to a calendar year end, the PHH statements of income for
the aforementioned twelve month periods have been combined with the HFS
statements of income for the years ended December 31, 1996, 1995 and 1994,
respectively. In combining PHH's twelve month periods to the HFS calendar
years, the consolidated statement of income for the year ended December
31, 1996 included one month (January 1996) of PHH's operating results
which was also included in the consolidated statement of income for the
year ended December 31, 1995. Accordingly, an adjustment has been made to
1996 retained earnings for the duplication of net income of $8.3 million
and cash dividends declared of $5.9 million for such one month period.
During February 1997, the Company acquired substantially all of the assets
and assumed specific liabilities of Numa Corporation ("Numa") for $73.5
million. The purchase price was satisfied by the issuance of 3.4 million
shares of Company common stock. Numa publishes personalized heritage
publications and markets
F-16
<PAGE>
and sells personalized merchandise.
1996 POOLINGS
During July 1996, the Company acquired all of the outstanding capital
stock of Davidson & Associates, Inc. ("Davidson") for a purchase price of
approximately $1 billion, which was satisfied by the issuance of 45.1
million shares of Company common stock. Also during July 1996, the Company
acquired all of the outstanding capital stock of Sierra On-Line, Inc.
("Sierra") for a purchase price of $858.0 million, which was satisfied by
the issuance of 38.4 million shares of Company common stock. Davidson and
Sierra develop, publish and distribute educational and entertainment
software for home and school use. During August 1996, the Company acquired
all of the outstanding capital stock of Ideon Group, Inc. ("Ideon"),
principally a provider of credit card enhancement services, for a purchase
price of $393 million, which was satisfied by the issuance of 16.6 million
shares of Company common stock.
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 .8 million and 3.9 million equivalent shares of
Company common stock, respectively. During 1994, Davidson acquired all of
the outstanding shares of a company by issuing .8 million equivalent
shares of Company common stock.
Davidson, Sierra and Ideon previously used the fiscal years ended December
31, March 31 and December 31, respectively, for their financial reporting.
To conform to the Company's January 31 former fiscal year end, Davidson's
and Ideon's operating results for January 1996 have been excluded from,
and Sierra's operating results for February and March 1996 have been
duplicated in the Company's year ended January 31, 1997 operating results.
The excluded and duplicated periods have been adjusted by a net $4.7
million charge to retained earnings at December 31, 1996. Effective
January 1, 1995, Ideon changed its fiscal year end from October 31 to
December 31 (the "Ideon Transition Period"). The Ideon Transition Period
has been excluded from the accompanying consolidated statements of income.
Ideon's revenues and net loss for the Ideon Transition Period were $34.7
million and $49.9 million, respectively. This excluded period has been
adjusted by a $49.9 million charge to retained earnings at December 31,
1995. The net loss for the Ideon Transition Period was principally the
result of a $65.5 million one-time, non-cash, pre-tax charge recorded in
connection with a change in amortization periods for deferred membership
acquisition costs. Prior to the change, membership acquisition costs were
generally amortized up to ten years for single year membership periods and
up to twelve years for multi-year membership periods. These amortization
periods represented the estimated life of the member. At December 31,
1994, the amortization periods were shortened to one year and three years
for single and multi-year membership periods, respectively (initial
membership period without regard for anticipated renewals).
In 1996, the Company acquired outstanding stock or substantially all of
the assets and liabilities of certain other entities for an aggregate
purchase price of $202.1 million, consisting of 8.3 million shares of
Company common stock.
1995 POOLINGS
During June 1995, the Company acquired all of the outstanding capital
stock of Getko Group, Inc. ("Getko") for a purchase price of $100.0
million, which was satisfied by the issuance of 5.6 million shares of
Company common stock. Getko distributes complimentary welcoming packages
to new homeowners throughout the
F-17
<PAGE>
United States and Canada. During September 1995, the Company acquired all
of the outstanding capital stock of North American Outdoor Group, Inc.
("NAOG") for a purchase price of $52.0 million, which was satisfied by the
issuance of 2.3 million shares of Company common stock. NAOG owns one of
the largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns various other membership
organizations. During January 1996, the Company acquired all of the
outstanding capital stock of Advance Ross Corporation ("Advance Ross") for
a purchase price of $183.0 million, which was satisfied by the issuance of
8.9 million shares of Company common stock. Advance Ross processes
value-added tax refunds for travelers in over 20 European countries.
Getko, NAOG, and Advance Ross previously used the fiscal years ended
November 30, December 31 and December 31, respectively for their financial
reporting. To conform to the Company's January 31 former fiscal year end,
Getko's operating results for December 1993 and January 1994 and NAOG's
operating results for January 1994 have been excluded from the Company's
year ended January 31, 1995 operating results in the consolidated
financial statements. The excluded periods have been adjusted by a net
$4.1 million charge to retained earnings at December 31, 1994. In
addition, Advance Ross' operating results for January 1995 have been
excluded from the year ended January 31, 1996 operating results in the
consolidated financial statements. This excluded period has been adjusted
by a $0.1 million charge to retained earnings at December 31, 1995.
The following table presents the historical results of the Company and the
pooled entities for the last complete periods prior to their respective
mergers ($000's):
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED SEPTEMBER 30, ------------------------------------------------
1997 (UNAUDITED) 1996 1995 1994
-------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues
The Company $ 2,002,597 $ 2,347,655 $ 1,401,551 $ 1,044,669
HFS (inclusive of PHH) 1,749,477 1,436,457 1,056,890 892,120
Hebdo Mag 137,941 124,668 - -
1996 Pooled Entities - - 533,681 371,715
1995 Pooled Entities - - - 138,227
------------ ------------- ------------- -------------
$ 3,890,015 $ 3,908,780 $ 2,992,122 $ 2,446,731
============ ============= ============= =============
Net income
The Company $ 252,082 $ 164,099 $ 164,669 $ 117,591
HFS (inclusive of PHH) 142,057 257,241 157,850 122,533
Hebdo Mag 6,555 2,271 - -
1996 Pooled Entities - - (19,694) 39,491
1995 Pooled Entities - - - 6,975
------------ ------------- ------------- -------------
$ 400,694 $ 423,611 $ 302,825 $ 286,590
============ ============= ============= =============
</TABLE>
F-18
<PAGE>
The following table shows the historical results of HFS and PHH for the
periods prior to the HFS/PHH Merger ($000's):
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ------------------------------------------------
1997 (UNAUDITED) 1996 1995 1994
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues
HFS $ 347,962 $ 785,980 $ 411,299 $ 312,081
PHH 178,635 650,477 645,591 580,039
------------ ------------- ------------- -------------
Total $ 526,597 $ 1,436,457 $ 1,056,890 $ 892,120
============ ============= ============= =============
Net income
HFS $ 58,940 $ 169,584 $ 79,730 $ 53,489
PHH 32,164 87,657 78,120 69,044
------------ ------------- ------------- -------------
Total $ 91,104 $ 257,241 $ 157,850 $ 122,533
============ ============= ============= =============
</TABLE>
PURCHASE BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting; accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. The operating results of
such acquired companies are reflected in the Company's consolidated
statements of income since the respective dates of acquisition.
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the acquisitions described below.
<TABLE>
<CAPTION>
(IN MILLIONS) ACQUIRED IN 1996
-----------------------------------------------------
COLDWELL
RCI AVIS BANKER OTHER
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Cash paid $ 412.1 $ 367.2 $ 747.8 $ 210.4
Common stock issued 75.0 338.4 - 70.8
Notes issued - 100.9 - 5.0
--------- -------- ----------- -----------
Total consideration 487.1 806.5 747.8 286.2
--------- -------- ----------- -----------
Assets acquired 439.1 783.9 541.7 94.8
Liabilities assumed 429.7 311.4 148.5 50.9
--------- -------- ----------- -----------
Fair value of net assets acquired 9.4 472.5 393.2 43.9
--------- -------- ----------- -----------
Goodwill $ 477.7 $ 334.0 $ 354.6 $ 242.3
========= ======== =========== ===========
Shares issued 2.4 11.1 46.6 2.5
========= ======== =========== ===========
</TABLE>
F-19
<PAGE>
(IN MILLIONS) ACQUIRED IN 1995
-------------------------------
CENTURY 21 OTHER
----------- ------------
Cash paid $ 100.2 $ 122.5
Common stock issued 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 net assets acquired 45.3 11.0
----------- ------------
Goodwill $ 199.7 $ 152.3
=========== ============
Shares issued 9.6 6.0
=========== ============
RESORT CONDOMINIUMS INTERNATIONAL, INC.: In November 1996, HFS 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 the next five years which are based on components
which measure RCI's future performance, including EBITDA, net revenues and
number of members, as defined. Any contingent payments made will be
accounted for as additional goodwill.
AVIS: In October 1996, HFS completed the acquisition of all of the
outstanding capital stock of ARAC, initially including payments under
certain employee stock plans of Avis and the redemption of certain series
of preferred stock of Avis for an aggregate $806.5 million. Subsequently,
HFS made contingent cash payments of: (a) during the first quarter of
1997, $17.6 million to General Motors Corporation ("GM"), representing the
amount by which the value attributable under the stock purchase agreement
to HFS common stock received by GM in the Avis acquisition exceeded the
proceeds realized upon the subsequent sale of such Company common stock;
and (b) during the fourth quarter of 1996, $26.0 million of credit
facility termination fees which were not at HFS's discretion since the
facility termination resulted from change of control provisions and the
elimination of the Avis Employee Stock Ownership Plan in connection with
the Avis acquisition.
In September 1997, ARAC completed an IPO resulting in a 72.5% dilution of
HFS's investment in ARAC, the Company that operated the car rental
operations of HFS Car Rental, Inc. Net proceeds approximating $359.3
million retained by ARAC were used to fund its August 20, 1997 acquisition
of The First Gray Line Corporation and repay ARAC indebtedness. See Note
23 for a discussion of HFS's executed business plan and related accounting
treatment regarding Avis.
COLDWELL BANKER CORPORATION: In May 1996, HFS 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. HFS 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 equivalent shares of Company common stock pursuant
to a public offering. Subsequent to the acquisition of Coldwell Banker,
HFS acquired for $2.8 million a relocation consulting firm which was
merged into the Coldwell Banker relocation business.
F-20
<PAGE>
Immediately following the closing of the Coldwell Banker acquisition, HFS
conveyed Coldwell Banker's 318 owned real estate brokerage offices (the
"Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which HFS has no beneficial interest. HFS recorded a
$5.0 million charge ($3.1 million, net of tax) in the second quarter of
1996 representing the fair value of operations contributed to the Trust.
The charge represents the fair value of the Owned Brokerage Business based
upon a valuation which considered earnings, cash flow, assets and business
prospects to the contributed business.
OTHER: During 1996, the Company and HFS acquired certain entities for an
aggregate purchase price of $286.2 million.
CENTURY 21: In August 1995, a majority owned subsidiary of HFS, 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 plus expenses, including an initial cash payment of $70.2
million, 9.6 million equivalent shares of Company common stock valued at
$64.8 million, the assumption of $80.0 million of Century 21 redeemable
preferred stock issued prior to the acquisition (subsequently redeemed in
February 1996) and a $30.0 million contingent payment made in February
1996.
HFS and certain stockholders sold approximately 15.4 million equivalent
shares of Company common stock pursuant to a public offering in September
1995 (the "C21 Offering"). Included in the C21 Offering were 9.6 million
equivalent Company shares issued as partial consideration for the
acquisition of Century 21. In accordance with Century 21 acquisition
agreements, HFS received $28.9 million representing proceeds from the sale
of such shares in excess of $7.28 per equivalent Company share, net of
certain expenses of the C21 Offering. In connection with the C21 Offering,
HFS also received $20.1 million of proceeds, net of certain expenses from
the sale of shares issued upon the exercise of an underwriter
over-allotment option. Net proceeds from the C21 Offering received by HFS
resulted in corresponding increases in stockholders' equity.
In connection with the acquisition, HFS executed an agreement (the
"Subscription and Stockholders' Agreement"), with a management group
pursuant to which the ownership of Century 21 Holding Corp. common stock
would be divided 87.5% to HFS and 12.5% to the management group. In
addition, the management group executives entered into renewable
employment agreements with HFS with initial terms that commenced on
November 1, 1995 and would expire on December 31, 1997. HFS had a call
option to purchase Holding common stock owned by the management group and
the management group had a put option to require HFS to purchase all their
Holding common stock after January 1, 1998 at fair market value. Effective
October 29, 1996 (the "Effective Date"), HFS amended the Subscription and
Stockholders' Agreement to provide that HFS's call option to purchase
Holding common stock at fair value from the management group would be
accelerated to the Effective Date with the fair value determined as of the
Effective Date. Pursuant to such amendment, the employment agreements were
terminated in October 1996 and the put and call options have been
exercised. The 12.5% interest was acquired by HFS for $52.8 million in the
second quarter of 1997.
OTHER: During 1995, the Company and HFS collectively acquired certain
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 years ended December 31, 1996 and
1995 assuming the aforementioned completed acquisitions were consummated
on January 1, 1995.
F-21
<PAGE>
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values with appropriate recognition given
to the effect of current interest rates and income taxes. Management does
not expect that the final allocation of the purchase prices for the above
acquisitions will differ materially from the preliminary allocations. The
pro forma results are not necessarily indicative of the operating results
that would have occurred had the transactions been consummated as
indicated nor are they intended to indicate results that may occur in the
future. The underlying pro forma information includes the amortization
expense associated with the assets acquired, the reflection of the
Company's and HFS's financing arrangements, the elimination of redundant
costs and the related income tax effects.
($000's, except per share amounts) YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995
------------- ------------
Net revenue $ 4,475,262 $ 3,809,181
Income before income taxes 797,042 634,898
Net income 473,359 378,577
Net income per share:
Primary $ .57 .48
Fully diluted $ .56 .47
Weighted average shares outstanding:
Primary 844,798 803,548
Fully diluted 851,091 817,628
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
1997 POOLINGS (UNAUDITED)
The Company expects to incur merger and related costs and other unusual
charges in connection with the fourth quarter 1997 mergers with HFS and
Hebdo Mag approximating $825.0 million ($560.0 million, after tax).
HFS recorded a one-time merger and related charge (the "PHH Merger
Charge") of $303.0 million ($227.0 million, after tax) during the second
quarter of 1997 in connection with the HFS/PHH Merger. The PHH Merger
Charge is summarized by type as follows (in millions):
Personnel related $ 142.4
Professional fees 36.8
Business terminations 44.7
Facility related 57.1
Other costs 22.0
-------------
Total $ 303.0
=============
Personnel related charges are comprised of costs incurred in connection
with employee reductions associated with the combination of HFS's
relocation services business and the consolidation of corporate
activities. Personnel related charges include termination benefits such as
severance, medical and other benefits. Also included in personnel related
charges are supplemental retirement benefits resulting from the change of
control. Several grantor trusts were established and funded by HFS to pay
such benefits in accordance with the terms of the PHH merger agreement.
Full implementation of the restructuring plan will result in the
termination of
F-22
<PAGE>
approximately 500 employees, substantially all of whom are located in
North America, of which 369 employees were terminated as of September 30,
1997. Professional fees are primarily comprised of investment banking,
accounting and legal fees incurred in connection with the HFS/PHH Merger.
Business termination charges relate to the exit from certain activities
associated with fleet management, mortgage services and ancillary
operations in accordance with HFS's revised strategic plan. Facility
related expenses include costs associated with contract and lease
terminations, asset disposal and other charges incurred in connection with
the consolidation and closure of excess space.
The Company anticipates that approximately $236.0 million will be paid in
cash in connection with the PHH Merger Charge of which $137.0 million was
paid through September 30, 1997. The remaining cash portion of the PHH
Merger Charge will be financed through cash generated from operations and
borrowings under the Company's revolving credit facilities. Revenue and
operating results from activities that will not be continued are not
material to the results of operations of the Company.
1996 POOLINGS
Principally in connection with the Davidson, Sierra and Ideon mergers, the
Company recorded a charge to operations of approximately $179.9 million
($118.7 million, after-tax) for the year ended December 31, 1996.
The charge is summarized by type, as follows ($000's):
Personnel related $ 18.6
Professional fees and litigation 95.3
Facility related 66.0
---------
$ 179.9
=========
Such costs in connection with the Davidson & Sierra mergers with the
Company (approximately $48.6 million) are non-recurring and are comprised
primarily of transaction costs, other professional fees and exit costs.
Such costs associated with the Company's merger with Ideon (the "Ideon
Merger") (approximately $131.3 million) are non-recurring and include
transaction and exit costs as well as a provision relating to certain
litigation matters giving consideration to the Company's intended approach
to these matters. In determining the amount of the provision related to
these outstanding litigation matters, the Company estimated the cost of
settling these litigation matters. In estimating such cost, the Company
considered potential liabilities related to these matters and the
estimated cost of prosecuting and defending them (including out-of-pocket
costs, such as attorneys' fees, and the cost to the Company of having its
management involved in numerous complex litigation matters). The Company
has since settled certain of these litigation matters while certain of
these matters remain outstanding. Although the Company has attempted to
estimate the amounts that will be required to settle remaining litigation
matters, there can be no assurance that the actual aggregate amount of
such settlements will not exceed the amount accrued (See Note 13). As of
September 30, 1997, such charges amounted to $155.7 million. The Company
considered litigation-related costs and liabilities, as well as exit 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
proposed consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger
and costs relating to the expected obligations for certain third-party
contracts (e.g., existing leases and vendor agreements) to which Ideon is
a party and which are neither terminable at will nor automatically
terminate upon a change-in-control of Ideon. As a result of the Ideon
Merger, 120 employees were terminated. The Company
F-23
<PAGE>
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. The
Company does not expect any loss in revenue as a result of these
consolidation efforts.
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
the Ideon merger and products abandoned are marketing and operational
costs incurred for products abandoned 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 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.
During 1994, costs related to products abandoned and restructuring were
incurred when Ideon reorganized its operations and named a new senior
management team, resulting in $7.9 million of charges for various
severance agreements and a lease termination.
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. Acquisition liabilities were
recorded at the dates of consummation and are included in the respective
purchase price allocations. These 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
F-24
<PAGE>
operating and overhead activities. Accrued acquisition obligations related
to each acquired entity are summarized by type as follows ($000's):
COLDWELL
CENTURY 21 BANKER RCI OTHER
---------- ----------- ----------- ----------
Personnel related $ 12,647 $ 4,237 $ 9,845 $ 5,542
Facility related 16,511 5,491 6,929 3,851
Other costs 990 211 7,025 880
---------- ----------- ----------- ----------
Total $ 30,148 $ 9,939 $ 23,799 $ 10,273
========== =========== =========== ==========
Terminated employees 319 87 252 275
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs
include contract and lease terminations, temporary storage and relocation
costs associated with assets to be disposed of, and other charges incurred
in the consolidation and closure of excess space.
During 1995, approximately $14.3 million was paid and charged against the
acquisition liability for restructuring charges related to the Century 21
acquisition. During 1996, approximately $11.3 million, $3.9 million, $0.5
million and $7.7 million was paid and charged against the acquisition
liabilities for restructuring charges related to the Century 21, Coldwell
Banker, RCI and certain other acquisitions, respectively. Additional
restructuring charges were accrued during 1996 for Century 21 of $6.1
million. The adjustment to the restructuring liability represented revised
cost estimates for activities contemplated in management's original
restructuring plans.
The business plans to restructure Century 21, Coldwell Banker, RCI and
certain other acquisitions have been fully executed. Remaining accrued
acquisition obligations related to the restructuring of such acquired
companies pertain primarily to future lease commitments and other
contractual obligations that existed at the respective acquisition dates.
4. OTHER INTANGIBLES - NET
Other intangibles - net consisted of ($000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
BENEFIT PERIODS ------------------------------
IN YEARS 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Avis trademark 40 $ 400,000 $ --
Customer lists 6.5 - 10 113,976 --
Reservation system 10 95,000 --
Contract renewal rights 2 - 16 90,695 90,345
------------- -------------
699,671 90,345
Less accumulated amortization 63,441 51,500
------------- -------------
Other intangibles - net $ 636,230 $ 38,845
============= =============
</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.
F-25
<PAGE>
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities consisted
of ($000's):
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
Accounts payable $ 535,978 $ 407,437
Short-term debt 250,930 --
Merger and acquisition obligations 167,238 13,227
Accrued payroll and related 157,032 88,364
Advances from relocation clients 78,761 95,869
Other 475,007 314,160
------------- -----------
Accounts payable, accrued expenses and other
current liabilities $ 1,664,946 $ 919,057
============= ===========
Short-term debt at December 31, 1996 consisted of $150 million of acquired
Avis fleet financing, borrowed on behalf of ARAC, which was repaid upon
settlement of the corresponding intercompany loan due from ARAC prior to
the IPO and a $100.9 million note payable issued to ARAC as partial
consideration for ARAC in connection with the Company's acquisition of
ARAC. The outstanding short-term debt as of December 31, 1996 had a
weighted average interest rate of 6.85%.
6. NET INVESTMENT IN LEASES AND LEASED VEHICLES
The net investment in leases and leased vehicles consisted of ($000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Vehicles under open-end operating leases $ 2,617,263 $ 2,585,953
Vehicles under closed-end operating leases 443,853 320,894
Direct financing leases 356,699 335,498
Accrued interest on leases 851 891
------------- -------------
Net investments in leases and leased vehicles $ 3,418,666 $ 3,243,236
============= =============
</TABLE>
The Company leases vehicles for initial periods of twelve months or more
under either operating or direct financing lease agreements. 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 for 1996 and 1995
were $1.6 billion and $1.5 billion, respectively, and the ratio of such
repayments to the average net investment in leases and leased vehicles was
47.19% and 47.96%, respectively.
Vehicles under operating leases are amortized using the straight-line
method over the expected lease term. 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 $4.6 billion and $2.0 billion, respectively, at December 31,
1996 and $4.4 billion and $1.8 billion, respectively, at December 31,
1995.
F-26
<PAGE>
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 $600.6 million and
$156.7 million, respectively at December 31, 1996 and $482.9 million and
$162.0 million, respectively, at December 31, 1995. 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.
Leasing revenues, which are reflected in fleet leasing on the consolidated
statements of income consist of ($000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Operating leases $ 1,145,745 $ 1,098,697 $ 982,416
Direct financing leases, primarily interest 43,323 42,375 41,688
------------- ------------- -------------
$ 1,189,068 $ 1,141,072 $ 1,024,104
============= ============= =============
</TABLE>
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 $7.1 million and
$5.9 million at December 31, 1996 and 1995, respectively; or guarantees to
a maximum extent of $0 and $263,000 at December 31, 1996 and 1995,
respectively. All such credit risk has been included in the Company's
consideration of related reserves. The outstanding balances under such
agreements aggregated $158.5 million and $98.4 million at December 31,
1996 and 1995, respectively.
Other managed vehicles with balances aggregating $93.9 million and $114.9
million at December 31, 1996 and 1995, 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 $47.4 million and $48.5 million at December 31,
1996 and 1995, 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 setoff exists and the Company
exercises its right of setoff in settlement with client corporations.
7. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are recorded at the lower of cost or market
value on the aggregate loan basis. The Company issues mortgage-backed
certificates insured or guaranteed by various government sponsored
entities and private insurance agencies. Primarily, the insurance or
guaranty is provided on a non-recourse basis to the Company, except where
limited by the Federal Housing Administration and Veterans Administration
and their respective loan program. The valuation reserve was approximately
$10.1 million and $1.9 million at December
F-27
<PAGE>
31, 1996 and 1995, respectively. As of December 31, 1996, mortgage loans
sold with recourse amounted to approximately $83.0 million.
8. MORTGAGE SERVICING RIGHTS AND FEES
Mortgage servicing rights and fees activity was as follows ($000's):
<TABLE>
<CAPTION>
EXCESS PURCHASED ORIGINATED
SERVICING SERVICING SERVICING IMPAIRMENT
FEES RIGHTS RIGHTS ALLOWANCE TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 75,529 $ 8,808 $ - $ - $ 84,337
Additions 24,679 17,241 - - 41,920
Amortization (13,512) (6,772) - - (20,284)
Sales (8,729) (31) - - (8,760)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 77,967 19,246 - - 97,213
Additions 51,191 17,849 61,095 - 130,135
Amortization (18,609) (5,858) (4,089) - (28,556)
Write-down/provision (1,630) - - (1,386) (3,016)
Sales (1,080) (3,262) - - (4,342)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 107,839 27,975 57,006 (1,386) 191,434
Less: PHH activity for January
1996 to reflect change in
PHH fiscal year (3,623) (170) (10,227) 183 (13,837)
Additions 66,825 - 97,568 - 164,393
Amortization (31,235) (4,763) (15,752) - (51,750)
Write-down/provision - - - 622 622
Sales (1,291) (628) - - (1,919)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 138,515 $ 22,414 $ 128,595 $ (581) $ 288,943
========== ========== ========== =========== ===========
</TABLE>
Excess servicing fees represent the present value of the differential
between the actual servicing fees and normal servicing fees which are
capitalized at the time loans are sold with servicing rights retained.
Purchased servicing rights represent the cost of acquiring the rights to
service mortgage loans for others. Originated servicing rights represents
the present value of normal servicing fees which are capitalized at the
time loans are sold with servicing rights retained.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122). This
Statement requires that mortgage servicing rights be recognized when a
mortgage loan is sold and servicing rights are retained. The Company
adopted SFAS No. 122 effective May 1, 1995 and, accordingly, capitalized
originated servicing rights, net of amortization and valuation allowances
of approximately $82.4 million and $55.6 million in the years ended
December 31, 1996 and 1995, respectively.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on the fair value
of the servicing rights' relative to the loan as a whole. To determine the
fair value of mortgage servicing rights, the Company uses market prices
for comparable mortgage servicing, when available, or alternatively uses a
valuation model that calculates the present value of future net servicing
income using assumptions that market participants would use in estimating
future net servicing income.
F-28
<PAGE>
SFAS No. 122 also requires the impairment of originated and purchased
servicing rights to be measured based on the difference between the
carrying amount and current fair value of the servicing rights. In
determining impairment, the Company aggregates all mortgage servicing
rights, excluding those capitalized prior to the adoption of SFAS No. 122,
and stratifies them based on the predominant risk characteristic of
interest rate band. For each risk stratification, a valuation allowance is
maintained for any excess of amortized book value over the current fair
value by a charge or credit to income.
Prior to the adoption of SFAS No. 122, the Company reviewed the
recoverability of purchased servicing rights by discounting anticipated
future cash flows at appropriate discount rates, utilizing externally
published prepayment rates. If the recorded balance exceeded the
discounted anticipated future cash flows, the amortization of the
purchased servicing rights was accelerated on a prospective basis.
9. MARKETING AND RESERVATION ACTIVITIES
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 sales. 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 $157.6 million, $140.1 million, $130.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Advertising
expenses included in marketing and reservation expense are $55.2 million,
$48.0 million and $43.6 million for the years ended December 31, 1996,
1995 and 1994, respectively.
10. LONG-TERM DEBT
Long-term debt consists of ($000's):
DECEMBER 31,
-----------------------------
1996 1995
------------ -------------
Revolving Credit Facilities $ 330,205 $ 15,400
5-7/8% Senior Notes 149,811 149,715
4-1/2% Convertible Senior Notes 146,678 149,971
4-3/4% Convertible Senior Notes 240,000 --
Other loans and capital lease obligations 148,925 41,140
------------ -------------
1,015,619 356,226
Less current portion 11,035 2,249
------------ -------------
Long-term debt $ 1,004,584 $ 353,977
============ =============
REVOLVING CREDIT FACILITIES: At December 31, 1996, the Company had a
$500.0 million revolving credit facility (the "CUC Credit Facility") with
a variety of different types of loans available thereunder. Interest was
payable, depending on the type of loan utilized by the Company, at a
variety of rates based on the federal funds rate, LIBOR, the prime rate or
rates quoted by participating banks based on an auction process for the
CUC Credit Facility. At December 31, 1996, no borrowings under this
facility were outstanding. The CUC Credit Facility required the Company to
maintain certain financial ratios and contained other restrictive
covenants
F-29
<PAGE>
including, without limitation, financial covenants and restrictions on
certain corporate transactions, and also contained various events of
default provisions including, without limitation, defaults arising from
certain changes in control of the Company.
At December 31, 1996, HFS had $1 billion in revolving credit facilities
consisting of (i) a $500.0 million, five year revolving credit facility
(the "Five Year Revolving Credit Facility") and (ii) a $500.0 million, 364
day revolving credit facility (the "364 Day Revolving Credit Facility" and
collectively with the Five Year Revolving Credit Facility, the "Revolving
Credit Facilities"). At December 31, 1996, there was $205.0 million
outstanding under the Revolving Credit Facilities and there were no
borrowings under such facility at December 31, 1995.
Upon consummation of the Cendant Merger, the CUC Credit Facility was
terminated and the Revolving Credit Facilities were maintained with
commitments aggregating $1.25 billion and $750.0 million under the 364 Day
Revolving Credit Facility and Five Year Revolving Credit Facility,
respectively. The 364 Day Revolving Credit Facility will mature on
September 30, 1998 but may be renewed on an annual basis for an additional
364 days upon receiving lender approval. The Five Year Revolving Credit
Facility will mature on October 1, 2001. The Revolving Credit Facilities,
at the option of the Company, bear interest based on competitive bids of
lenders participating in the facilities, at prime rates or at LIBOR plus a
margin of approximately 22 basis points. The Company is required to pay a
per annum facility fee of .08% and .06% of the average daily availability
of the Five Year Revolving Credit Facility and 364 Revolving Credit
Facility, respectively. The interest rates and facility fees are subject
to change based upon credit ratings on the Company's senior unsecured
long-term debt by nationally recognized statistical rating companies. The
Revolving Credit Facilities contain certain restrictive covenants
including restrictions on indebtedness, mergers, liquidations and sale and
leaseback transactions and requires the maintenance of certain financial
ratios, including a 3:1 minimum interest average ratio and a 3.5:1 maximum
coverage ratio, as defined.
During the year ended December 31, 1996, Wright Express Corporation, a
wholly-owned subsidiary of the Company, entered into a new revolving
credit facility agreement replacing its previous revolving line of credit.
This facility has an available line of $60 million and expires February 8,
1999. Interest on the outstanding borrowings is computed, at the option of
Wright Express Corporation, under various methods. At December 31, 1996,
$31.4 million was outstanding under this facility with an interest rate of
6.04%. Borrowings under the previous arrangement at December 31, 1995
aggregated $15.4 million with interest rates ranging from 6.31% to 7.25%.
In connection with the acquisition of Hebdo Mag, the Company assumed a
$115.2 million revolving credit facility which bears interest at varying
rates ranging from the prime rate plus .25% to 1.5% or LIBOR plus 1.0% to
2.25%, depending upon Hebdo Mag's ratio of total debt to pro forma cash
flow, as defined. At December 31, 1996, $93.8 million was outstanding
under this facility. This facility expires on March 15, 1998 but may be
renewed on an annual basis for successive periods of one year upon
receiving lender approval.
Amounts outstanding under all revolving credit facilities as of December
31, 1996 and 1995 are classified as long-term, based on the Company's
intent and ability to maintain these loans on a long-term basis.
SENIOR NOTES: In December 1993, HFS completed a public offering of $150.0
million, unsecured 5-7/8% Senior Notes due December 15, 1998 (the "Senior
Notes"). Interest is payable semi-annually.
4-1/2% CONVERTIBLE SENIOR NOTES: In October 1994, HFS completed a public
offering of $150.0 million unsecured 4-1/2% Convertible Senior Notes (the
"4-1/2% Notes") due 1999, which were convertible at the
F-30
<PAGE>
option of the holders at any time prior to maturity into 132.425
equivalent shares of Company common stock per $1,000 principal amount of
the 4-1/2% Notes, representing a conversion price of $7.55 per share.
Interest was payable semi-annually commencing April 1995.
On September 22, 1997, HFS exercised its option to redeem the outstanding
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. Accordingly, 19.7 million equivalent shares of Company common
stock were issued as a result of the conversion of such notes.
4-3/4% CONVERTIBLE SENIOR NOTES: On February 22, 1996, HFS 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 equivalent shares of
Company common stock per $1,000 principal amount of the 4-3/4% Notes,
representing a conversion price of $27.76 per share. The 4- 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time
on or after March 3, 1998 at redemption prices decreasing from 103.393% of
principal at March 3, 1998 to 100% of principal at March 3, 2003. However,
on or after March 3, 1998 and prior to March 3, 2000, the 4-3/4% Notes
will not be redeemable at the option of the Company unless the closing
price of the Company's common stock shall have exceeded $38.86 per share
(subject to adjustment upon the occurrence of certain events) for 20
trading days within a period of 30 consecutive trading days ending within
five days prior to redemption. Interest on the 4- 3/4% Notes is payable
semi-annually commencing September 1, 1996.
OTHER LOANS AND CAPITAL LEASES OBLIGATIONS
Zero Coupon Convertible Notes: The Zero Coupon Convertible Notes issued
in connection with the Company's fiscal 1990 recapitalization were
recorded at their fair value on the date of issuance and were issued in
$100 principal amounts and multiples thereof. Each $100 principal amount
was convertible into 22.78 shares of Company common stock. Virtually all
of the Zero Coupon Convertible Notes were converted into Company common
stock by the maturity date of June 6, 1996. The principal balance
outstanding at December 31, 1995 was $14.4 million.
6-1/2% Convertible Subordinated Notes: On April 12, 1994, Sierra issued
$50.0 million in principal amount of 6-1/2% Convertible Subordinated Notes
due April 1, 2001 (the "6-1/2% Notes"). Interest on the 6-1/2% Notes is
payable semi-annually on April 1 and October 1 of each year. Each $7.62
principal amount of 6-1/2% Notes is convertible into one share of Company
common stock, subject to adjustment under certain conditions. The 6-1/2%
Notes are redeemable after April 2, 1997, at the option of the Company, at
specified redemption prices. The 6-1/2% Notes are subordinated to all
existing and future Senior Indebtedness (as defined in the indenture
governing the 6-1/2% Notes) of Sierra. Issuance costs have been netted
against the principal convertible debt balance and are being amortized on
a straight-line basis over seven years. The principal convertible debt
balance outstanding at December 31, 1996 and 1995 was $23.5 million and
$23.4 million, respectively.
Other: In connection with the acquisition of Hebdo Mag, the Company
assumed long-term debt of $110.5 million consisting of senior and
subordinated notes and other miscellaneous loans which is reflected in the
long-term debt balance at December 31, 1996.
F-31
<PAGE>
Long-term debt payments including obligations under capital leases at
December 31, 1996 are due as follows ($000's):
YEAR AMOUNT
----------- -------------
1997 $ 11,035
1998 167,797
1999 175,447
2000 34,900
2001 261,286
Thereafter 365,154
-------------
Total $ 1,015,619
=============
11. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs,
classified as "Liabilities under management and mortgage programs-debt"
consisted of ($000's):
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
Commercial paper $ 3,090,843 $ 2,348,732
Medium-term notes 1,662,200 2,031,200
Other 336,900 47,940
------------- -------------
Liabilities under management and
mortgage programs - debt $ 5,089,943 $ 4,427,872
============= =============
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 5.4% and 5.8% at December 31, 1996 and
1995, respectively
Medium-term notes of $1.6 billion represent unsecured loans which mature
in 1997. The weighted average interest rates on such medium-term notes was
5.7% and 5.8% at December 31, 1996 and 1995, respectively. The remaining
$0.1 billion of medium-term notes represents an unsecured obligation
having a fixed interest rate of 6.5% with interest payable semi-annually
and a term of seven years payable in full in 2000.
Other liabilities under management and mortgage programs is principally
comprised of unsecured debt, all of which matures in 1997, which includes
borrowings under short-term lines of credit and other bank facilities. The
weighted average interest rate on unsecured debt was 5.8% and 6.9% at
December 31, 1996 and 1995, respectively.
Interest expense is incurred on indebtedness which is used to finance
vehicle leasing activities, mobility services, and mortgage servicing
activities. Interest incurred on borrowings used to finance vehicle
leasing activities of $161.8 million, $159.7 million and $126.7 million
for the years ended December 31, 1996, 1995, and 1994 respectively, is
included net within fleet leasing revenues in the consolidated statements
of income. Interest on borrowings used to finance both equity advances on
homes and mortgage servicing activities are recorded net within service
fee revenues in the consolidated statements of income. Interest related to
equity advances on homes was $35.0 million, $26.0 million and $20.0
million for the years ended December 31, 1996, 1995 and 1994,
respectively. Interest related to mortgage servicing activities was $63.4
million, $49.9 million and $32.8 million for the years ended December 31,
1996, 1995 and 1994, respectively.
F-32
<PAGE>
The Company has a $2.5 billion syndicated unsecured credit facility backed
by a consortium of domestic and foreign banks. The facility is comprised
of $1.25 billion of lines maturing in 364 days and $1.25 billion maturing
in five years. Under the credit facilities, the Company is obligated to
pay annual commitment fees which were $2.4 million and $2.3 million for
the years ended December 31, 1996 and 1995, respectively. The Company had
other unused lines of credit of $301.5 million and $327.9 million at
December 31, 1996 and 1995, respectively with various banks.
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, 1996, as set forth in the table below,
indicate that the actual repayments of liabilities under management and
mortgage programs will be different than required by contractual
maturities. ($000's):
ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS
----- ------------------------ ---------------------
1997 $ 2,961,264 $ 2,608,179
1998 1,539,172 1,471,407
1999 673,535 671,623
2000 318,643 217,143
2001 53,843 71,061
2002-2006 182,777 50,530
------------- -------------
$ 5,729,234 $ 5,089,943
============= =============
12. 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: Marketable securities primarily consist of
corporate bonds, tax-free municipal obligations, U.S. Treasury notes,
commercial paper and equity 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, 1996 and 1995 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. Securities not maturing
within one year are classified as non-current assets. 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. The majority of debt securities had contractual maturities
of less than one year with $4.0 million and $28.7 million having
maturities of greater than one year at December 31, 1996 and 1995,
respectively. Gross unrealized gains and losses of such 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
F-33
<PAGE>
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 and fees: Fair value is estimated by discounting
the expected net cash flow of servicing rights and fees using discount
rates that approximate market rates and externally published prepayment
rates, adjusted, if appropriate, for individual portfolio characteristics.
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.
Interest rate swaps, foreign exchange contracts, forward delivery
commitments, futures contracts and options: The fair value of interest
rate swaps, foreign exchange contracts, forward delivery commitments,
futures contracts and options is estimated, using dealer quotes, as the
amount that the Company would receive or pay to execute a new agreement
with terms identical to those remaining on the current agreement,
considering interest rates at the reporting date.
F-34
<PAGE>
The carrying amounts and fair values of the Company's financial
instruments at December 31, are as follows ($000's):
<TABLE>
<CAPTION>
1996 1995
------------------------------------ -------------------------------------
ESTIMATED ESTIMATED
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ----------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ - $ 633,903 $ 633,903 $ - $ 355,959 $ 355,959
Marketable securities:
Debt securities - 75,673 75,673 - 110,492 110,492
Equity securities - 22,500 22,500 - 15,353 19,200
Assets under management
and mortgage programs:
Receivables - 1,290,625 1,290,625 - 1,028,976 1,028,976
Relocation receivables - 773,326 773,326 - 736,038 736,038
Mortgage loans held for sale - 1,248,299 1,248,299 - 784,901 784,901
Excess mortgage servicing fees - 138,515 155,033 - 107,839 107,966
Originated mortgage servicing
rights - 128,014 139,776 - 55,620 58,764
Purchased mortgage servicing
rights - 22,414 29,326 - 27,975 33,268
Liabilities
Long-term debt - 1,004,584 1,484,277 - 353,977 543,092
Liabilities under management
and mortgage programs:
Debt - 5,089,943 5,089,943 - 4,427,872 4,427,872
Off balance sheet
Interest rate swaps 1,670,155 - - 2,630,567 - -
In a gain position - - 2,457 - - 4,969
In a loss position - - (10,704) - - (13,828)
Foreign exchange forwards 329,088 - 10,010 118,069 - 6,413
Mortgage-related positions:(a)
Forward delivery commitments 1,703,495 11,425 7,448 1,323,285 5,407 (6,997)
Option contracts to sell 265,000 952 746 330,000 839 69
Option contracts to buy 350,000 1,346 (463) 485,000 3,388 528
Treasury options used to hedge
servicing rights 313,900 1,327 278 - - -
</TABLE>
- ---------
(a) Gains (losses) on mortgage-related positions are already included in the
determination of market value of mortgage loans held for sale.
F-35
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
LEASES: The Company has noncancelable operating leases covering various
equipment and facilities, which expire through 2004. Rental expense for
the years ended December 31, 1996, 1995 and 1994 was $84.4 million, $66.9
million and $54.5 million respectively, excluding real estate taxes and
other fees that are also the responsibility of the Company.
Operating lease commitments over the next five years and thereafter are as
follows ($000's):
FOR THE YEAR ENDING DECEMBER 31,
1997 $ 90,066
1998 77,543
1999 58,727
2000 45,335
2001 33,067
Thereafter 76,430
-------------
Total minimum lease payments $ 381,168
=============
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.
IDEON: On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Company acquired Ideon in August 1996. The Agreement provides for the
settlement of all of the outstanding litigation matters involving Peter
Halmos, SafeCard and Ideon as set forth below. The Agreement became
effective in July 1997. The Agreement calls for the dismissal with
prejudice of these outstanding litigation matters and the payment to Peter
Halmos, over a six-year period, of $70.5 million. Specifically, the
Agreement requires that the Company pay Peter Halmos one up-front payment
of $13.5 million and six subsequent annual payments of $9.5 million each.
The Agreement also calls for the transfer to the Company of assets related
to SafeCard's CreditLine business, including the transfer by CreditLine
Corporation to the Company of all of the CreditLine Corporation's rights
under a marketing agreement between it and SafeCard dated November 1,
1988.
The following Halmos related cases have been dismissed pursuant to the
Agreement:
1. Halmos Trading & Investing Company v. SafeCard Services, Inc. and
Gerald Cahill v. Peter A. Halmos and Steven J. Halmos and Halmos
Trading & Investment Co., Case No. 93-04354 (06) in the Circuit Court
for the 17th Judicial Circuit in and for Broward County, Florida.
2. SafeCard Services, Inc. v. Peter Halmos, a Florida resident; High
Plains Capital Corporation, a Wyoming Corporation; and CreditLine
Corporation, a Wyoming corporation which is pending in the District
Court, First Judicial District of Laramie County, Wyoming; Case No.
Doc. 134, No. 192.
3. Peter Halmos, CreditLine Corporation and Continuity Marketing
Corporation v. Paul G. Kahn, William T. Bacon, Robert L.
Dilenschneider, Eugene Miller and SafeCard Services, Inc., in the
United States District Court, Southern District of Florida, Case No.
94-6920 CG-NESBITT.
F-36
<PAGE>
4. Peter Halmos v SafeCard Services, Inc., William T. Bacon, Jr., Barry
I. Tillis and Barry Natter, Case No. 95-6325 (AJ) filed in the
Circuit Court, Fifteenth Judicial Circuit, in and for Palm Beach
County Florida.
5. High Plains Capital Corporation f/k/a Halmos & Company, Inc v. Ideon
Group, Inc., SafeCard Services, Inc., Eugene Miller, Robert L.
Dilenschneider, and the Dilenschneider Group, Inc., Palm Beach
County, Florida, Civil Action No. CL 95 8313 AE (Hon. Walter
Colbath).
6. High Plains Capital Corporation v. Ideon Group, Inc., and SafeCard
Services, Inc., Civil Action No. 95 015024, Seventeenth Judicial
Circuit, Broward County, Florida.
The following Halmos related case will also be dismissed pursuant to the
Agreement:
7. Ideon Group, Inc., SafeCard Services, Inc., Paul G. Kahn, William T.
Bacon, Jr., Marshall L. Burman, John Ellis (Jeb) Bush, Robert L.
Dilenschneider, Adam W. Herbert, Eugene Miller, and Thomas F. Petway,
III v. Peter Halmos, Civil Action No. 14600, filed in the Court of
Chancery of New Castle County, Delaware.
On October 22, 1997, the plaintiffs, the Company and all of the Company's
indemnitees, entered into a Memorandum of Understanding and thereafter
filed final settlement agreements in James B. Chambers and Peter A. Halmos
v. SafeCard Services, Inc; Ideon Group, Inc.; Paul G. Kahn; William T.
Bacon, Jr.,; Robert L. Dilenschneider; The Dilenschneider Group; Eugene
Miller; G. Thomas Frankland; Francis J. Marino; John R. Birk; Marshall
Burman; Thomas F. Petway III; John Ellis Bush; Adam W. Herbert, Jr.; Price
Waterhouse LLP; Mahoney Adams & Criser, P.A. and John Does 1 through 25,
United States District Court, Southern District of Florida, Case No.
95-1298-CIV-NESBITT ("Chambers"); Lois Hekker v. Ideon Group, Inc. and
Paul G. Kahn, United States District Court, Middle District of Florida,
Jacksonville Division, Case No. 95-681-CIV-J ("Hekker"); and James L.
Binder, individually, as custodian for Elizabeth Binder, and as custodian
for the James L. Binder, D.D.S., P.C. Profit Sharing Trust; Edward Dubois;
Sheila Ann Dubois, as Personal Representative for The Estate of Winifred
Dubois; G. Neal Goolsby; John E. Masters, individually and as custodian
for Gregory Halmos and Nicholas Halmos; J.B. McKinney; on behalf of
themselves and all others similarly situated, and Peter A. Halmos, as
Trustee for the Peter A. Halmos Revocable Trust Dated January 24, 1990,
and The Halmos Foundation, Inc., individually, v. SafeCard Services, Inc.,
a Delaware corporation; Paul G. Kahn; William T. Bacon, Jr.; Robert L.
Dilenschneider; The Dilenschneider Group, a Delaware corporation; Eugene
Miller; Gerald R. Cahill; Oppenheimer & Co., Inc., a Delaware corporation;
and John Does 1 through 100, inclusive. United States District Court for
the Southern District of Florida, (Miami Division) Case No.
94-2604-CIV-MOORE ("Binder"). The above referenced settlement in the
Chambers and Hekker matters was for payment by the Company to class
members of $15.0 million. The settlement in the Binder litigation calls
for the payment by the Company to class members of $3.0 million. These
settlements must be approved by the court at hearings anticipated during
the first quarter of 1998.
The following actions remain pending, in whole or in part, as described
below:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for SafeCard) in April 1993 in Cook County Circuit Court in
Illinois against SafeCard and one of Ideon's directors, purporting to
state claims aggregating in excess of $100.0 million, principally relating
to alleged rights to "incentive compensation," stock options or their
equivalent, indemnification, wrongful termination and defamation. On
February 7, 1995, the court dismissed with prejudice Peter Halmos' claims
regarding alleged rights to "incentive compensation," stock options or
their equivalent, wrongful termination and defamation. Mr. Halmos has
appealed this ruling. SafeCard has filed an answer to the remaining
indemnification claims. Its obligation to file an answer to the
F-37
<PAGE>
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a declaratory judgment action filed by Ideon in Delaware
Chancery Court. As a result of the Halmos settlement described above, only
the claims of Myron Cherry remain pending.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos,
in the State Circuit Court in Palm Beach County, Florida in April 1995
against Ideon, Family Protection Network, Inc., SafeCard, one of Ideon's
directors and Ideon's Chief Executive Officer purporting to state various
statutory and tort claims. The claims principally relate to the allegation
by these companies that SafeCard's Early Warnings Service and Family
Protection Network were conceived and commercialized by, among others,
Peter Halmos and have been improperly copied. An amended complaint filed
on June 14, 1995 seeking monetary damages adds to the prior claims certain
claims by Nicholas Rubino that principally relate to the allegation that
SafeCard's Pet Registration Product was conceived by Mr. Rubino and has
been improperly copied. The company has filed an appropriate answer. As a
result of the Halmos settlement, all claims of Continuity Marketing
Corporation will be dismissed, leaving pending only the claims related to
Family Protection Network and the Pet Registration Program.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F.
Elcan against Ideon and two of its employees in the United States District
Court for the Southern District of New York. The litigation involves
claims against Ideon, its former CEO and its Vice President of Investor
Relations for alleged material misrepresentations and omissions in
connection with announcements relating to Ideon's expected earnings per
share in 1995 and its new product sales, which included the PGA Tour Card
Program, Family Protection Network and Collections of the Vatican Museums.
On July 15, 1996, Ideon filed a motion to dismiss. The company withdrew
its motion to dismiss and answered the complaint on December 5, 1996.
The Company established a reserve upon the consummation of the merger with
Ideon during the third quarter of 1996 related, in part, to these
litigation matters. Although not anticipated, in the event the foregoing
class action settlements are not approved by the Court, the outcome of the
class action matters described above as well as the other pending Ideon
matters could also exceed the amount accrued. The Company is also involved
in certain other claims and litigation arising in the ordinary course of
business, which are not considered material to the financial position,
operations or cash flows of the Company.
F-38
<PAGE>
14. INCOME TAXES
The income tax provision (benefit) consists of ($000's):
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------ ------------- -------------
Current
Federal $ 149,290 $ 108,767 $ 106,831
State 19,561 22,050 19,738
Foreign 21,254 14,744 11,261
------------- ------------- -------------
190,105 145,561 137,830
------------- ------------- -------------
Deferred
Federal $ 83,308 $ 52,447 $ 36,687
State 15,462 1,299 5,460
Foreign 1,184 1,200 (235)
------------- ------------- -------------
99,954 54,946 41,912
------------- ------------- ------------
Provision for income taxes $ 290,059 $ 200,507 $ 179,742
============= ============= ============
Net deferred income tax assets and liabilities are comprised of the
following ($000's):
DECEMBER 31,
-------------------------
1996 1995
--------- ----------
Provision for doubtful accounts $ 8,100 $ 7,600
Deferred income 46,400 7,800
Acquisition and litigation related reserves 62,700 14,446
Franchise acquisition costs (2,600) (2,400)
Insurance retention refund (11,306) (9,773)
Accrued liabilities and deferred income 37,591 29,915
Other 366 2,975
---------- ----------
Current net deferred tax asset $ 141,251 $ 50,563
========== ==========
Depreciation and amortization $ (173,597) $ (78,742)
Accrued liabilities and deferred income 65,165 22,239
Acquired net operating loss carryforward 85,900 --
Insurance retention refund (11,306) (9,773)
Acquisition and litigation related reserves -- 8,175
Other (12,932) (1,798)
------------ -----------
Noncurrent net deferred tax liability $ (46,770) $ (59,899)
============ ===========
F-39
<PAGE>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
Depreciation $ (245,146) $ (223,337)
Unamortized mortgage servicing rights (51,239) (23,489)
Accrued liabilities and deferred income 1,359 2,101
Alternative minimum tax and net operating loss
carryforwards 13,078 9,807
----------- ----------
Net deferred tax liabilities under management
and mortgage programs $ (281,948) $ (234,918)
=========== ===========
Net operating loss carryforwards at December 31, 1996 acquired in
connection with the acquisition of Avis, Inc. expire as follows: 2001,
$14.8 million; 2002, $89.6 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 YEARS ENDING DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 3.0% 3.6% 3.4%
Amortization of non-deductible goodwill 1.2% 1.4% 1.2%
Foreign taxes differential 0.3% 0.1% 0.3%
Tax exempt interest (0.2%) -- (0.6%)
Technology under development -- -- 0.3%
Non consolidated losses -- -- (0.2%)
Merger costs 1.4% -- --
Other (0.1%) (0.3%) (0.7%)
--------- -------- -------
Effective tax rate 40.6% 39.8% 38.7%
========= ======== =======
</TABLE>
15. SHAREHOLDERS' EQUITY
A. STOCK SPLITS: On September 26, 1996, the Company's Board of Directors
declared a three-for-two split of the Company's common stock which was
effected in the form of a stock dividend in October 1996. In each of
November 1995 and February 1994, HFS's Board of Directors authorized a
two-for-one split of HFS's common stock which was effected in the form of
a 100% stock dividend in February 1996 and April 1994, respectively. All
equivalent share, per share, stock price and stock award plan information
presented herein has been retroactively adjusted to reflect the stock
splits.
B. AUTHORIZED SHARES: In conjunction with the Cendant Merger effective on
December 17, 1997, 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. The Company has never issued any
shares of preferred stock.
16. 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
F-40
<PAGE>
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: the 1992 Employee Stock Option Plan (the "1992 Plan"),
the 1992 Bonus and Salary Replacement Stock Option Plan (the "Replacement
Plan") and the 1987 Stock Option Plan (the "1987 Plan"). Under these
plans, the Company may grant options to purchase in the aggregate up to
90.8 million shares of Company common stock. At December 31, 1996, there
were outstanding in the aggregate options to purchase 35.5 million shares
of Company common stock pursuant to the 1992 Plan, the Replacement Plan
and the 1987 Plan. Options granted under the 1992 Plan generally are
exercisable at 20% per year commencing one year from the date of grant.
Options granted under the Replacement Plan generally are exercisable at
33% per year commencing one year from the date of grant. Options granted
under the 1987 Plan generally are exercisable at 25% per year commencing
one year from the date of grant. Options granted under these stock option
plans generally have 10-year terms. All options outstanding under these
plans are non-qualified stock options. These stock option plans include
options acquired by the Company in connection with its various
acquisitions accounted for in accordance with the pooling of interests
method of accounting (See Note 2).
The Company has granted options to its non-employee directors pursuant to
its 1994 Directors Stock Option Plan (the "1994 Directors Plan"). The 1994
Directors Plan provides that options to acquire an aggregate of up to .3
million shares of Company common stock shall be granted to non-employee
directors of the Company in office on each of November 23, 1994, 1995,
1996 and 1997. Options under the 1994 Directors Plan are exercisable in
full on the date of grant. At January 31, 1997, there also were
outstanding grants made to non-employee directors of the Company under the
Company's 1990 Directors Stock Option Plan (the "1990 Directors Plan") and
1992 Directors Stock Option Plan (the "1992 Directors Plan"), under which
the Company is no longer granting options.
The Company has certain other stock option plans pursuant to which it no
longer makes any new option grants, but pursuant to which there continues
to exist outstanding options to purchase shares of Company common stock.
These options generally expire ten years after their grant dates. Under
these plans, there are outstanding both non-qualified stock options and
incentive stock options to purchase 3.8 million shares of Company common
stock in the aggregate at January 31, 1997. These stock option plans
include plans assumed by the Company in connection with its acquisitions
of Sierra and Knowledge Adventure, Inc. during fiscal 1997.
Prior to the Cendant Merger, HFS had two stock option plans: the 1992
Stock Option Plan and the Amended and Restated 1993 Stock Option Plan.
These plans provided for the granting of options to certain directors,
officers, employees and independent contractors of HFS's common stock at
prices not less than the fair market values at the date of grant.
Generally, such stock options have a ten-year term and vest within five
years from the date
F-41
<PAGE>
of grant On December 17, 1997, in connection with the Cendant Merger, all
obligations under HFS's stock option plans were assumed by the Company.
Following the Cendant Merger, no further grants will be made under these
plans.
Prior to the HFS/PHH Merger, PHH had stock option plans for its key
employees and outside directors. The plans allowed for the purchase of
common stock at prices not less than fair market value on the date of
grant. Either incentive stock options or non-statutory stock options were
granted under the plans. Options became exercisable after one year from
date of grant on a vesting schedule provided by the plans and expired ten
years after the date of the grant. On April 30, 1997, in connection with
the HFS/PHH Merger, all unexercised PHH stock options were canceled and
converted to 1,770,852 equivalent shares of Company common stock. The
table below summarizes the annual activity of the Company's pooled stock
option plans (shares in 000's):
WEIGHTED
OPTIONS AVG. EXERCISE
OUTSTANDING PRICE
----------- ---------
BALANCE AT JANUARY 1, 1994 77,579 $ 4.86
Granted 23,878 9.90
Canceled (2,079) 6.36
Exercised (7,731) 3.93
Distribution of Chartwell Leisure Inc. 1,091 4.44
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 92,738 $ 6.20
Granted 21,098 10.74
Canceled (2,726) 8.48
Exercised (12,434) 5.39
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 98,676 $ 7.21
Granted 36,116 22.14
Canceled (2,838) 18.48
Exercised (14,010) 5.77
Less: PHH activity for January 1996
to reflect change in PHH fiscal year 48 8.78
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 117,992 $ 11.68
----------------------------------------------------------------------
F-42
<PAGE>
The Company adopted the disclosure-only provisions of SFAS No. 123 and
accordingly, no compensation cost was recognized in connection with its
stock option plans. Had the Company elected to recognize compensation cost
for its stock option plans based on the calculated fair value at the grant
dates for awards under such plans, consistent with the method prescribed
by SFAS No. 123, net income per share would have reflected the pro forma
amounts indicated below ($000's, except per share data):
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995
------------- -------------
Net income:
as reported $ 423,611 $ 302,825
pro forma 338,769 297,547
-------------------------------------------------------------------
Net income per share:
Primary as reported $ 0.53 $ 0.42
pro forma 0.43 0.41
Fully diluted as reported 0.52 0.41
pro forma 0.43 0.41
-------------------------------------------------------------------
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 1996 and 1995:
<TABLE>
<CAPTION>
THE COMPANY PLANS HFS PLANS PHH PLANS
--------------------- ---------------------- ----------------------
1996 1995 1996 1995 1996 1995
-------- -------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividend yield 0% 0% 0% 0% 2.8% 3.5%
Expected volatility 28.0% 26.0% 37.5% 37.5% 21.5% 19.8%
Risk-free interest rate 6.3% 5.3% 6.4% 6.4% 6.5% 6.9%
Expected holding period 5 years 5 years 9.1 years 9.1 years 7.5 years 7.5 years
</TABLE>
The weighted average fair values of stock options granted during the years
ended December 31, 1996 and 1995 were $7.51 and $6.69, respectively for
the Company plans. The weighted average fair values of stock options
granted during the years ended December 31, 1996 and 1995 for the HFS
plans (inclusive of PHH Plans) were $10.96 and $4.79, respectively.
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.
F-43
<PAGE>
The tables below summarize information regarding pooled stock options
outstanding and exercisable of the Company as of December 31, 1996 (shares
in 000's):
<TABLE>
<CAPTION>
THE COMPANY/HFS OPTIONS OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ---------------------------------------------- ----------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
---------------------- --------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ .01 to $ 10.00 56,548 6.3 $ 4.19 43,460 $ 3.71
$ 10.01 to $ 20.00 31,597 8.2 14.50 8,781 15.04
$ 20.01 to $ 30.00 16,809 9.4 23.97 1,055 25.77
$ 30.01 to $ 40.00 6,331 9.6 31.78 226 31.37
--------- -----------
Total 111,285 7.5 11.67 53,522 6.12
========= ===========
PHH OPTIONS
Less than $6.87 3,489 4.5 $ 5.74 3,489 $ 5.74
Greater than $6.87 3,218 8.7 8.82 1,055 6.90
--------- -----------
Total 6,707 6.5 7.22 4,544 6.01
========= ===========
</TABLE>
Shares exercisable and available for grant were as follows (000's):
<TABLE>
<CAPTION>
THE COMPANY OPTIONS HFS OPTIONS PHH OPTIONS
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
--------------------- -------------------- ---------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Shares exercisable 11,819 12,193 41,703 17,012 4,544 5,890
Shares available for grant 8,358 10,013 3,958 84 1,182 3,316
</TABLE>
The Company has reserved 11,390,625 shares of Company common stock for
issuance in connection with its 1989 Restricted Stock Plan. As of December
31, 1996, 10,494,423 shares of restricted common stock had been granted
under this plan. During fiscal 1997, 720,000 shares of restricted common
stock were granted under the plan and 645,000 shares of restricted common
stock were granted other than under the plan. The aggregate fair value on
the date of grant of such restricted common stock was $30.5 million, which
amount was deducted from shareholders' equity and is being amortized over
the vesting period of 10 years.
The Company has reserved 1,125,000 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.
17. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate
funds for their retirement. The Company matches the contributions of
participating employees on the basis of the percentages specified in the
plans. 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
F-44
<PAGE>
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 for all periods
presented.
PENSION AND SUPPLEMENTAL RETIREMENT PLANS
The Company's PHH subsidiary has a non-contributory defined benefit
pension plan covering substantially all US employees of PHH and its
subsidiaries. PHH's subsidiary located in the UK has a contributory
defined benefit pension plan, with participation at the employee's option.
Under both the US and UK 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 $97.1 million and 85.6 million and funded assets, at fair value
(primarily common stock and bond mutual funds) were $88.4 million and
$74.3 million at December 31, 1996 and 1995, respectively. The net pension
cost and the recorded liability were not material to the accompanying
consolidated financial statements.
The Company also sponsors two unfunded supplemental 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 for all periods presented.
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 for all
periods presented.
18. SALE OF THE IMAGINATION NETWORK - SIERRA
The operating activities of The ImagiNation Network, Inc. ("INN") were
consolidated with those of Sierra through July 26, 1993. On July 27, 1993
Sierra sold 42% of INN's voting stock and reduced its ownership interest
to 58% and reduced its voting control such that Sierra recorded its
liquidation preference in excess of recorded book value as shareholders'
equity.
In December 1994, Sierra sold its remaining equity interest in INN to AT&T
and recorded a gain of $19.7 million for the year ended December 31, 1994.
Sierra also entered into a multi-year publishing agreement with AT&T to
provide content for INN. The publishing agreement provides for AT&T to
fund up to $4.0 million of Sierra's development expenditures under an
existing publishing agreement and up to $23.0 million of Sierra's
development expenditures, subject to certain limitations, through
non-refundable royalty advances. The non-refundable royalty advances are
reflected net of research and development expense.
19. FRANCHISING ACTIVITIES
F-45
<PAGE>
Revenue from franchising activities includes initial fees charged to
lodging properties and real estate brokerage offices upon execution of a
franchise contract based on the number of rooms at the lodging property
and estimated real estate brokerage offices gross closed commissions.
Initial franchise fees amounted to $24.2 million, $15.7 million and $13.8
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Franchising activity for the years ended December 31, 1996, 1995 and 1994
is as follows:
<TABLE>
<CAPTION>
LODGING REAL ESTATE
----------------------------------- ---------------------------
1996 1995 1994 1996 1995
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FRANCHISES IN OPERATION
Units at end of year 5,397 4,603 4,229 11,349 5,990
EXECUTED BUT NOT OPENED
Acquired 24 31 - 110 104
New agreements 1,142 983 870 829 248
Backlog, end of year 786 682 594 275 176
</TABLE>
20. DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs interest rate swap agreements to match effectively the
fixed or floating rate nature of liabilities to the assets funded. A key
assumption in the following information is that rates remain constant at
December 31, 1996 levels. To the extent that rates change, both the
maturity and variable interest rate information will change. However, the
net rate the Company pays remains matched with the assets funded.
F-46
<PAGE>
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps employed at December 31, 1996. These
characteristics are effectively offset within the portfolio of assets
funded by the Company ($000's):
<TABLE>
<CAPTION>
MATURITIES
---------------------------------------------------------------
TOTAL 1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES
Commercial Paper:
Pay fixed/receive floating:
Notional value $427,181 $199,528 $136,176 $ 59,346 $ 20,531 $ 4,625 $ 6,975
Weighted average receive rate 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Weighted average pay rate 6.21% 6.33% 6.47% 6.37% 6.51% 6.60%
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 336,000 250,000 86,000
Weighted average receive rate 6.59% 6.50%
Weighted average pay rate 5.95% 5.86%
Pay floating/receive floating:
Notional value 357,200 357,200
Weighted average receive rate 5.51%
Weighted average pay rate 5.90%
CANADA
Commercial Paper:
Pay fixed/receive floating:
Notional value 68,255 32,631 22,849 10,585 2,190
Weighted average receive rate 3.11% 3.11% 3.11% 3.11%
Weighted average pay rate 6.25% 5.89% 5.63% 4.58%
Pay floating/receive floating:
Notional value 52,730 28,010 14,961 4,342 2,853 2,564
Weighted average receive rate 7.21% 7.09% 6.93% 7.61% 7.61%
Weighted average pay rate 3.38% 3.38% 3.38% 3.38% 3.38%
Pay floating/receive fixed:
Notional value 36,481 36,481
Weighted average receive rate 4.92%
Weighted average pay rate 3.07%
UK
Commercial Paper:
Pay floating/receive fixed:
Notional value 379,308 37,708 93,070 138,834 109,696
Weighted average receive rate 6.56% 6.56% 6.56% 6.56%
Weighted average pay rate 6.17% 7.85% 6.96% 7.10%
GERMANY
Commercial Paper:
Pay fixed/receive fixed:
Notional value 13,000 1,950 2,925 (6,825) 3,575 11,375
Weighted average receive rate 3.25% 3.25% 3.25% 3.25% 3.25%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34% 5.34%
--------- -------- -------- -------- -------- ---------
Total $1,670,155 $943,508 $269,981 $292,282 $138,845 $ 18,564 $ 6,975
========== ======== ======== ======== ======== ========= =========
</TABLE>
F-47
<PAGE>
For the years ended December 31, 1996 and 1995, the Company's hedging
activities increased interest expense $4.1 million and $2.0 million,
respectively, and had no effect on its weighted average borrowing rate.
For the same period in the year ended December 31, 1994, hedging
activities increased interest expense $8.4 million and increased the
weighted average borrowing rate 0.2%.
The Company enters into foreign exchange contracts as hedges against
currency fluctuations on certain intercompany loans. Such contracts
effectively offset the currency risk applicable to approximately $329.1
million and $118.1 million of obligations at December 31, 1996 and 1995,
respectively.
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.
F-48
<PAGE>
21. INDUSTRY SEGMENT INFORMATION
The Company is principally in the business of providing services to
businesses that serve consumer industry customers. The Company's major
business segments are reflective of the industries in which it serves. See
Note 1 for a more detailed description of each of the Company's industry
segments. Operating profit consists of revenues less operating expenses
excluding interest income, net and includes merger and related charges of
$131.3 million and $48.6 million allocated to the membership and other
segments respectively, for the year ended December 31, 1996 (See Note 3).
Membership services operating profit for the year ended December 31, 1995
includes $97.0 million of costs related to Ideon products abandoned and
restructuring. Membership Services operating profit for the year ended
December 31, 1994 includes $7.9 million of costs related to Ideon products
abandoned and restructuring and a $17.7 million net gain on the sale of
INN. The following table presents industry segment data of the Company for
the years ended December 31, 1996, 1995 and 1994.
F-49
<PAGE>
Operations by segment ($000's):
Year Ended December 31, 1996
<TABLE>
<CAPTION>
REAL ESTATE
------------------------------------------
REAL ESTATE MORTGAGE
CONSOLIDATED MEMBERSHIP FRANCHISE RELOCATION SERVICES
------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 3,908,780 $ 2,097,098 $ 233,469 $ 344,865 $ 127,729
Operating income 739,115 266,314 110,535 54,302 41,302
Identifiable assets 13,588,368 2,517,600 1,295,501 1,086,374 1,742,409
Depreciation and amortization 167,907 60,888 27,317 11,168 4,442
Capital expenditures 140,626 48,678 9,932 9,112 9,859
TRAVEL
-----------------------------------------------------------
CAR
LODGING RENTAL TIMESHARE FLEET OTHER
----------- ----------- ----------- ------------- -----------
Net revenues $ 385,920 $ 10,014 $ 30,723 $ 255,866 $ 423,096
Operating income 145,798 537 3,319 76,218 40,790
Identifiable assets 954,649 882,397 772,585 3,868,472 468,381
Depreciation and amortization 30,852 3,439 2,559 13,214 14,028
Capital expenditures 19,302 -- 1,473 9,999 32,271
Year Ended December 31, 1995
REAL ESTATE
------------------------------------------
REAL ESTATE MORTGAGE
CONSOLIDATED MEMBERSHIP FRANCHISE RELOCATION SERVICES
------------- ----------- ----------- ------------- -----------
Net revenues $ 2,992,122 $ 1,643,242 $ 47,965 $ 301,667 $ 93,251
Operating income 516,596 184,699 19,277 41,718 41,744
Identifiable assets 8,994,384 1,800,952 195,157 1,023,860 1,142,272
Depreciation and amortization 112,914 40,358 2,997 10,385 3,099
Capital expenditures 108,702 53,048 2,034 8,678 2,987
TRAVEL
------------------------------------------
LODGING FLEET OTHER
----------- ----------- -----------
Net revenues $ 335,402 $ 258,877 $ 311,718
Operating income 120,606 56,918 51,634
Identifiable assets 724,673 3,649,654 457,816
Depreciation and amortization 26,058 18,837 11,180
Capital expenditures 5,059 9,872 27,024
</TABLE>
F-50
<PAGE>
Year Ended December 31, 1994
<TABLE>
<CAPTION>
REAL ESTATE
----------------------------
MORTGAGE
CONSOLIDATED MEMBERSHIP RELOCATION SERVICES
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 2,446,731 $ 1,363,561 $ 255,974 $ 74,494
Operating income 474,885 218,145 34,534 30,172
Identifiable assets 7,437,042 1,566,186 794,372 849,131
Depreciation and amortization 97,175 27,683 9,280 2,944
Capital expenditures 73,804 29,809 11,541 2,471
TRAVEL
------------------------------------------
LODGING FLEET OTHER
----------- ----------- -----------
Net revenues $ 300,694 $ 249,571 $ 202,437
Operating income 102,487 52,323 37,224
Identifiable assets 738,543 3,247,320 241,490
Depreciation and amortization 21,921 17,765 17,582
Capital expenditures 9,378 8,854 11,751
</TABLE>
The Company's operations outside of North America principally include
fleet management and relocation segment operations in Europe. Geographic
operations of the Company are as follows ($000's):
<TABLE>
<CAPTION>
NORTH EUROPE
YEAR ENDED DECEMBER 31, 1996 AMERICA & OTHER CONSOLIDATED
---------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
Net revenues $ 3,529,563 $ 379,217 $ 3,908,780
Income before income taxes 650,030 63,640 713,670
Identifiable assets 12,519,616 1,068,752 13,588,368
YEAR ENDED DECEMBER 31, 1995
Net revenues 2,774,201 217,921 2,992,122
Income before income taxes 464,393 38,939 503,332
Identifiable assets 8,230,792 763,592 8,994,384
YEAR ENDED DECEMBER 31, 1994
Net revenues $ 2,296,067 $ 150,664 $ 2,446,731
Income before income taxes 439,390 24,942 464,332
Identifiable assets 6,857,565 579,477 7,437,042
</TABLE>
F-51
<PAGE>
22. SELECTED QUARTERLY FINANCIAL DATA - (UNAUDITED)
($000's, except per share data)
<TABLE>
<CAPTION>
1996 FIRST SECOND (1) THIRD (2) FOURTH (3) TOTAL YEAR
---- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 821,411 $ 935,639 $ 1,042,901 $ 1,108,829 $ 3,908,780
Income before income taxes 158,300 179,430 112,569 263,371 713,670
Net income 95,974 101,064 68,466 158,107 423,611
Net income per share:
Primary $ .13 $ .13 $ .08 $ .20 $ .53
Fully diluted $ .13 $ .13 $ .08 $ .19 $ .52
1995 FIRST (4) SECOND (4) THIRD (4) FOURTH (4, 5) TOTAL YEAR
---- ----------- ----------- ----------- ------------- -------------
Net revenues $ 661,280 $ 722,571 $ 787,150 $ 821,121 $ 2,992,122
Income before income taxes 117,865 64,211 151,646 169,610 503,332
Net income 71,139 36,116 90,082 105,488 302,825
Net income per share:
Primary $ .10 $ .05 $ .12 $ .14 $ .42
Fully diluted $ .10 $ .05 $ .12 $ .14 $ .41
</TABLE>
(1) Includes merger cost of $28.6 million ($25.1 million, after tax or
$0.03 per share) recorded in connection with the mergers of Davidson
& Associates, Inc. and Sierra On-Line, Inc.
(2) Includes merger costs of $147.2 million ($89.6 million, after tax or
$0.11 per share) principally related to the completion of the Ideon
Group, Inc. acquisition.
(3) Includes costs of $4.1 million principally related to investment
banking fees incurred in connection with other Company acquisitions.
(4) The first, second, third and fourth quarters include $8.1 million
($5.2 million, net of tax or $.01 per share), $73.1 million ($46.8
million net of tax or $.07 per share), $16.4 million ($10.5 million
net of tax or $.01 per share) and ($.6 million), respectively of
Ideon's costs related to products abandoned and restructuring.
(5) Includes merger costs of $5.2 million ($4.2 million, net of tax or
$.06 per share) related to the acquisition of Advance Ross.
23. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc. in
July 1996, HFS announced its strategy to dilute its interest in ARAC's car
rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. In September 1997, ARAC completed the IPO, which diluted
HFS's equity interest to approximately 27.5%.
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. Summarized financial information of ARAC is as follows
($000's):
F-52
<PAGE>
AVIS RENT A CAR, INC.
SEPTEMBER 30,
1997 DECEMBER 31,
Balance sheet data: (UNAUDITED) 1996
----------------- --------------
Vehicles $ 3,364,660 $ 2,243,492
Total assets 4,717,107 3,131,357
Debt 3,285,548 2,295,474
Total liabilities 4,263,001 3,054,817
Shareholders' equity 454,106 76,540
NINE MONTHS ENDED OCTOBER 17, 1996
SEPTEMBER 30, 1997 (DATE OF ACQUISITION)
(UNAUDITED) TO DECEMBER 31, 1996
------------------ --------------------
Statement of income data:
Revenues $ 1,525,696 $ 362,844
Income before provision
for income taxes 49,313 2,261
Net income 26,974 1,221
24. SUBSEQUENT EVENTS - (PRIOR TO THE CENDANT MERGER DATE OF DECEMBER 17, 1997)
PROVIDIAN ACQUISITION
On December 9, 1997, HFS executed a definitive agreement to acquire
Providian Auto and Home Insurance Company and its subsidiaries from an
AEGON N.V. subsidiary for approximately $219.0 million in cash. Closing is
subject to receipt of required regulatory approval and other customary
conditions and is anticipated in the spring of 1998. Providian sells
automobile insurance to consumers through direct response marketing in 45
states and the District of Columbia.
DIVESTITURE
As directed by the Federal Trade Commission ("FTC") as a condition
terminating the waiting period under the Hart Scott Rodino Antitrust
Improvements Act in connection with the Cendant Merger, on December 17,
1997, the Company sold its wholly-owned subsidiary, Interval International
Inc. and certain related entities ("Interval"), for approximately $200.0
million, subject to certain adjustments. The agreement contemplates that
the Company will continue to provide certain existing services to
Interval's developers and members.
INVESTMENT IN NRT
During the third quarter of 1997, HFS acquired $182.0 million of preferred
stock of NRT Incorporated ("NRT"), a newly formed corporation created to
acquire residential real estate brokerage firms. HFS acquired $216.1
million of certain intangible assets including trademarks associated with
real estate brokerage firms acquired by NRT in 1997. The Company, at its
discretion, may acquire up to $81.3 million of additional NRT preferred
stock and may also purchase up to $229.9 million of certain intangible
assets of real estate brokerage firms acquired by NRT.
In September 1997, NRT acquired the real estate brokerage business and
operations of the Trust, and two other regional real estate brokerage
businesses. The Trust is an independent trust to which HFS contributed the
brokerage offices formerly owned by Coldwell Banker in connection with
HFS's acquisitions of Coldwell Banker. NRT is the largest residential
brokerage firm in the United States.
ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550 million in principal amount
of 3% Convertible Subordinated Notes (the "3% Notes") due February 15,
2002. Interest on the 3% Notes is payable semi-annually. 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. Issuance costs are being amortized
on a straight-line basis over five years.
F-53
<PAGE>
- -------------------------------------------------------------------------------
SUBSEQUENT EVENTS - (POST CENDANT MERGER DATE OF DECEMBER 17, 1997) -
UNAUDITED
PROPOSED ACQUISITION
On January 27, 1998, the Company proposed to acquire American Bankers
Insurance Group Inc. ("American Bankers") for $58 per share in cash and
stock, for an aggregate purchase price approximating $2.7 billion. On
January 28, 1998, the Company commenced a tender offer to purchase
approximately 23.5 million shares of American Bankers' common stock at a
price of $58 per share in cash, which together with shares owned by the
Company on the announcement date, approximate 51% of the fully diluted
shares of American Bankers. The Company proposed to exchange, on a tax
free basis, shares of its common stock with a fixed value of $58 per share
for the balance of American Bankers' common stock. The tender offer is
subject to certain customary conditions and there can be no assurance that
the Company will be successful in its proposal to acquire American
Bankers. The Company received a commitment from a bank to provide funds
necessary to finance the proposed acquisition.
HARPUR GROUP LTD. ACQUISITION
On January 20, 1998, the Company completed its acquisition of The Harpur
Group Ltd. ("Harpur"), a leading fuel card and vehicle management company
in the United Kingdom, from privately held H-G Holdings, Inc. for
approximately $186.0 million in cash plus future contingent payments of up
to $20.0 million over the next two years.
JACKSON HEWITT INC. MERGER
On January 7, 1998, the Company completed the acquisition of Jackson
Hewitt Inc. (" Jackson Hewitt"), for approximately $480.0 million in cash
or $68 per share of common stock of Jackson Hewitt. Jackson Hewitt is the
second largest tax preparation service system in the United States with
locations in 41 states.
Jackson Hewitt franchises a system of approximately 2,050 offices that
specialize in computerized prepartion of federal and state individual
income tax returns.
F-54
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 902,777 $ 633,903
Marketable securities 308,947 94,200
Receivables, net 1,538,415 1,290,625
Other current assets 630,657 510,865
--------------- --------------
Total current assets 3,380,796 2,529,593
--------------- --------------
Deferred membership acquisition costs 389,870 401,564
Franchise agreements, net 942,780 995,947
Goodwill, net 1,913,478 2,302,226
Other intangibles, net 1,438,537 636,230
Other assets 1,329,370 993,574
--------------- --------------
Total assets exclusive of assets under programs 9,394,831 7,859,134
--------------- --------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,547,217 3,418,666
Relocation receivables 587,310 773,326
Mortgage loans held for sale 1,162,220 1,248,299
Mortgage servicing rights and fees 305,428 288,943
--------------- --------------
5,602,175 5,729,234
--------------- --------------
TOTAL ASSETS $ 14,997,006 $ 13,588,368
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and
other current liabilities $ 1,358,767 $ 1,664,946
--------------- --------------
Deferred income 1,091,649 1,099,393
Long-term debt 2,422,524 1,004,584
Other noncurrent liabilities 262,407 124,885
--------------- --------------
Total liabilities exclusive of liabilities under programs 5,135,347 3,893,808
--------------- --------------
Liabilities under management and mortgage programs
Debt 4,952,083 5,089,943
Deferred income taxes 300,683 281,948
--------------- --------------
5,252,766 5,371,891
--------------- --------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized 10 million shares;
none issued and outstanding -- --
Common stock, $.01 par value - authorized 2 billion shares;
issued 824,544,641 and 804,655,850 shares, respectively 8,245 8,047
Additional paid-in capital 3,017,461 2,870,422
Retained earnings 1,890,452 1,556,300
Net unrealized gain on marketable securities -- 4,334
Currency translation adjustment (27,024) (12,452)
Restricted stock, deferred compensation (28,664) (28,212)
Treasury stock, at cost (13,964,693 and 6,911,757 shares, respectively) (251,577) (75,770)
---------------- --------------
Total shareholders' equity 4,608,893 4,322,669
---------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,997,006 $ 13,588,368
================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-56
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net $ 1,288,092 $ 924,246 $ 3,502,423 $ 2,513,994
Fleet leasing (net of depreciation and
interest costs of $307,908, $283,086,
$892,186 and $839,080, respectively) 13,148 14,297 42,905 41,016
Other 130,064 104,358 344,687 244,941
------------ ------------- ------------- -----------
Net revenues 1,431,304 1,042,901 3,890,015 2,799,951
------------ ------------- ------------- -----------
EXPENSES
Operating 464,483 363,426 1,317,841 1,004,391
Marketing and reservation 360,900 283,529 963,349 776,908
General and administrative 105,859 83,811 324,076 255,765
Merger and related costs and other
unusual charges - 147,200 303,000 175,835
Depreciation and amortization 70,240 49,903 190,599 119,529
Interest, net 15,562 2,463 43,920 17,224
------------ ------------- ------------- -----------
Total expenses 1,017,044 930,332 3,142,785 2,349,652
------------ ------------- ------------- -----------
Income before income taxes 414,260 112,569 747,230 450,299
Provision for income taxes 165,996 44,103 346,536 184,795
------------ ------------- ------------- -------------
Net income $ 248,264 $ 68,466 $ 400,694 $ 265,504
============ ============= ============= =============
PER SHARE INFORMATION
Net income per share
Primary $ 0.29 $ 0.08 $ 0.47 $ 0.34
============ ============= ============= ===========
Fully diluted $ 0.28 $ 0.08 $ 0.47 $ 0.33
============ ============= ============= ===========
Weighted average common and common
equivalent shares outstanding
Primary 888,061 834,441 874,379 800,716
Fully diluted 899,447 838,483 877,419 807,607
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1996
------------ --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 400,694 $ 265,504
Merger related charge 303,000 --
Merger related payments (137,000) --
Depreciation and amortization 168,083 93,606
Increase (decrease) from changes in
assets under management programs
Depreciation and amortization under management
and mortgage programs 812,309 764,173
Mortgage loans held for sale 86,079 (318,767)
Other (314,955) 61,310
------------- --------------
Net cash provided by operating activities 1,318,210 865,826
------------- --------------
INVESTING ACTIVITIES:
Assets under management and mortgage programs
Investment in leases and leased vehicles (1,565,857) (1,217,700)
Payments received on investment in leases and leased vehicles 615,153 470,193
Equity advances on homes under management (4,185,486) (2,347,351)
Repayment of advances on homes under management 4,341,295 2,377,103
Additions to originated mortgage servicing rights (147,608) (115,219)
Proceeds from sales of mortgage servicing rights 48,974 7,113
Property and equipment additions (112,608) (93,381)
Proceeds from sales of marketable securities 233,902 108,071
Purchases of marketable securities (467,176) (96,517)
Investment in preferred stock (181,191) --
Due from Avis Rent A Car, Inc. (124,440) --
Net assets acquired, exclusive of cash acquired (567,438) (990,668)
Other (6,789) 19,853
------------ --------------
Net cash used in investing activities (2,119,269) (1,878,503)
------------ ---------------
FINANCING ACTIVITIES:
Proceeds from borrowings 3,046,657 1,538,130
Principal payments on borrowings (1,767,264) (1,212,446)
Net proceeds from issuance of convertible notes 542,830 --
Redemption of series A preferred stock -- (80,000)
Net change in short term borrowings under management and mortgage programs (693,891) 114,518
Issuance of common stock, net 119,977 1,218,689
Purchases of common stock (171,318) (8,025)
Payment of dividends of pooled entities (6,644) (21,154)
------------ ---------------
Net cash provided by financing activities 1,070,347 1,549,712
----------- -------------
Effect of changes in exchange rates on cash and cash equivalents (414) (17,104)
------------ --------------
Net increase in cash and cash equivalents 268,874 519,931
Cash and cash equivalents, beginning of period 633,903 355,959
----------- --------------
Cash and cash equivalents, end of period $ 902,777 $ 875,890
=========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated balance sheet of Cendant Corporation and subsidiaries,
formerly CUC International Inc. (the "Company"), as of September 30, 1997,
the consolidated statements of income for the three and nine months ended
September 30, 1997 and 1996, and the consolidated statements of cash flows
for the nine months ended September 30, 1997 and 1996, are unaudited. In
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements are included. There were no
adjustments of an unusual nature recorded during the three and nine months
ended September 30, 1997 and 1996 except for (i) a one-time charge of
$303.0 million ($227.0 million after tax), recorded in the second quarter
of 1997 representing merger and related costs incurred in connection with
the merger of HFS Incorporated ("HFS") with PHH Corporation ("PHH"); (ii)
non-recurring charges of $147.2 ($89.6 million, after tax) and $28.6
million ($25.1 million, after tax) recorded in the third and second
quarters of 1996, respectively, representing merger and related costs
incurred in connection with the 1996 mergers of the Company with Davidson
& Associates, Inc. ("Davidson"), Sierra On-Line, Inc. ("Sierra") and Ideon
Group, Inc. ("Ideon") and (iii) a $5.0 million restructuring charge
recorded in June 1996, related to the contribution of owned Coldwell
Banker brokerage offices to an independent trust.
The consolidated financial statements include the accounts and
transactions of the Company and all wholly-owned and majority owned
subsidiaries and joint ventures except for the Company's ownership of Avis
Rent A Car Inc. ("ARAC"), which is accounted for under the equity method
(See Note 5). The accompanying consolidated financial statements have been
restated for the business combinations accounted for as poolings of
interest (See Note 2) as if such combined companies had operated as one
entity since inception. All material intercompany balances and
transactions have been eliminated in consolidation. These consolidated
financial statements will become the Company's primary historical
financial statements for the periods presented. Interim results are not
necessarily indicative of results for a full year.
The accompanying consolidated financial statements and notes thereto
are presented in accordance with interim financial reporting requirements
as required by Form 10-Q and do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. The December 31, 1996 consolidated balance sheet was
derived from the Company's audited consolidated financial statements. For
further information, refer to the consolidated financial statements and
notes thereto included herein as Exhibit 99.1 in this Form 8-K.
Certain reclassifications have been made to the historical financial
statements of the pooled companies to conform to the restated
presentation.
F-59
<PAGE>
2. BUSINESS COMBINATIONS
1997 POOLINGS
On December 17, 1997, the Company completed a merger with HFS (the
"Cendant Merger") by 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 Company common stock for each share of HFS common stock.
Upon consummation of the Cendant Merger, the Company changed its name from
CUC International Inc. to Cendant Corporation.
In connection with the Cendant Merger, the Company changed its fiscal
year end from January 31 to December 31. HFS has a calendar year end and
the Company has only recalendarized its 1997 results. Accordingly, the HFS
statements of income for the three and nine months ended September 30,
1997 and September 30, 1996 have been combined with the Company's
statements of income for the three and nine months ended September 30,
1997 and October 31, 1996, respectively.
On October 3, 1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag"), pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440.0 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information.
On April 30, 1997, prior to being merged with and into the Company, HFS
acquired PHH by merger (the "HFS/PHH Merger") which was satisfied by the
issuance of 72.8 million equivalent shares of Company common stock in
exchange for all of the outstanding common stock of PHH. PHH is the
world's largest provider of corporate relocation services and also
provides mortgage services and fleet management services. In connection
with the merger, PHH changed its fiscal year end from April 30 to December
31.
During February 1997, the Company acquired substantially all of the
assets and assumed specific liabilities of Numa Corporation ("Numa") for
$73.5 million. The purchase price was satisfied by the issuance of 3.4
million shares of Company common stock. Numa publishes personalized
heritage publications and markets and sells personalized merchandise.
The following table presents the historical results of the Company and
the respective pooled entities for the last complete periods prior to
their respective mergers ($000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues
The Company $ 737,067 $ 602,203 $ 2,002,597 $ 1,673,426
HFS (inclusive of PHH) 649,880 409,571 1,749,477 1,032,615
Hebdo Mag 44,357 31,127 137,941 93,910
------------- ------------- ------------- -------------
$ 1,431,304 $ 1,042,901 $ 3,890,015 $ 2,799,951
============= ============= ============= =============
</TABLE>
F-60
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income
The Company $ 87,553 $ (18,009) $ 252,082 $ 74,573
HFS (inclusive of PHH) 157,403 84,874 142,057 188,491
Hebdo Mag 3,308 1,601 6,555 2,440
------------- ------------- ------------- -------------
$ 248,264 $ 68,466 $ 400,694 $ 265,504
============= ============= ============= =============
</TABLE>
The following table presents the historical results of HFS and PHH for
the periods prior to the HFS/PHH Merger ($000's):
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, 1997 SEPTEMBER 30, 1996
--------------- ------------------
Net revenues
HFS $ 347,962 $ 550,010
PHH 177,923 482,605
--------------- -------------------
$ 525,885 $ 1,032,615
=============== ===================
Net income
HFS $ 58,940 $ 130,960
PHH 32,164 57,531
--------------- -------------------
$ 91,104 $ 188,491
=============== ===================
PURCHASE BUSINESS COMBINATIONS
During the nine months ended September 30, 1997, the Company acquired
certain entities for an aggregate purchase price of $63.3 million,
satisfied by the payment of $27.5 million in cash and the issuance of 1.5
million shares of Company common stock. The goodwill resulting from these
acquisitions aggregated $89.9 million. These acquisitions were accounted
for in accordance with the purchase method of accounting and, accordingly,
the results of operations have been included in the consolidated results
of operations from the respective dates of acquisitions. The results of
operations for the periods prior to the respective dates of acquisition
were not significant to the Company's operations.
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
PHH MERGER CHARGE
HFS recorded a one-time merger and restructuring charge (the "PHH
Merger Charge") of $303.0 million ($227.0 million, after tax) during the
second quarter of 1997 in connection with the HFS/PHH Merger. Excluding
the PHH Merger Charge, net income was $627.7 million for the nine months
ended September 30, 1997. The PHH Merger Charge is summarized by type as
follows (in millions):
F-61
<PAGE>
Personnel related $ 142.4
Professional fees 36.8
Business terminations 44.7
Facility related 57.1
Other costs 22.0
-----------
Total $ 303.0
===========
Personnel related charges are comprised of costs incurred in connection
with employee reductions associated with the combination of HFS's
relocation service businesses and the consolidation of corporate
activities. Personnel related charges include termination benefits such as
severance, medical and other benefits. Also included in personnel related
charges are supplemental retirement benefits resulting from the change of
control. Several grantor trusts were established and funded by HFS to pay
such benefits in accordance with the terms of the HFS/PHH Merger
agreement. Full implementation of the restructuring plan will result in
the termination of approximately 500 employees substantially all of whom
are located in North America, of which 369 employees were terminated as of
September 30, 1997. Professional fees are primarily comprised of
investment banking, accounting and legal fees incurred in connection with
the HFS/PHH Merger. Business termination charges relate to the exit from
certain activities associated with fleet management, mortgage services and
ancillary operations. Facility related expenses include costs associated
with contract and lease terminations, asset disposals and other charges
incurred in connection with the consolidation and closure of excess space.
The Company anticipates that approximately $236.0 million will be paid
in cash in connection with the PHH Merger Charge of which $137.0 million
was paid through September 30, 1997. The remaining cash portion of the PHH
Restructuring Charge will be financed through cash generated from
operations and borrowings under the Company's revolving credit facilities.
It is currently anticipated that the restructuring plan will be completed
during the first quarter of 1998. Revenue and operating results from
activities that will not be continued are not material to the results of
operations of the Company.
1996 POOLINGS
In connection with the Company's 1996 acquisitions of Davidson, Sierra and
Ideon, which were accounted for as poolings of interests, the Company
recorded a non-recurring charge of approximately $179.9 million ($118.7
million, after tax) for the year ended December 31, 1996. Such charge is
comprised of transaction costs, exit costs and a provision relating to
certain litigation matters giving consideration to the Company's intended
approach to these matters. As of September 30, 1997, such charges amounted
to $155.7 million.
4. PRO FORMA INFORMATION
The following table reflects the unaudited operating results of the
Company for the nine months ended September 30, 1996 on a pro forma basis,
which gives effect to HFS's 1996 acquisitions, accounted for under the
purchase method of accounting as if they had occurred on January 1, 1996:
Net revenues $ 3,284,158
Net income 319,439
Net income per share (fully diluted) $ 0.38
F-62
<PAGE>
5. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc.
in July 1996, HFS announced its strategy to dilute its interest in ARAC's
car rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. In September 1997, ARAC completed an initial public
offering ("IPO") of a subsidiary that operated the car rental operations
of HFS Car Rental Inc., which diluted HFS's equity interest in such
subsidiary to approximately 27.5%. Net proceeds from the IPO approximating
$359.3 million retained by ARAC were used to fund its August 20, 1997
acquisition of The First Gray Line Corporation and repay ARAC
indebtedness.
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. Summarized financial information of ARAC is as follows
($000's):
AVIS RENT A CAR, INC.
<TABLE>
<CAPTION>
Balance sheet data: SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- -----------------
<S> <C> <C>
Vehicles $ 3,364,660 $ 2,243,492
Total assets 4,717,107 3,131,357
Debt 3,285,548 2,295,474
Total liabilities 4,263,001 3,054,817
Shareholders' equity 454,106 76,540
THREE MONTHS ENDED NINE MONTHS ENDED
Statement of income data: SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------- ------------------
Revenues $ 580,049 $ 1,525,696
Income before provision for income taxes 24,953 49,313
Net income 13,868 26,974
</TABLE>
6. SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses
and aggregated $30.0 million and $15.9 million for the three months ended
September 30, 1997 and 1996, respectively, and $79.7 million and $46.1
million for the nine months ended September 30, 1997 and 1996,
respectively. Software revenue included in Other was $265.2 million and
$228.1 million for the nine months ended September 30, 1997 and 1996,
respectively. Costs of software revenue are included in operating expenses
and aggregated $26.7 million and $24.0 million for the three months ended
September 30, 1997 and 1996, respectively, and $82.1 million and $69.9
million for the nine months ended September 30, 1997 and 1996,
respectively.
F-63
<PAGE>
7. REDEMPTION OF 4-1/2% NOTES
On September 22, 1997, HFS exercised its option to redeem the
outstanding 4-1/2% Convertible Senior Notes ("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. Accordingly, 19.7 million
equivalent shares of Company common stock were issued (0.2 million shares
as of September 30, 1997) as a result of the conversion of such notes.
8. ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550.0 million in principal
amount of 3% Convertible Subordinated Notes (the "3% Notes") due February
15, 2002. Interest on the 3% Notes is payable semi-annually. 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. Issuance costs are being amortized
on a straight-line basis over five years.
9. INVESTMENT IN NRT
During the third quarter of 1997, HFS acquired $182.0 million of
preferred stock (included in other assets) of NRT Incorporated ("NRT"), a
newly formed corporation created to acquire residential real estate
brokerage firms. HFS acquired $216.1 million of certain intangible assets
including trademarks associated with real estate brokerage firms acquired
by NRT in 1997. HFS, at its discretion, may acquire up to $81.3 million
of additional NRT preferred stock and may also purchase up to $229.9
million of certain intangible assets of real estate brokerage firms
acquired by NRT.
In September 1997, NRT, acquired the real estate brokerage business and
operations of National Realty Trust (the "Trust"), and two other regional
real estate brokerage businesses. The Trust is an independent trust to
which HFS contributed the brokerage offices formerly owned by Coldwell
Banker Corporation in connection with HFS's acquisition of Coldwell Banker
Corporation. NRT is the largest residential brokerage firm in the United
States.
10. SHAREHOLDERS' EQUITY
A. AUTHORIZED SHARES
In conjunction with the Cendant Merger effective on December 17, 1997,
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. The Company has never issued
shares of preferred stock.
F-64
<PAGE>
B. TREASURY PURCHASES
In January 1997, HFS's Board of Directors authorized the purchase of 6.2
million equivalent shares of Company common stock to satisfy stock option
exercises and conversions of convertible debt securities and to fund
future acquisitions. The Company acquired approximately 6.2 million
equivalent treasury shares in January and February 1997 for $179.4 million
with revolving credit borrowings.
11. CONTINGENCIES - IDEON
On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Agreement calls for the dismissal with prejudice of certain outstanding
litigation matters between Peter Halmos and certain of the Company's
subsidiaries and the payment to Peter Halmos, over a six-year period, of
$70.5 million. Specifically, the Agreement requires that the Company pay
Peter Halmos one up-front payment of $13.5 million of six subsequent
annual payments of $9.5 million each. For additional disclosure, see
Footnote 13 -- Commitments and Contingencies on Page F-37.
F-65
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
On December 17, 1997 CUC International Inc. ("CUC" or the "Company")
merged with HFS Incorporated ("HFS") and was renamed Cendant Corporation in a
transaction which has been accounted for as a pooling of interests.
Accordingly, financial statements have been restated for all periods presented
as if CUC and HFS had operated as one entity since inception. The Company is a
leading global provider of services to businesses serving consumer industries.
The Company provides fee-based services to consumers within the
Membership, Travel and Real Estate business segments. The Company generally
does not own the assets or share the risks associated with the underlying
businesses of its customers. In the Membership Services segment, the Company is
a technology-driven leading provider of membership-based consumer services. In
the Travel segment, the Company is the world's largest franchisor of lodging
facilities and rental car agencies, the leading provider of vacation timeshare
exchange services and a leading provider of international fleet management
services. In the Real Estate segment, the Company is the world's largest
franchisor of residential real estate brokerage offices, the world's largest
provider of corporate relocation services and operates a leading mortgage
lending business in the United States. The combination of CUC and HFS provides
the Company's membership businesses access to HFS's more than 100 million
consumer contacts, while providing HFS businesses with the technology-driven,
direct marketing expertise necessary to successfully cross-market within its
existing business units.
SEGMENT DISCUSSION
Certain of the underlying business segments are comprised of businesses
acquired which were accounted for as poolings of interest (See "Liquidity and
Capital Resources - 1997 Poolings, 1996 Poolings and 1995 Poolings").
Accordingly, all financial information has been restated as if all of the
pooled companies operated as one entity since inception. Certain of the
underlying segments are comprised of businesses which were acquired in 1996 and
1995 and accounted for by the purchase method of accounting. (See " Liquidity
and Capital Resources - 1996 Purchase Acquisitions and 1995 Purchase
Acquisitions"). Accordingly, the results of operations of such acquired
companies were included in the consolidated operating results of the Company
from the respective dates of acquisition. In the underlying results of
operations discussions, operating expenses include total expenses excluding
interest expense and income taxes.
RESULTS OF OPERATIONS DISCUSSION
YEAR ENDED DECEMBER 31, 1996 VS YEAR ENDED DECEMBER 31, 1995
Net income increased $120.8 million (40%) despite non-recurring merger and
related charges approximating $179.9 million ($118.7 million, after tax) (the
"Davidson, Sierra and Ideon Merger Charge") in 1996 in connection with the
mergers with Davidson & Associates, Inc. ("Davidson"), Sierra On-Line, Inc.
("Sierra") and Ideon Group, Inc. ("Ideon"). In connection with such charge,
$131.3 million was allocated to the operations of the "Membership" segment.
F-66
<PAGE>
The increase in net income primarily resulted from a $222.5 million (43%)
increase in operating income.
The financial summary of the Company for the years ended December 31, 1996
and 1995 is as follows ($000's):
1996 1995 VARIANCE
------------- -------------- ---------
Net revenue $ 3,908,780 $ 2,992,122 31%
Operating expenses 3,169,665 2,475,526 28%
------------- --------------
Operating income $ 739,115 $ 516,596 43%
============= ==============
Net income $ 423,611 $ 302,825 40%
============= ==============
MEMBERSHIP SEGMENT
The Company provides its consumers, representing approximately 73 million
memberships at September 30, 1997, access to a variety of goods and services
including 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 distributes welcoming packages which provide new
homeowners with discounts for local merchants. Revenue is derived from
membership fees which vary depending on the particular membership program. The
Company provides individual, wholesale and discount program membership services
to consumers, which are distributed through various channels including
financial institutions, credit unions, charities, other cardholder-based
organizations and retail establishments. Individual memberships consist of
members that pay directly for the services and the Company pays for the
marketing costs to solicit the members primarily using direct marketing
techniques. Wholesale memberships include members that pay directly for the
services to their sponsor and the Company does not pay for the marketing costs
to solicit the members. Discount program memberships are generally marketed
through a direct sales force, participating merchants or general advertising
and the related fees are either paid directly by the member or the local
retailer. All of these categories share various aspects of the Company's
marketing and operating resources. The Company maintains a flexible marketing
plan so that it is not dependent on any one service for the future growth of
the total membership base.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ------------- ------------- --------
<S> <C> <C> <C>
Net revenue $ 2,097,098 $ 1,643,242 28%
Operating expenses 1,830,784 1,458,543 26%
------------- -------------
Operating income $ 266,314 $ 184,699 44%
============= =============
</TABLE>
Operating income increased $81.6 million (44%) despite $34.3 million of
incremental non-recurring merger and related costs and other unusual charges in
1996 compared to 1995. Operating income increased $115.9 million (41%)
excluding such charges.
The Company's overall membership base continues to grow at a rapid rate
(from 59.7 million members at December 31, 1995 to 66.3 million members at
December 31, 1996), which is the largest contributing factor to the 28%
increase in membership revenues (from $1.6 billion in 1995 to $2.1 billion in
1996). While the
F-67
<PAGE>
overall membership base increased by 6.6 million members, or 11% during the
year, the average annual fee charged for the Company's membership services
increased by approximately 4%.
In 1996, individual (before giving effect to Ideon acquired members),
wholesale and discount program memberships grew by 14%, 23% and 12%,
respectively. Wholesale memberships have grown in part due to the success of
the Company's international business in Europe. For the year ended December 31,
1996, individual, wholesale and discount program memberships represented 68%,
13% and 19% of membership revenues, respectively. The Company completed a
number of acquisitions accounted for under the purchase method of accounting
during 1996. Total revenue contributed by these acquisitions is not material to
the Company's total reported membership revenue.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impact profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $401
million in 1996, compared to $376 million in 1995. This represents 17% and 19%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations
has increased due to the increased level of marketing efforts, but has
decreased as a percentage of the total number of members.
The major components of the Company's membership operating costs continue
to be personnel, telephone, computer processing and participant insurance
premiums (the cost of obtaining insurance coverage for members). Historically,
the Company has seen a direct correlation between providing a high level of
service to its members and improved retention. Marketing costs remained
constant as a percentage of revenues, which is primarily due to maintained per
member acquisitions costs and an increase in renewing members. The Company
routinely reviews all membership renewal rates and has not seen any material
change in the average renewal rate in 1996 compared to 1995. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members eligible for renewal.
TRAVEL SEGMENT
LODGING
The Company operates eight nationally recognized brands with approximately
5,700 lodging properties under franchise contracts of up to 20 years in
duration. The Company provides central reservation system services and national
marketing programs, which are completely funded by its franchisees from a
designated portion of the franchise fees. The Company charges royalty fees
based on a percentage of franchisee gross room sales to fund all expenses not
covered by marketing and reservation fees, such as quality inspections and
franchise sales and service functions. The significant revenue drivers of the
Company are the number of royalty-paying franchise units and the average rate
at which they pay. Other relevant drivers are the average daily rates and
occupancy percentages of the underlying lodging properties.
F-68
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- --------
<S> <C> <C> <C>
Net revenue $ 385,920 $ 335,402 15%
Operating expenses 240,122 214,796 12%
----------- -----------
Operating income $ 145,798 $ 120,606 21%
=========== ===========
</TABLE>
Operating income increased 21% and net revenue increased 15% as a result
of a 13% increase in royalty fees and a 41% increase in revenue from preferred
alliances seeking access to the Company's franchisees and their underlying
consumer base. Results for 1996 demonstrated that room growth is the most
significant outcome driver for franchisee royalty, as the Company added 55,253
net rooms in 1996, representing a 133% increase from 1995 results. The Company
added 94,506 rooms in 1996 (including 30,274 rooms added by the acquisition of
Travelodge franchise contracts) and terminated 39,253 rooms in 1996 (including
6,053 Park Inn International rooms, comprising the franchise system sold in
September 1996 for $2.2 million). In 1995, the Company added 63,280 rooms
(including 9,780 rooms added by the acquisition of Knights Inn franchise
contracts) and terminated 39,603 rooms (including 22,151 related to a special
year-end removal of properties as a result of the repositioning and tightening
of quality standards of the Company's brands). Total U.S. system revenue per
available room ("REVPAR") increased 1.3% primarily due to a 1.9% increase in
the average daily rates ("ADR") charged at franchised lodging facilities,
however, REVPAR for comparable properties in 1996 and 1995 ("same store basis")
increased 3.3% as a result of increases in ADR. The 12% ($25.3 million)
increase in operating expenses included an 18% increase ($4.7 million) in
depreciation and amortization, primarily related to the excess of cost over net
assets acquired ("goodwill") associated with the acquisitions of the Travelodge
and Knights Inn franchise systems in January 1996 and August 1995,
respectively. In addition, operating expenses increased as a result of a 13%
($17.8 million) increase in marketing and reservation expenses associated with
funds administered by the Company on a pass-through basis (corresponding
franchisee contribution included in revenue).
CAR RENTAL
HFS acquired HFS Car Rental, Inc. (formerly Avis, Inc.) in October 1996.
In September 1997, Avis Rent A Car, Inc. ("ARAC") then a subsidiary of HFS Car
Rental Inc., which operated the rental car operations of HFS Car Rental Inc.,
completed an initial public offering ("IPO") which diluted HFS's equity
interest in ARAC from 100% to 27.5%. HFS retained the assets that are
consistent with its service provider business profile, including the
trademarks, franchise agreements, reservation system and information technology
system assets. 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.
FOR THE PERIOD
OCTOBER 17, 1996 TO
OPERATING INCOME ($000'S) DECEMBER 31, 1996
------------------------- -------------------
Net revenue $ 10,014
Operating expenses 9,477
-----------
Operating income $ 537
===========
F-69
<PAGE>
Net revenue consisted primarily of fees for information technology
services provided to ARAC from the October 17, 1996 acquisition date. Operating
expenses consisted of $3.4 million of depreciation and amortization expenses
primarily associated with the Avis trademark and goodwill and $6.0 million of
technology related expenses for services provided to ARAC and other rental car
companies.
TIMESHARE
HFS acquired Resort Condominiums International ("RCI") in November 1996
for $487.1 million plus up to $200 million of contingent consideration. RCI
sells subscription memberships to owners of vacation timeshare resorts which
allow members to exchange their timeshare accommodations for timeshare
accommodations owned by other members at participating affiliated resorts
worldwide. In addition to membership fees, RCI earns fees for exchanges
processed by its call center. The key timeshare revenue drivers include the
number of fee paying members and exchanges as well as each corresponding
average fee.
FOR THE PERIOD
NOVEMBER 12, 1996 TO
OPERATING INCOME ($000'S) DECEMBER 31, 1996
------------------------- --------------------
Net revenue $ 30,723
Operating expenses 27,404
-----------
Operating income $ 3,319
===========
Net revenue primarily consisted of $11.3 million of member fees and $12.1
million of exchange fees. Operating expenses consisted primarily of $17.9
million of staff and communication costs associated with member services (call
centers). Assuming Company ownership of RCI since January 1, 1995, pro forma
annual membership and exchange fee revenue increased 12% to $102.0 million and
$11% to $157.6 million, respectively and total members and exchanges for
calendar year 1996 increased 8% to 2.2 million and 9% to 1.7 million,
respectively compared to 1995.
F-70
<PAGE>
FLEET MANAGEMENT SERVICES
Fleet management services are offered to corporate clients and government
agencies to assist them in effectively managing their vehicle fleet costs,
reducing in-house administrative costs and enhancing driver productivity.
Services consist of leasing (which generally requires an investment by the
Company in the vehicle and includes new vehicle purchasing, open and closed-end
operating leasing, direct finance leasing and used vehicle marketing) as well
as a variety of fee-based services including fuel purchasing, maintenance
management programs, expense reporting, fuel management programs, accident and
safety programs and other driver services for managing clients' vehicle fleets.
The Company has experienced minimal losses associated with its investment in
vehicles due to the overall creditworthiness of its corporate clients.
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- ---------
Net revenue $ 255,866 $ 258,877 (1%)
Operating expenses 179,648 201,959 (11%)
----------- -----------
Operating income $ 76,218 $ 56,918 34%
=========== ===========
Operating income increased $19.3 million (34%) to $76.2 million, primarily
as a result of an increase in fee-based services and an $11.7 million gain on
the sale of the Company's truck fuel management business ("NTS") which was sold
in January 1996. The net revenue generated in 1996 included the increase in
fee- based services but was offset by the absence of approximately $21.8
million of revenue from the sold NTS business. The $22.3 million (11%) decrease
in operating expenses was primarily associated with $19.1 million of expenses
associated with the sold NTS business.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
The Company licenses brand names to independently owned brokerage offices
associated with three of the four largest franchise systems in the world. The
Company acquired the world's largest franchise system, the CENTURY 21(R)
franchise system, in August 1995, the ERA(R) franchise system in February 1996
and the Coldwell Banker(R)franchise system in May 1996. The most significant
revenue driver for real estate franchise is the number of transactions for
which the broker receives commission revenue. Royalties are calculated based on
a percentage of such franchisee commission revenue. Marketing fees are
collected by the Company and are used to fund national advertising expenditures
and other marketing activities.
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- -----------
Net revenue $ 233,469 $ 47,965 387%
Operating expenses 122,934 28,688 329%
----------- -----------
Operating income $ 110,535 $ 19,277 473%
=========== ===========
The increases in net revenue and operating income are due to the CENTURY
21 franchise system's first full year contribution to operating results and
partial year contributions from the acquired Coldwell Banker and ERA franchise
systems. These franchises systems licensed their trademarks to approximately
184,000 sales associates at December 31, 1996. The royalty portion of revenue
increased $162.8 million (361%) and revenue from preferred affiliates grew from
$0.2 million to $13.4 million, net of the Company's $11.0 million
F-71
<PAGE>
fourth quarter 1996 write-off of revenue associated with the license of the
CENTURY 21 trademark to Amre, Inc., which filed for bankruptcy protection in
February 1997.
Operating expenses increased 329% ($94.2 million) as a result of
incremental expenses associated with acquired franchise systems. Operating
expenses also included a $5.0 million restructuring charge associated with the
second quarter 1996 contribution of Coldwell Banker's former owned brokerage
business to National Realty Trust (the "Trust"), an independent entity governed
by independent trustees.
RELOCATION
Relocation primarily consist of the purchase, management and resale of
homes and fee-based home- related services for transferred employees of
corporate clients, members of affinity group clients and government agencies.
Although the Company acquires the homes of client employees, the client
corporations reimburse the Company for carrying costs until the home is sold
and for home sale losses. Accordingly, the Company earns a fee for services
with minimal real estate risk. Operating expenses primarily consist of staffing
and related costs for sales and service functions. Operating results include
contributions from PHH Relocation for all periods shown, from Coldwell Banker
Relocation Services, Inc. ("CBRS") since the May 31, 1996 acquisition date and
from Worldwide Relocation Management, Inc. ("WRM") since the August 1, 1995
acquisition date.
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 344,865 $ 301,667 14%
Operating expenses 290,563 259,949 12%
----------- -----------
Operating income $ 54,302 $ 41,718 30%
=========== ===========
Acquired CBRS and WRM operations generated $19.2 million of operating
income and PHH Relocation operating income decreased $6.6 million (18%). PHH
Relocation net revenue increased $23.7 million due to an expansion of services
provided to corporate clients while revenue from home sale assistance was flat
compared to 1995. The revenue increase was offset by $30.3 million of increased
expenses associated with the development of the expanded full service
infrastructure.
MORTGAGE SERVICES
Mortgage services primarily consist of the origination, sale and servicing
of residential first mortgage loans. The Company packages its originated loans
for sale in secondary markets, generally within 45 days of origination, and
retains servicing rights. The Company markets a variety of first mortgage
products to consumers through relationships with corporations, affinity groups,
government agencies, financial institutions, real estate brokerage firms and
mortgage banks by a combination of retail teleservices delivery and wholesale
correspondent lending arrangements.
YEAR ENDED DECEMBER 31,
--------------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ------------ --------
Net revenue $ 127,729 $ 93,251 37%
Operating expenses 86,427 51,507 68%
----------- ------------
Operating income $ 41,302 $ 41,744 (1%)
=========== ============
F-72
<PAGE>
The increase in net revenue resulted from a 149% increase in loan
origination revenue offset by a 28% decrease in loan servicing fees. The volume
of loan closings increased 33% from $6.3 billion to $8.4 billion and the
average fee increased from 54 to 100 basis points. Whereas the portfolio of
loans serviced increased 16% from $19.4 billion to $22.5 billion, the average
fee decreased 38% from 30.8 to 19.2 basis points. The increase in origination
fees and decrease in servicing fees results from the implementation of
Statement of Financial Accounting Standards ("SFAS") No. 122 "Accounting for
Mortgage Servicing Rights" in 1995, which had the effect of reallocating
revenue from servicing fees to origination fees. A reduction in gains recorded
from the sale of a portion of the loan servicing portfolio also contributed to
the decrease in service fees. The gain on the sale of servicing amounted to
$17.4 million in 1995 compared to $1.5 million in 1996. Operating expenses
increased as a result of higher closing volume experienced in expanded retail
teleservices delivery arrangements in 1996.
OTHER SEGMENT
Other business operations primarily consist of the development and sale of
high-quality educational, entertainment and personal productivity interactive
multimedia products for home and school use ("Software"), casino credit
information and marketing services, the equity in earnings from the Company's
investment in ARAC (net of information technology fees charged to ARAC) and
other operations or transactions which are not included in the Company's
primary business segments.
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ------------ --------
Net revenue $ 423,096 $ 311,718 36%
Operating expenses 382,306 260,084 47%
----------- ------------
Operating income $ 40,790 $ 51,634 (21%)
=========== ============
Operating income decreased $10.9 million (21%) as a result of $48.6
million of incremental merger and related charges associated with the
acquisitions of Davidson and Sierra. Excluding such merger and related charges,
operating income increased $37.8 million (73%) primarily as a result of a $27.1
million increase from Software operations and $9.5 million in consideration
received for the termination of a corporate services agreement with Chartwell
Leisure Inc. Software revenue increased 28% to $375.2 million in 1996 and
excluding the merger and related costs, software profit margins increased from
14% in 1995 to 19% in 1996. Distribution revenue, which consists principally of
third-party software and typically has low operating margins, was down from
$64.8 million in 1995 to $46.9 million in 1996. The Company's Software
operations continue to grow by focusing on selling titles through retailers.
Excluding distribution revenue, core software revenue grew by 44%. Contributing
to the Software revenue growth in 1996 is the availability of a larger number
of titles as well as a significant increase in the installed base of CD-ROM
personal computers.
F-73
<PAGE>
YEAR ENDED DECEMBER 31, 1995 VS YEAR ENDED DECEMBER 31, 1994
Net income increased $16.2 million (6%) despite $89.1 million of incremental
non-recurring merger charges and costs associated with Ideon products
abandoned. Net income excluding such charges increased $72.1 million (25%). The
increase in net income was a result of a $41.7 million increase in operating
income partially offset by a $2.7 million increase in net interest expense
associated with financing the CENTURY 21 acquisition, and a general rise in
interest rates in 1995 compared to 1994. Despite average LIBOR rate increases
approximating 84 basis points, the Company's average borrowing rate increased
only 40 basis points to 6.0%, principally as a result of favorable fixed rate
debt securities issued in 1994 and 1993.
The financial summary of the Company for the years ended December 31, 1995 and
1994 is as follows ($000's):
1995 1994 VARIANCE
------------- ------------- ---------
Net revenue $ 2,992,122 $ 2,446,731 22%
Operating expenses 2,475,526 1,971,846 26%
------------- -------------
Operating income $ 516,596 $ 474,885 9%
============= =============
Net income $ 302,825 $ 286,590 6%
============= =============
MEMBERSHIP SEGMENT
YEAR ENDED DECEMBER 31,
-------------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ------------- ------------- --------
Net revenue $ 1,643,242 $ 1,363,561 21%
Operating expenses 1,458,543 1,145,416 27%
------------- -------------
Operating income $ 184,699 $ 218,145 (15%)
============= =============
Operating income decreased $33.4 million (15%) as a result of $89.1
million of incremental non-recurring merger charges and costs related to Ideon
products abandoned. Excluding such costs, operating income increased $55.7
million (26%) in 1995 compared to 1994.
The Company's overall membership base grew at a rapid rate (from 46.9
million members at December 31, 1994 to 59.7 million members at December 31,
1995), which is the largest contributing factor to the 21% increase in
membership revenues (from $1.4 billion in 1994 to $1.6 billion in 1995). While
the overall membership base increased by 12.8 million members, or 27%, (of
which approximately 8.0 million members came from acquisitions during the year
("Acquired Members")), the average annual fee charged for the Company's
membership services increased by 3%.
In 1995, individual (before giving effect to Ideon acquired members),
wholesale and discount program memberships grew by 14%, 19% and 11%,
respectively, in addition to the increase due to Acquired Members. For the year
ended December 31, 1995, individual, wholesale and discount program memberships
represented 68%, 12% and 20% of membership revenues, respectively. Discount
program memberships incurred the largest increase from Acquired Members.
Welcome Wagon International, Inc., Getko Group Inc. and Advance Ross
Corporation, all acquired in 1995, are classified in this membership category
as their businesses provide local discounts to consumers. The Company maintains
a flexible marketing plan so that it is not dependent on any one service for
the future growth of the total membership base. The Company completed
F-74
<PAGE>
a number of acquisitions during 1995 which were accounted for under the
purchase method of accounting. The total revenues contributed by these
acquisitions are not material to the Company's total reported revenues.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $376
million in 1995 compared to $354 million in 1994. This represents 19% and 21%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations
has increased due to the increased level of marketing efforts, but has
decreased as a percentage of the total number of members.
The major components of the Company's membership operating costs are
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). Marketing costs
decreased as a percentage of revenues which is primarily due to improved per
member acquisition costs and an increase in renewing members. The Company
routinely reviews all membership renewal rates and has not seen any material
change in the average renewal rate in 1996 compared to 1995.
TRAVEL SEGMENT
LODGING
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 335,402 $ 300,694 12%
Operating expenses 214,796 198,207 8%
----------- -----------
Operating income $ 120,606 $ 102,487 18%
=========== ===========
Net revenue increased 12% as a result of a $20.7 million (16%) increase in
royalty fees and a $6.8 million (49%) increase in revenue from preferred
alliances seeking access to franchisees and their customers. Room growth
represented the most significant revenue outcome driver contributing to the
revenue increase. The Company added 63,280 rooms during 1995, representing an
18.8% increase, but also terminated 39,603 rooms including 22,151 rooms in a
special year-end removal of properties as a result of the repositioning and
tightening of quality standards of the Company's brands. Total REVPAR increased
3.0% primarily due to a 2.6% increase in the average daily rates charged at
franchisee hotels and a 1.8% increase in average royalty rates.
Demonstrating the Company's ability to translate revenue into earnings,
operating income increased $18.1 million (18%) while operating expenses
increased only $16.6 million (8%). The increase in operating expenses included
$4.6 million of franchise sales and bad debt expenses associated with system
growth as well as $1.5 million of scheduled Ramada license fee increases.
Depreciation expense also increased $4.1 million in part from a full year's
expense in 1995 related to the newly developed reservation system for Days Inn
which was implemented in October 1994. The increase was also attributable to
goodwill amortization associated with the issuance of Company common stock in
December 1994 and September 1995, pursuant to an earnout agreement entered into
with Bryanston Group, Inc., an affiliate of the sellers of the Days Inn
franchise system.
F-75
<PAGE>
FLEET MANAGEMENT SERVICES
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 258,877 $ 249,571 4%
Operating expenses 201,959 197,248 2%
----------- -----------
Operating income $ 56,918 $ 52,323 9%
=========== ===========
The revenue increase primarily resulted from an increase in service fees
generated by growth in fuel and maintenance management programs. Such growth
reflects increased market penetration in the United States and United Kingdom.
Operating expenses increased only 2% reflecting a cost reduction program
implemented in 1995 net of certain expenses that vary with revenue growth.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
The CENTURY 21 franchise system contributed $48.0 million of net revenue
and $19.3 million of operating income for the five months following HFS's
August 1, 1995 acquisition. Franchise fees paid by the approximately 6,000
CENTURY 21 franchised brokerage offices approximated $42.1 million and
accounted for the significant portion of real estate franchise net revenue.
Operating expenses included $21.5 million of SG&A, including franchise sales,
service and training expenses and $3.0 million of depreciation and amortization
associated with goodwill and franchise agreements acquired in the CENTURY 21
acquisition.
RELOCATION
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 301,667 $ 255,974 18%
Operating expenses 259,949 221,440 17%
----------- -----------
Operating income $ 41,718 $ 34,534 21%
=========== ===========
The 18% increase in net revenue resulted primarily from an expansion of
full service products offered to corporate clients and a 7% ($7.8 million)
increase in home sale assistance fees. 1995 also included revenue and expense
contributions from WRM which was acquired on August 1, 1995 in connection with
the acquisition of CENTURY 21. The operating expense increase resulted from
growth in the infrastructure necessary to match competition for fee-based
services other than home sale assistance and system related expenses associated
with U.S. and Canadian asset management businesses.
MORTGAGE SERVICES
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 93,251 $ 74,494 25%
Operating expenses 51,507 44,322 16%
----------- -----------
Operating income $ 41,744 $ 30,172 38%
=========== ===========
F-76
<PAGE>
The increase in net revenue was primarily a result of the capitalization
of $55.6 million of net revenue associated with the capitalization of
originated mortgage servicing rights partially offset by a $10.7 million
reduction in the gain on sale of servicing rights and a 32% increase in total
loan closings from 1994 to 1995. In addition, operating expenses increased as
the Company responded to the increase in loan production volume and the
increased servicing portfolio.
Mortgage loan closings increased from $3.4 billion in 1994 to $6.3 billion
in 1995. These increases resulted from increased consumer demand and the
Company's increased market share due primarily to expanded relationships with
affinity groups which represented 29% of the total increase, and with financial
institutions which represented 24% of the total increase. Servicing net revenue
increased 13% as a result of an increase in the average servicing portfolio
partially offset by increased amortization of servicing rights.
The Company adopted SFAS No. 122, effective May 1, 1995. This statement
requires that originated mortgage servicing rights be recognized as income when
the loan is sold and servicing is retained. The effect of this change in
accounting was partially offset by a decrease in margins realized on loans
sold. This decline in margins reflects the price competition in the industry
intended to capture market share during a period of low demand for mortgages
which was created by changes in interest rates during 1995.
OTHER SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 311,718 $ 202,437 54%
Operating expenses 260,084 165,213 57%
----------- -----------
Operating income $ 51,634 $ 37,224 39%
=========== ===========
Operating income increased $14.4 million (39%) as a result of $27.8
million from software operations and incremental profits from Central Credit
Inc., which conducts a casino credit information business and was acquired in
May 1995. Operating income in 1994 included a $19.7 million gain on the sale of
the ImagiNation Network.
Software revenues increased 53% ($100.9 million) to $292.0 million in
1995. Contributing to the strong Software growth in 1995 was the release of 63
new titles and an additional 18 titles which were acquired, as compared to 34
new products released in 1994. Also contributing to the Software revenue growth
is the significant increase in the installed base of CD-ROM personal computers
as well as increases in affiliated label and distribution revenues.
F-77
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS THREE MONTHS ENDED SEPTEMBER 30,
1996
The Company recorded a merger and related charge of $147.2 million ($89.6
million, after tax) (the "Third Quarter 1996 Davidson, Sierra and Ideon Merger
Charge") during the third quarter of 1996 in connection with the 1996 mergers
of the Company with Davidson, Sierra and Ideon. In connection with such charge
$127.2 million was allocated to the operations of the "Membership" segment, and
the remaining $20.0 million of the charge pertained to the Company's software
operations, which is included in the Company's "Other" segment.
The financial summary of the Company for the three months ended September
30, 1997 and 1996, INCLUDING AND EXCLUDING THE DAVIDSON, SIERRA AND IDEON
MERGER CHARGE, IS AS FOLLOWS ($000'S):
<TABLE>
<CAPTION>
1996 VARIANCE
---------------------------- --------------------------
INCLUDING EXCLUDING INCLUDING EXCLUDING
1997 CHARGE CHARGE CHARGE CHARGE
-------------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net revenue $ 1,431,304 $ 1,042,901 $ 1,042,901 37% 37%
Operating expenses 1,001,482 927,869 780,669 8% 28%
-------------- ------------- -------------
Operating income $ 429,822 $ 115,032 $ 262,232 274% 64%
============== ============= =============
Net income $ 248,264 $ 68,466 $ 158,066 263% 57%
============== ============= =============
Net income per share
(fully diluted) $ 0.28 $ 0.08 $ 0.19 250% 47%
============== ============= =============
</TABLE>
Net interest expense increased $13.1 million in 1997 primarily resulting
from borrowings under revolving credit arrangements which financed 1997
treasury stock purchases, restructuring expenditures and acquisition related
expenditures. The weighted average effective interest rate decreased from 7.84%
to 5.30% as a result of increased fixed rate borrowings at lower interest
rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND
DISCUSSIONS EXCLUDE THE THIRD QUARTER 1996 DAVIDSON, SIERRA AND IDEON MERGER
CHARGE.
MEMBERSHIP SEGMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenues $ 690,220 $ 534,718 29%
Operating expenses 544,414 438,793 24%
----------- -------------
Operating income $ 145,806 $ 95,925 52%
=========== =============
The Company's overall membership base continues to grow at a rapid rate
(from 63.8 million members at September 30, 1996 to 72.9 million members at
September 30, 1997), which is the largest contributing factor to the 29%
increase in membership revenues (from $534.7 million for the quarter ended
September 30, 1996 to $690.2 million for the quarter ended September 30, 1997).
While the overall membership base increased by approximately 2.2 million
members during the quarter, the average annual fee collected for the Company's
membership services increased by approximately 1%.
F-78
<PAGE>
Compared to the previous year's third quarter, individual, wholesale and
discount program memberships grew by 13%, 21% and 13%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended September 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Included in net revenue for the quarter
ended September 30, 1997, are revenues resulting from acquisitions which were
completed during the nine months ended September 30, 1997. However, net revenue
contributed from these acquisitions are not material to the Company's total
reported net revenue. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 124,473 $ 115,670 8%
Operating expenses 73,487 71,530 3%
----------- ------------
Operating income $ 50,986 $ 44,140 16%
=========== ============
The net revenue increase resulted from an 8% increase in royalty fees and a
41% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. The increase in
royalty fees resulted primarily from a 5% growth in franchised rooms from the
same period in 1996. The 3% increase in operating expenses represents increased
marketing expenses associated with funds administered by the Company on behalf
of franchisees on a pass-through basis (corresponding franchisee contribution
included in revenue).
CAR RENTAL
In September 1997, the IPO of ARAC, then a subsidiary that operated the car
rental operations of HFS Car Rental Inc., was completed, which diluted HFS's
equity interest in such subsidiary from 100% to 27.5%. 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
which the Company charges ARAC at cost.
F-79
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996
OPERATING INCOME ($000'S) 1997 (PRO FORMA) VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 62,787 $ 59,315 6%
Operating expenses 37,596 38,334 (2%)
------------- --------------
Operating income $ 25,191 $ 20,981 20%
============= ==============
Assuming the ARAC IPO occurred on January 1, 1996, pro forma operating
income increased $4.2 million (20%) from 1996 to 1997 as a result of $1.3
million (7%) increase in royalty fees and $2.2 million of preferred alliance
and other revenue. A 6% increase in franchisee car rental price per day
contributed to the royalty increase.
TIMESHARE
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996
OPERATING INCOME ($000'S) 1997 (PRO FORMA) VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 86,860 $ 78,164 11%
Operating expenses 64,392 66,649 (3%)
------------ -------------
Operating income $ 22,468 $ 11,515 95%
============ =============
Assuming Company ownership of timeshare operations since January 1, 1996,
pro forma operating income increased $11.0 million (95%) from 1996 to 1997 as a
result of expense reductions realized following the November 1996 acquisition
of RCI. Pro forma revenue increased 11% as a result of a 9% increase in
exchange revenue and a 24% increase in subscription revenue, resulting from
member fee and price increases.
FLEET MANAGEMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 59,810 $ 59,062 1%
Operating expenses 41,104 44,156 (7%)
------------ --------------
Operating income $ 18,706 $ 14,906 25%
============ ==============
Net revenue increased only $.7 million (1%) as a result of the Company's
January 1997 sale of certain credit card operations. The Company currently
participates in such credit card operations as a joint venture partner and
accordingly, records revenue based on its equity in earnings on the joint
venture. As a result, revenue in 1997 includes revenue, net of expenses from
the joint venture, compared to gross revenue received from corresponding,
wholly-owned credit card operations in 1996. Assuming the joint venture
commenced January 1, 1996, pro forma net revenue increased 12% primarily as a
result of $3.6 million of increased fuel card revenue in the United Kingdom and
a $1.6 million increase in the United States fleet card operations. Operating
income increased 25% as a result of savings generated from the restructuring of
operations subsequent to the HFS/PHH Merger.
F-80
<PAGE>
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 98,344 $ 79,426 24%
Operating expenses 36,574 36,187 1%
----------- -------------
Operating income $ 61,770 $ 43,239 43%
=========== =============
The royalty portion of revenue increased $13.0 million (18%) to $85.8
million. Increased royalty revenue reflects higher broker sales volume
primarily resulting from a 5 % increase in real estate transactions and a 12%
increase in the average price of homes sold. The net revenue increase also
reflects a 75% increase in revenue from preferred alliance programs to $8.3
million in 1997. The Company limited operating expenses to a $0.4 million (1%)
increase as a result of the post-acquisition realization of cost savings
associated with the consolidation of operating functions of its franchise
systems.
RELOCATION
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 112,034 $ 101,958 10%
Operating expenses 76,907 80,804 (5%)
------------- -------------
Operating income $ 35,127 $ 21,154 66%
============= =============
The increase in net revenue was primarily attributable to an increase in
referral fees from home sale transactions. The $3.9 million reduction in
operating expenses primarily reflects savings associated with the restructuring
of relocation operations following the HFS/PHH Merger.
MORTGAGE SERVICES
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 51,602 $ 40,513 27%
Operating expenses 32,161 26,533 21%
----------- -------------
Operating income $ 19,441 $ 13,980 39%
=========== =============
The increase in net revenue resulted primarily from a $6.2 million (22%)
increase in loan origination revenue due to an increase in loan closings ($3.5
billion for third quarter ) and a $4.9 million (41%) increase in loan servicing
fees. Operating expenses increased $5.6 million (21%), reflecting the increase
in current loan origination volume, and the anticipation of future volume
increases.
F-81
<PAGE>
OTHER SEGMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 145,174 $ 111,554 30%
Operating expenses 94,847 82,666 15%
----------- -------------
Operating income $ 50,327 $ 28,888 74%
=========== =============
Operating income increased $21.4 million (74%) primarily as a result of a
$26.9 million increase in the equity in earnings of ARAC (recorded in net
revenue) and a $6.0 million gain on the sale of an investment partially offset
by a decrease of $22.4 million from Software operations. As a result of the
Company recalendarizing only its 1997 results, software operations for calendar
1997 are compared against the fiscal period ended October 31, 1996. Assuming a
comparable quarter, software operating income remained relatively constant from
1996 to 1997. The increase in net revenues is also attributable to the
continued focus on selling software titles through retailers and the
availability of a large number of titles as well as the significant increase in
the installed base of CD-ROM personal computers.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company incurred an anticipated $303.0 million one-time merger and
restructuring charge ($227.0 million, after tax) during the nine months ended
September 30, 1997 in connection with the HFS/PHH Merger. In connection with
such charge, $40.4 million and $50.4 million of costs were allocated to the
operations of the fleet management and relocation business segments,
respectively. The remaining merger and related costs did not directly apply to
the Company's operating segments and were therefore included as operating
expenses in the Company's "Other" segment.
During the nine months ended September 30, 1996, the Company incurred a
merger and related charge of $175.8 million ($114.7 million after tax) in
connection with the mergers with Davidson, Sierra and Ideon. In connection with
such charge, $127.2 million was allocated to the operations of the membership
segment and the remaining $48.6 million pertained to the Company's software
operations, which is included in the Company's "Other" segment.
The financial summary for the nine months ended September 30, 1997 and 1996
INCLUDING THE PHH MERGER CHARGE OF $303.0 MILLION ($227.0 MILLION AFTER TAX)
AND THE MERGER AND RELATED CHARGES ASSOCIATED WITH THE MERGERS WITH DAVIDSON,
SIERRA AND IDEON OF $175.8 MILLION $114.6 MILLION AFTER TAX) IS AS FOLLOWS
($000's):
1997 1996 VARIANCE
------------- ------------ --------
Net revenue $ 3,890,015 $ 2,799,951 39%
Operating expenses 3,098,865 2,332,428 33%
------------- ------------
Operating income $ 791,150 $ 467,523 69%
============= ============
Net income $ 400,694 $ 265,504 51%
============= ============
Net income per share
(fully diluted) $ .47 $ .33 42%
============= ============
F-82
<PAGE>
The financial summary for the nine months ended September 30, 1997 and 1996,
EXCLUDING THE PHH MERGER CHARGE AND THE MERGER AND RELATED CHARGES ASSOCIATED
WITH THE MERGERS WITH DAVIDSON, SIERRA AND IDEON IS AS FOLLOWS ($000's):
1997 1996 VARIANCE
------------- ------------ --------
Net revenue $ 3,890,015 $ 2,799,951 39%
Operating expenses 2,795,865 2,156,593 30%
------------- ------------
Operating income $ 1,094,150 $ 643,358 70%
============= ============
Net income $ 627,694 $ 380,104 65%
============= ============
Net income per share
(fully diluted) $ .73 $ .48 52%
============= ============
Net interest expense increased 155% ($26.7 million) primarily resulting from
borrowings under revolving credit arrangements which financed 1997 treasury
stock purchases, restructuring expenditures and acquisition related
expenditures, while the weighted average effective interest rate decreased from
7.53% to 6.09% as a result of increased fixed rate borrowings at lower interest
rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND DISCUSSIONS
EXCLUDE THE PHH MERGER CHARGE AND THE MERGER AND RELATED CHARGES ASSOCIATED
WITH THE MERGERS WITH DAVIDSON, SIERRA AND IDEON.
MEMBERSHIP SEGMENT
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 1,875,347 $ 1,539,240 22%
Operating expenses 1,458,829 1,250,785 17%
------------- -------------
Operating income $ 416,518 $ 288,455 44%
============= =============
The Company's overall membership base continues to grow at a rapid rate
(from 63.8 million members at September 30, 1996 to 72.9 million members at
September 30, 1997), which is the largest contributing factor to the 22%
increase in membership revenues (from $1.5 billion for the nine months ended
September 30, 1996 to $1.9 billion for the nine months ended September 30,
1997). While the overall membership base increased by approximately 6.6 million
members during the nine months ended September 30, 1997, the average annual fee
collected for the Company's membership services increased by approximately 3%.
Compared to the previous year's first nine months, individual, wholesale and
discount program memberships grew by 10%, 23% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended September 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates.
F-83
<PAGE>
Historically, an increase in overall membership usage has had a favorable
impact on renewal rates. Included in total revenues for the quarter ended
September 30, 1997, are revenues resulting from acquisitions which were
completed during the nine months ended September 30, 1997. However, total
revenues contributed from these acquisitions are not material to the Company's
total reported revenues. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 322,427 $ 295,892 9%
Operating expenses 191,240 186,555 3%
------------- ------------
Operating income $ 131,187 $ 109,337 20%
============= ============
The net revenue increase resulted from a 7% increase in royalty fees and a
62% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. The increase in
royalty fees resulted primarily from a 4% growth in franchised rooms from the
same period in 1996. The 3% ($4.7 million) increase in operating expenses
resulted from a 10% ($12.2 million) increase in marketing and reservation
expenses which are funded by the Company's franchisees partially offset by the
absorption of corporate overhead expenses by several other operating segments
acquired in 1996.
CAR RENTAL
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 181,657 $ 165,112 10%
Operating expenses 113,889 109,561 4%
------------- ------------
Operating income $ 67,768 $ 55,551 22%
============= ============
Assuming the ARAC IPO occurred on January 1, 1996, pro forma operating
income increased 22% primarily as a result of a $3.3 million ( 5%) increase in
royalty fees and $5.2 million of preferred alliance and other revenue. The
increase in royalty fees was primarily attributable to a 5% increase in ARAC's
car rental price per day.
TIMESHARE
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 274,570 $ 236,675 16%
Operating expenses 212,531 207,397 2%
------------- ------------
Operating income $ 62,039 $ 29,278 112%
============= ============
Assuming Company ownership of timeshare operations since January 1, 1996,
pro forma operating income increased $32.8 million (112%) from 1996 to 1997 as
a result of a $37.9 million (16%) increase in net revenue and only a $5.1
million (2%) increase in operating expenses. Pro forma revenue increased 16% as
a result
F-84
<PAGE>
of an $11.6 million (9%) increase in exchange revenue and an $18.0 million
(24%) increase in subscription revenue due to both membership and price
increases. The pro forma operating expense increase of only 2% is a result of
expense reductions realized following the November 1996 acquisition of RCI.
FLEET MANAGEMENT
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 206,391 $ 192,832 7%
Operating expenses 130,491 135,055 (3%)
------------- ------------
Operating income $ 75,900 $ 57,777 31%
============= ============
Operating income increased $18.1 million (31%) to $75.9 million, primarily
as a result of a $13.6 million (7%) increase in net revenue and a $4.6 million
(3%) decrease in operating expenses resulting from operational efficiencies
realized from the second quarter 1997 restructuring of certain fleet management
operations. The increase in net revenue is comprised of a 10% increase in
fee-based revenue and a 4% increase in asset-based fees.
REAL ESTATE INDUSTRY
REAL ESTATE FRANCHISE
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
NINE MONTHS ENDED SEPTEMBER 30, 1996
OPERATING INCOME ($000'S) 1997 1996 VARIANCE (PRO FORMA) VARIANCE
------------------------- ------------- -------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue $ 237,412 $ 159,951 48% $ 203,519 17%
Operating expenses 108,465 84,897 28% 113,264 (4%)
------------- -------------- -------------
Operating income $ 128,947 $ 75,054 72% $ 90,255 43%
============= ============== =============
</TABLE>
Operating income increased 72% as a result of a $77.5 million (48%) increase
in net revenue and only a $23.6 million (28%) increase in operating expenses.
The royalty portion of revenue increased $65.5 million (46%) to $208.8 million
which is primarily attributable to the Coldwell Banker franchise system
operations which were acquired in May 1996. Operating expenses increased as a
result of incremental expenses associated with the acquired franchise systems.
Pro forma operating income which gives effect to the acquisitions of the
Coldwell Banker and ERA franchise systems as if these acquisitions were
consummated on January 1, 1996, increased $38.7 million (43%) from 1996 to 1997
as a result of a $33.9 million (17%) increase in net revenue and a $4.8 million
(4%) reduction in operating expenses. Pro forma net revenue increased primarily
as a result of a 10% increase in royalty fees principally due to increases in
homes sold and the average price of homes sold. The pro forma reduction in
operating expenses reflects cost savings realized from the restructuring of
real estate businesses acquired.
F-85
<PAGE>
RELOCATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1996
OPERATING INCOME ($000'S) 1997 1996 VARIANCE (PRO FORMA) VARIANCE
------------------------- ----------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net revenue $ 300,727 $ 253,073 19% $ 287,951 4%
Operating expenses 226,348 213,689 6% 241,859 (6%)
----------- ----------- -----------
Operating income $ 74,379 $ 39,384 89% $ 46,092 61%
=========== =========== ===========
</TABLE>
The $35.0 million (89%) increase in operating income is primarily
attributable to operating income from the Coldwell Banker relocation business
acquired in May 1996. Pro forma operating income increased $28.3 million (61%)
from 1996 to 1997 as a result of a $12.8 million (4%) increase in net revenue
and a $15.5 million (6%) reduction in operating expenses. Pro forma net revenue
increased primarily as a result of an increase in referral fees from home sale
transactions. The pro forma reduction in operating expenses reflects savings
associated with the restructuring of relocation operations following the
HFS/PHH Merger.
MORTGAGE SERVICES
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 127,731 $ 95,667 34%
Operating expenses 76,832 65,620 17%
------------- ------------
Operating income $ 50,899 $ 30,047 69%
============= ============
Operating income increased 69% as a result of a 34% increase in net revenue,
net of a 17% increase in operating expenses. Loan origination revenue increased
$25.5 million (43%) as a result of a 19% increase in loan closings and a 20%
price increase. Servicing revenue increased $4.3 million (20%) as a result of
an 18% increase in revenue from the servicing portfolio. Operating expenses
increased 17% due to increases in loan origination volume as well as increased
recruiting, training and systems development costs associated with the
anticipation of increased volume, primarily from the retail teleservice
delivery systems.
OTHER SEGMENT
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 363,753 $ 263,296 38%
Operating expenses 277,240 219,992 26%
------------- ------------
Operating income $ 86,513 $ 43,304 100%
============= ============
Operating income increased $43.2 million (100%) primarily as a result of a
$51.2 million increase in the equity in earnings of ARAC (recorded in net
revenue) and a $16.7 million gain on the sale of investments, partially offset
by a decrease of $22.3 million from software operations. As a result of the
Company recalendarizing its 1997 results, software operations for calendar
1997 are compared against the fiscal period ended October 31, 1996. Assuming a
comparable nine month period, software operating income remained relatively
constant from 1996 to 1997.
The increase in net revenues is in large part attributable to the continued
focus on selling software titles through retailers and the availability of a
large number of titles as well as the significant increase in the installed
base of CD-ROM personal computers.
F-86
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
ACQUISITION OVERVIEW
The Company continues to seek to expand and strengthen its leadership
position in its membership, travel and real estate industry segments with
strategic acquisitions. The Company's acquired businesses share similar
characteristics, foremost of which is that each was immediately accretive to
Company cash flow and earnings. Revenue is substantially generated from service
fees and is not dependent on tangible assets or the need for capital
expenditures other than technology investments. These service businesses each
generate significant cash flow which is enhanced by the Company's operating
leverage that supports acquired revenue streams without corresponding increases
in operating infrastructure expenses.
1997 POOLINGS
CENDANT - The Cendant Merger was completed on December 17, 1997 pursuant to
which the Company issued 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 Company common stock for
each share of HFS common stock. The Company anticipates that it will incur
merger and related charges approximating $825 million associated with fourth
quarter 1997 mergers.
As directed by the Federal Trade Commission ("FTC") as a condition of
terminating the waiting period under the Hart Scott Rodino Antitrust
Improvements Act in connection with the Cendant Merger, on December 17, 1997,
the Company sold its wholly-owned subsidiary, Interval International Inc. and
certain related entities ("Interval"), for approximately $200 million, subject
to certain adjustments. The agreement contemplates that the Company will
continue to provide certain existing services to Interval's developers and
members.
HEBDO MAG - On October 3, 1997, the Company acquired all of the outstanding
capital stock of Hebdo Mag for approximately $440 million, which was satisfied
by the issuance of approximately 14.2 million shares of Company common stock.
Hebdo Mag is a leading publisher and distributor of international classified
advertising information.
PHH - On April 30, 1997, HFS acquired PHH by merger, which was satisfied by the
issuance of 72.8 million equivalent shares of Company common stock in exchange
for all of the outstanding common stock of PHH. PHH is the world's largest
provider of corporate relocation services and also provides mortgage and fleet
management services. HFS recorded a one-time merger and related charge of
approximately $303.0 million in the second quarter of 1997 upon consummation of
the HFS/PHH Merger.
1996 POOLINGS
DAVIDSON AND SIERRA - During July 1996, the Company acquired all of the
outstanding capital stock of Davidson for a purchase price of approximately $1
billion, which was satisfied by the issuance of approximately 45.1 million
shares of Company common stock. Also during July 1996, the Company acquired all
of the outstanding capital stock of Sierra for a purchase price of
approximately $858 million, which was satisfied by the issuance of
approximately 38.4 million shares of the Company common stock. Davidson and
Sierra develop, publish and distribute educational and entertainment software
for home and school use. During August 1996, the Company acquired all of the
outstanding capital stock of Ideon, principally a
F-87
<PAGE>
provider of credit card enhancement services, for a purchase price of
approximately $393 million, which was satisfied by the issuance of 16.6 million
shares of Company common stock.
In connection with the Davidson, Sierra and Ideon mergers, the Company recorded
a charge approximating $179.9 million in the year ended December 31, 1996. Such
costs are non-recurring and those associated with the Ideon Merger include a
provision relating to certain litigation matters giving consideration to the
Company's intended approach to these matters. The Company has since settled
certain of these litigation matters while certain of these matters remain
outstanding. Although the Company has attempted to estimate the amounts that
will be required to settle the remaining litigation matters, there can be no
assurance that the actual aggregate amount of such settlements will not exceed
the amount accrued.
1995 POOLINGS
GETKO, NAOG AND ADVANCE ROSS - During June 1995, the Company acquired all of
the outstanding capital stock of Getko Group, Inc. ("Getko") for a purchase
price of approximately $100 million, which was satisfied by the issuance of
approximately 5.6 million shares of Company common stock. Getko distributes
complimentary welcoming packages to new homeowners throughout the United States
and Canada. During September 1995, the Company acquired all of the outstanding
capital stock of North American Outdoor Group, Inc. ("NAOG") for a purchase
price of approximately $52 million, which was satisfied by the issuance of
approximately 2.3 million shares of Company common stock. NAOG owns one of the
largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns various other membership
organizations. During January 1996, the Company acquired all of the outstanding
capital stock of Advance Ross Corporation ("Advance Ross") for a purchase price
of approximately $183 million, which was satisfied by the issuance of
approximately 8.9 million shares of Company common stock. Advance Ross
processes value-added tax refunds to travelers in over 20 European countries.
1997 PURCHASE ACQUISITIONS
PROPOSED ACQUISITION
On January 27, 1998, the Company proposed to acquire American Bankers Insurance
Group Inc. ("American Bankers") for $58 per share in cash and stock, for an
aggregate purchase price approximating $2.7 billion. On January 28, 1998, the
Company commenced a tender offer to purchase approximately 23.5 million of
American Bankers' common stock at a price of $58 per share in cash, which
together with shares the Company owns on the announcement date approximating
51% of the fully diluted shares of American Bankers. The Company proposed to
exchange, on a tax free basis, shares of its common stock with a fixed value of
$58 per share for the balance of American Bankers' common stock. The tender
offer is subject to certain conditions and there can be no assurance that the
Company will be successful in its proposal to acquire American Bankers. The
Company has received a commitment from a bank to provide funds necessary to
finance the proposed acquisition.
F-88
<PAGE>
HARPUR - On January 20, 1998, the Company completed its acquisition of The
Harpur Group Ltd., a leading fuel card and vehicle management company in the
United Kingdom, from privately held H-G Holdings, Inc., for approximately $186
million in cash plus future contingent payments of up to $20 million over the
next two years.
JACKSON HEWITT - On January 7, 1998, the Company completed the acquisition of
Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480 million in cash
or $68 per share of common stock of Jackson Hewitt. Jackson Hewitt is the
second largest tax preparation service franchise system in the United States
with locations in 41 states. Jackson Hewitt franchises a system of
approximately 2,050 offices that specialize in computerized preparation of
federal and state individual income tax returns.
PROVIDIAN - On December 9, 1997, HFS executed a definitive agreement to
acquire Providian Auto and Home Insurance Company and its subsidiaries from an
AEGON N.V. subsidiary for approximately $219 million in cash. Closing is
subject to receipt of required regulatory approval and other customary
conditions and is anticipated in the spring of 1998. Providian sells automobile
insurance to consumers through direct response marketing in 45 states and the
District of Columbia.
INVESTMENT IN NRT - During the third quarter of 1997, HFS acquired $182.0
million of preferred stock of NRT Incorporated ("NRT"), a newly formed
corporation created to acquire residential real estate brokerage firms. HFS
acquired $216.1 million of certain intangible assets including trademarks
associated with real estate brokerage firms acquired by NRT in 1997. The
Company, at its discretion, may acquire up to $81.3 million of additional NRT
preferred stock and may also purchase up to $229.9 million of certain
intangible assets of real estate brokerage firms acquired by NRT.
In September 1997, NRT acquired the real estate brokerage business and
operations of the Trust, and two other regional real estate brokerage
businesses. The Trust is an independent trust to which HFS contributed the
brokerage offices formerly owned by Coldwell Banker in connection with HFS's
acquisition of Coldwell Banker. NRT is the largest residential brokerage firm
in the United States.
1996 PURCHASE ACQUISITIONS
RCI - In November 1996, HFS completed the acquisition of all the outstanding
common stock of RCI for approximately $487 million comprised of $412 million in
cash and $75 million of HFS common stock plus future contingent payments of up
to $200 million over the next five years. The cash portion of the purchase
price was funded with borrowings under a revolving credit facility, acquired
RCI cash and excess proceeds from a second quarter public offering of
approximately 46.6 million equivalent shares of Company common stock (the
"Offering") which generated $1.2 billion of proceeds.
RCI is the world's largest provider of timeshare exchange programs and is also
engaged in publishing related to the timeshare industry and provides other
travel-related services, integrated software systems and resort management and
consulting services.
AVIS - In October 1996, HFS completed the acquisition of all of the outstanding
capital stock of HFS Car Rental Inc., formerly Avis Inc. ("Avis"), including
payments under certain employee stock plans of Avis and the redemption of
certain series of preferred stock of Avis for $806.5 million. The purchase
price was comprised of approximately $367.2 million in cash, $100.9 million in
indebtedness and $338.4 million
F-89
<PAGE>
(approximately 11.1 million equivalent shares) in Company common stock. The
cash portion of the purchase price was funded with excess proceeds from the
Offering.
Prior to the consummation of the acquisition, HFS 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 HFS Car Rental, Inc.) completed an IPO resulting in a 72.5%
dilution of HFS's equity interest in ARAC.
COLDWELL BANKER - In May 1996, HFS acquired by merger Coldwell Banker, the
largest gross revenue producing residential real estate company in North
America and a leading provider of corporate relocation services. HFS 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 equivalent shares of Company common stock generating
$1.2 billion of proceeds pursuant to a public offering. Immediately following
the closing of the Coldwell Banker acquisition, HFS conveyed Coldwell Banker's
318 owned real estate brokerage offices to National Realty Trust, an
independent trust in which HFS has no beneficial interest and recorded a $5.0
million pre-tax charge in connection with such contribution.
OTHER - During 1996, HFS acquired certain other entities for an aggregate
purchase price of $286.2 million comprised of $210.4 million in cash, $70.8
million of common stock (2.5 million equivalent Company shares) and $5.0
million of notes.
1995 PURCHASE ACQUISITIONS
CENTURY 21 - In August 1995, a majority owned subsidiary of HFS, 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 plus expenses,
including an initial cash payment of $70.2 million, 9.6 million equivalent
shares of Company common stock valued at $64.8 million, the assumption of $80.0
million of Century 21 redeemable preferred stock prior to the acquisition
(subsequently redeemed in February 1996) and a $30.0 million contingent payment
made in February 1996. Consideration paid in 1996 financed these payments with
proceeds from the February 1996 issuance of $240 million of unsecured 4-3/4%
Convertible Senior Notes (the "4-3/4% Notes").
Effective October 29, 1996 (the "Effective Date"), HFS amended the Subscription
and Stockholders' Agreement dated as of August 1, 1995 among Holding, HFS and a
group of former executives of Century 21 Real Estate Corporation ("the Former
Management") pursuant to which the Company owned 87.5% of Holding and the
Former Management owned 12.5% of Holding. Such amendment provided for the
acceleration of HFS's option to purchase the 12.5% ownership from the Former
Management at fair market value, determined as of the Effective Date. The
Company completed such purchase in the second quarter of 1997 for $52.8
million.
OTHER - During 1995, the Company and HFS collectively acquired certain entities
for an aggregate purchase price of $163.3 million, comprised of $122.5 million
in cash and $40.8 million of common stock (6.0 million equivalent Company
shares).
TREASURY PURCHASES
F-90
<PAGE>
In January 1997, HFS's Board of Directors authorized the purchase of 6.2
million equivalent shares of Company common stock to satisfy stock option
exercises and conversions of convertible debt securities and to fund future
acquisitions. HFS acquired approximately 6.2 million equivalent treasury shares
of Company common stock in the first quarter of 1997 for $179.4 million with
revolving credit borrowings.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
POST CENDANT MERGER
The Company continues to believe that it has excellent liquidity and access
to liquidity through various sources. The Company has also demonstrated its
ability to access equity and public debt markets and financial institutions to
generate capital for strategic acquisitions. Indicative of the Company's
creditworthiness, as of the consummation of the Cendant Merger, Standard and
Poors Corporation ("S&P") and Duff and Phelps ("Duff") affirmed A ratings to
the Company's debt and Moody's Investor Service ("Moody's") upgraded the
Company's senior unsecured debt rating to A3. A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time by S&P, Duff and Moody's.
As of the Cendant Merger consummation date, the Company terminated its
existing credit facility and amended the HFS revolving credit facilities to
provide aggregate commitments of $2.0 billion consisting of (i) a $1.25
billion, 364-day revolving credit facility (the "364 Day Revolving Credit
Facility") and (ii) a $750.0 million, five year revolving credit facility (the
"Five Year Revolving Credit Facility" and collectively with the 364 Day
Revolving Credit Facility, (the "Revolving Credit Facilities"). The 364 Day
Revolving Credit Facility will mature on September 30, 1998 but may be renewed
on an annual basis for an additional 364 days up to a maximum aggregate term of
five years upon receiving lender approval. The Five Year Revolving Credit
Facility will mature on October 1, 2001. The Revolving Credit Facilities, at
the option of the Company, bear interest based on competitive bids of lenders
participating in the facilities, at prime rates or at LIBOR plus a margin of
approximately 22 basis points. The Company is required to pay a per annum
facility fee of .08% and .06% of the average daily availability of the Five
Year Revolving Credit Facility and the 364 Day Revolving Credit Facility,
respectively. The interest rates and facility fees are subject to change based
upon credit ratings assigned to the Company's senior unsecured long-term debt
by nationally recognized statistical rating companies. The Revolving Credit
Facilities contain certain restrictive covenants including restrictions on
indebtedness, mergers, liquidations and sale and leaseback transactions.
The Company intends to file a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to an aggregate $3
billion of debt and equity securities. These securities may be offered from
time to time based on terms to be determined at the time of sale. The proceeds
would be used for general corporate purposes, which may include future
acquisitions.
PRE CENDANT MERGER
Prior to the Cendant Merger, the Company had a $500.0 million revolving
credit facility (the "CUC Credit Facility") with a variety of different types
of loans available thereunder. Interest was payable, depending on the type of
loan utilized by the Company, at a variety of rates based on the federal funds
rate, LIBOR, the prime rate or rates quoted by participating banks based on an
auction process for the CUC Credit Facility. No borrowings under this facility
were outstanding at December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997. The CUC Credit Facility required the Company to maintain
certain financial ratios and contained other restrictive covenants including,
without limitation, financial covenants and restrictions
F-91
<PAGE>
on certain corporate transactions, and also contained various events of default
provisions including, without limitation, defaults arising from certain changes
in control of the Company.
Prior to Cendant Merger, HFS maintained up to $1.5 billion in revolving
credit facilities pursuant to the same terms and conditions under the Company's
Revolving Credit Facilities post the Cendant Merger. Outstanding borrowings
under HFS's revolving credit facilities at December 31, 1996 and September 30,
1997 aggregated $205.0 million and $1.1 billion, respectively. At December 31,
1996 and September 30, 1997 available borrowings under HFS's revolving credit
facilities were $795.0 million and $400.0 million respectively.
In connection with the acquisition of Hebdo Mag, the Company assumed a
$115.2 million revolving credit facility and other long-term debt of $110.5
million, consisting of senior and subordinated notes and other miscellaneous
loans. The revolving credit facility bears interest at varying rates ranging
from the prime rate plus .25% to 1.5% or LIBOR plus 1.0% to 2.25%, depending
upon Hebdo Mag's ratio of total debt to pro forma cash flow, as defined. This
facility expires on February 15, 1998 but may be renewed on an annual basis for
successive periods of one year upon receiving lender approval. Outstanding
borrowings under this facility at December 31, 1996 and September 30, 1997
aggregated $93.8 million and $82.9 million, respectively.
On February 11, 1997, the Company issued $550 million in principal amount of
3% convertible subordinated Notes (the "3% Notes") due February 15, 2002.
Interest on the 3% Notes is payable semi-annually. 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.
In January 1997, Wright Express Corporation, a wholly-owned subsidiary,
entered into a new revolving credit facility agreement replacing its previous
revolving line of credit. The new credit facility has an available line of $60
million. At December 31, 1996 and September 30, 1997, Wright Express had $31.4
million and $36.2 million, respectively outstanding under the new credit
facility. The new credit facility expires February 8, 1999.
On February 22, 1996, HFS 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
36.028 equivalent shares of Company common stock per $1,000 principal amount of
the 4-3/4% Notes, representing a conversion price of $27.756 per share. The
4-3/4% Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after March 3, 1998 at redemption prices decreasing from
103.393% of principal at March 3, 1998 to 100% of principal at March 3, 2003.
However, on or after March 3, 1998 and prior to March 3, 2000, the 4-3/4% Notes
will not be redeemable at the option of the Company unless the closing price of
the Company's common stock shall have exceeded $38.86 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days within a
period of 30 consecutive trading days ending within five days prior to
redemption. Interest on the 4-3/4% Notes is payable semi-annually commencing
September 1, 1996.
F-92
<PAGE>
In October 1994, HFS completed a public offering of $150 million unsecured
4-1/2% Convertible Senior Notes (the "4-1/2% Notes") due 1999, which were
convertible at the option of the holders at any time prior to maturity into
132.425 equivalent shares of Company common stock per $1,000 principal amount
of the 4- 1/2% Notes, representing a conversion price of $7.55 per share.
Interest was payable semi-annually commencing April 1995. On September 22,
1997, HFS exercised its option to redeem the outstanding 4-1/2% Notes effective
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. Accordingly, 19.7 million equivalent
shares of Company common stock were issued as a result of the conversion of
such notes.
In connection with the Company's 1996 acquisition of Sierra, the Company
assumed $50 million in principal amount of 6-1/2% convertible subordinated
notes due April 1, 2001 (the "Notes"). Interest on the Notes is payable
semi-annually on April 1 and October 1 of each year. Each $7.62 principal
amount of Notes is convertible into one share of Company common stock, subject
to adjustment under certain conditions. The Notes are redeemable after April 2,
1997, at the option of Sierra, at specified redemption prices. At December 31,
1996 and September 30, 1997, Sierra had $23.5 million and $20.3 million,
respectively, outstanding on the Notes.
Long-term debt increased $1.4 billion to $2.4 billion at September 30, 1997
when compared to amounts outstanding at December 31, 1996, primarily as a
result of the $550 million issuance of 3% Notes, and approximately $900 million
of incremental borrowings under HFS's revolving credit facilities, which was
principally used to fund $171.3 million of treasury share purchases, $137.0
million of the PHH Merger Charge and $680.0 million of the Company's investment
in NRT and certain intangible assets associated with NRT's acquisitions during
the third quarter of 1997 and other acquisition related payments. Long-term
debt at September 30, 1997 primarily consisted of $1.1 billion of fixed rate
publicly issued debt and $1.2 billion of borrowings under the Company's
revolving credit facilities.
Long-term debt increased $646.0 million from $354.0 million at December 31,
1995 to $1.0 billion at December 31, 1996, primarily due to the issuance of the
$240 million 4-3/4% Notes and $189.6 million of incremental borrowings under
HFS's revolving credit facilities which partially financed the November
acquisition of RCI. In addition, the Company assumed $204.3 million of debt in
connection with the merger of Hebdo Mag, which consisted of revolving credit
facility borrowings, senior and subordinated notes and other miscellaneous
loans.
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH operates mortgage services, fleet management and relocation businesses
as a separate public reporting entity and supports purchases of leased vehicles
and originated mortgages primarily by issuing commercial paper and medium term
notes. Such borrowings are not classified based on contractual maturities, but
rather are included in liabilities under management and mortgage programs
rather than long-term debt since such debt corresponds directly with high
quality related assets. Although PHH's debt to equity ratio approximates 6 to
1, such debt corresponds directly with net investments in high quality related
assets. Accordingly, following the announcement of the HFS/PHH Merger, S&P,
Moody's and Fitch Investor Service affirmed investment grade ratings of A+, A2
and A+, respectively to PHH debt and A1 and F1, respectively to PHH commercial
paper. A security rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal at any time.
F-93
<PAGE>
PHH debt is issued without recourse to the Company. The Company expects to
continue to have broad access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing credit
standards to minimize credit risk and the potential for losses. Depending upon
asset growth and financial market conditions, PHH utilizes the United States,
European and Canadian commercial paper markets, as well as other cost-effective
short-term instruments. In addition, PHH will continue to utilize the public
and private debt markets to issue unsecured senior corporate debt. Augmenting
these sources, PHH will continue to manage outstanding debt with the potential
sale or transfer of managed assets to third parties while retaining fee-related
servicing responsibility.
PHH's aggregate outstanding borrowings at the underlying balance sheet dates
were as follows ($ billions):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- -------------
<S> <C> <C>
Commercial paper $3.1 $2.5
Medium-term notes 1.7 2.3
Other 0.4 0.2
</TABLE>
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 80 percent of the
average amount of outstanding commercial paper. PHH maintains a $2.5 billion
syndicated unsecured credit facility which is backed by domestic and foreign
banks and is comprised of $1.25 billion of lines of credit maturing in 364 days
and $1.25 billion maturing in five years. In addition, PHH has approximately
$300 million of uncommitted lines of credit with various financial
institutions. Management closely evaluates not only the credit of the banks but
the terms of the various agreements to ensure ongoing availability. The full
amount of PHH's committed facilities in 1997 to date are undrawn and available.
Management believes that its current policy provides adequate protection should
volatility in the financial markets limit PHH's access to commercial paper or
medium-term notes funding.
PHH minimizes its exposure to interest rate and liquidity risk by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
domestic and international funding sources, and securing available credit under
committed banking facilities.
The Company and PHH currently operate under policies limiting (a) the
payment of dividends on PHH's capital stock to 40% of net income of PHH on an
annual basis, less the outstanding principal balance of loans from PHH to the
Company as of the date of the proposed dividend payment, and (b) the
outstanding principal balance of loans from PHH to the Company to 40% of net
income of PHH on an annual basis, less payment of dividends on PHH's capital
stock during such year.
CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 VS YEAR ENDED DECEMBER 31, 1995
The Company generated $1.6 billion of cash flows from operations in 1996
representing a $464.3 million increase from 1995. This increase primarily
reflects improved net income net of non-cash charges.
In 1996, cash flows from operating activities of $1.6 billion and $1.8
billion of cash flows from financing activities, principally consisting of net
debt financing of $733 million and $1.2 billion of proceeds from the
F-94
<PAGE>
issuance of common stock were used principally to fund $1.7 million of Company
acquisitions and the Company's net investment in assets under management
mortgage programs of $1.3 billion and core service fee based operations.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company generated $1.3 billion of cash flows from operations in 1997
representing a $452.4 million increase from 1996. This increase primarily
reflects improved net income net of non cash charges. In 1997, cash flows from
operating activities of $1.3 billion and net debt borrowings of $1.1 billion,
including the February 1997 issuance of $550 million 3% convertible
subordinated Notes were used principally to fund the Company's net investment
in assets under mangement and mortgage programs of $893.5 million, $748.6
million of Company acquisitions, treasury stock purchases of $171.3 million,
and core service fee based operations.
CAPITAL EXPENDITURES
The Company anticipates investing approximately $200 million during
calendar year 1998 in capital expenditures. Such capital expenditures are
primarily associated with the consolidation of internationally based call
centers and information technology systems to support expected volume increases
in the Company's mortgage services business and improve operational
efficiencies in the delivery of relocation services.
IMPACT OF INFLATION AND SEASONALITY
To date, inflation has not had a material impact on Company operations.
The third quarter represented 29% of annual pro forma net income as a result of
peak leisure travel and real estate sales in summer months. Fourth quarter
respresented 27% of pro forma net income due to holiday season demand for
software products.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company is currently assessing these statements, which are effective for
fiscal years beginning after December 15, 1997 and establish standards for the
reporting and display of comprehensive income and disclosure regarding related
segments.
In March 1997, FASB issued SFAS No. 128, "Earnings per Share" which is
effective for the Company in financial statements issued after December 15,
1997. SFAS No. 128 supersedes APB 15 and replaces the presentations of primary
EPS with a presentation of Basic EPS. It also requires presentation of Basic
and Diluted EPS on the income statement for all entities with complex capital
structures. Assuming SFAS No. 128 was applicable for 1996, the Company would
have reported the following net income (loss) per share amounts:
F-95
<PAGE>
BASIC DILUTED
-------- ------------
YEAR ENDED DECEMBER 31,
-----------------------
1996 .56 .52
1995 .45 .42
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 .31 .29
1996 .09 .08
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 .50 .47
1996 .36 .34
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and, among other things, also requires that
previously recognized servicing receivables that exceed contractually specified
servicing fees be reclassified as interest-only strips receivable, and
subsequently measured under the provisions of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." The Company adopted the
provisions of SFAS No. 125 on January 1, 1997 and has reclassified a portion of
its excess servicing fees to interest-only strips. The effect of adopting SFAS
No. 125 was not material to the Company's operations or financial condition.
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forwarding-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forwarding-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forwarding-looking statements. These forwarding-looking statements were based
on various factors and were derived utilizing numerous important assumptions
and other important factors that could cause actual results to differ
materially from those in the forwarding-looking statements. Important
assumptions and other factors that could cause actual results to differ
materially from those in the forwarding-looking statements, include, but are
not limited to: uncertainty as to the Company's future profitability, the
Company's ability to develop and implement operational and financial systems to
manage rapidly growing operations; competition in the Company's existing and
potential future lines of business; the Company's ability to integrate and
operate
F-96
<PAGE>
successfully acquired and merged businesses and the risks associated with such
businesses, including the Company's ability to obtain financing on acceptable
terms to finance the Company's growth strategy and for the Company to operate
within the limitations imposed by financing arrangements; uncertainty as to the
future profitability of acquired businesses, and other factors. Other factors
and assumptions not identified above were also involved in the derivation of
these forwarding-looking statements, and the failure of such other assumptions
to be realized as well as other factors may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forwarding-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forwarding-looking
statements.
F-97
<PAGE>
PROSPECTUS
$4,000,000,000
CENDANT CORPORATION
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK,
STOCK PURCHASE CONTRACTS, STOCK PURCHASE UNITS AND WARRANTS
CENDANT CAPITAL I
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 I, 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 pari passu 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 $4,000,000,000 (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.
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 in
<PAGE>
settlement 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 February 23, 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 SOLICITATION
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.
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 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.
2
<PAGE>
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:
(i) Annual Report on Form 10-K for the fiscal year ended January 31, 1997
(the "1997 Form 10-K"); (ii) Quarterly Reports on Form 10-Q for the fiscal
quarters ended April 30, 1997, July 31, 1997 and October 31, 1997 (the "1997
Form 10-Qs"); (iii) Current Reports on Form 8-K dated January 22, 1997,
February 4, 1997, February 13, 1997, February 26, 1997, March 17, 1997, May
29, 1997, August 15, 1997, October 31, 1997, November 4, 1997, December 18,
1997, January 14, 1998, January 22, 1998, January 27, 1998, January 29, 1998,
February 4, 1998, February 6, 1998 and February 16, 1998; and (iv)
description of the common stock of the Company which is contained in the
Registration Statements on Form 8-A of the Company dated July 27, 1984 and
August 15, 1989.
The financial statements filed as part of the Current Report on Form 8-K
dated January 29, 1998 are now the historical financial statements of the
Company (the "Historical Financial Statements"). The Historical Financial
Statements supercede the financial statements appearing in the 1997 Form 10-K
and the 1997 Form 10-Qs.
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 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 James E.
Buckman, Esq., Senior Executive Vice President and General Counsel, Cendant
Corporation, 6 Sylvan Way, Parsippany, New Jersey 07054, (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.
3
<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 (the
"Merger") of CUC International Inc. ("CUC") and HFS Incorporated ("HFS") in
December 1997 and provides all of the services formerly provided by each of
CUC and HFS, including technology-driven, membership-based consumer services,
travel services and real estate services.
Membership Services. The Company's membership-based consumer services
provide more than 66.5 million members with access to a variety of goods and
services worldwide. These memberships include such components as shopping,
travel, auto, dining, home improvement, lifestyle, vacation exchange, credit
card and checking account enhancement packages, financial products and
discount programs. The Company also administers insurance package programs
which are generally combined with discount shopping and travel for credit
union members, distributes welcoming packages which provide new homeowners
with discounts for local merchants, and provides travelers with value-added
tax refunds. The Company believes that it is the leading provider of
membership-based consumer services of these types in the United States. The
Company's membership activities are conducted principally through its
Comp-U-Card division and certain of the Company's wholly-owned subsidiaries,
FISI*Madison Financial Corporation, Benefit Consultants, Inc., Entertainment
Publications, Inc. and SafeCard Services, Inc.
Travel Services. The Company also provides services to consumers through
intermediaries in the travel and real estate industries. In the travel
industry, the Company, through certain of its subsidiaries, franchises hotels
primarily in the mid-priced and economy markets. It is the world's largest
hotel franchisor, operating the Days Inn(Registered Trademark),
Ramada(Registered Trademark) (in the United States), Howard
Johnson(Registered Trademark), Super 8(Registered Trademark),
Travelodge(Registered Trademark) (in North America), Villager
Lodge(Registered Trademark), Knights Inn(Registered Trademark) and Wingate
Inn(Registered Trademark) franchise systems. Additionally, the Company owns
the Avis worldwide vehicle rental system, which is operated through its
franchisees and is the second-largest car rental system in the world (based
on total revenues and volume of rental transactions). The Company currently
owns approximately 27.5% of the capital stock of the world's largest Avis
franchisee, Avis Rent A Car, Inc. The Company also owns Resort Condominiums
International, Inc., a leading timeshare exchange organization. The Company
also operates the second largest provider in North America of comprehensive
vehicle management services and is the market leader in the United Kingdom
among the four nationwide providers of fuel card services and the six
nationwide providers of vehicle management services.
Real Estate Services. In the residential real estate industry, the
Company, through certain of its subsidiaries, franchises real estate
brokerage offices under the Century 21(Registered Trademark), Coldwell
Banker(Registered Trademark) and Electronic Realty Associates(Registered
Trademark) (ERA(Registered Trademark)) real estate brokerage franchise
systems and is the world's largest real estate brokerage franchisor.
Additionally, the Company, through Cendant Mobility Services Corporation, is
the largest provider of corporate relocation services in the United States,
offering relocation clients a variety of services in connection with the
transfer of a client's employees. Through Cendant Mortgage Corporation, the
Company originates, sells and services residential mortgage loans in the
United States, marketing such services to consumers through relationships
with corporations, affinity groups, financial institutions, real estate
brokerage firms and other mortgage banks.
As a franchisor of hotels, residential real estate brokerage offices and
car rental operations, the Company licenses the owners and operators of
independent businesses to use the Company's brand names. The Company does not
own or operate hotels or real estate brokerage offices. Instead, the Company
provides its franchisee customers with services designed to increase their
revenue and profitability.
Other. The Company also offers consumer software in various multimedia
forms. During 1996, the Company acquired Davidson & Associates, Inc., Sierra
On-Line, Inc. and Knowledge Adventure, Inc. These companies develop, publish,
manufacture and distribute educational, entertainment and personal
productivity interactive multimedia products for home and school use.
The Company from time to time explores and conducts discussions with
regard to acquisitions and other strategic corporate transactions in its
industries and in other businesses. Historically, the Company
4
<PAGE>
has been involved in numerous transactions of various magnitudes, for
consideration which included cash or securities (including Common Stock) or
combinations thereof. The Company will evaluate and pursue appropriate
acquisition and combination opportunities as they arise. No assurance can be
given with respect to the timing, likelihood or financial or business effect
of any possible transaction. In the past, acquisitions by the Company have
involved both relatively small acquisitions and acquisitions which have been
significant.
As part of its regular on-going evaluation of acquisition opportunities,
the Company is currently engaged in a number of separate and unrelated
preliminary discussions concerning possible acquisitions. The Company is in
the early stages of such discussions and has not entered into any agreement
in principle with respect to any of these possible acquisitions. The purchase
price for the possible acquisitions may be paid in cash, through the issuance
of Common Stock (which would increase the number of shares of Common Stock
outstanding) Preferred Stock, Debt Securities or other securities of the
Company, borrowings, or a combination thereof. Prior to consummating any such
possible acquisitions, the Company, among other things, will have to initiate
and satisfactorily complete its due diligence investigation; negotiate the
financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and secure financing. The Company cannot
predict whether any such acquisitions will be consummated or, if consummated,
will result in a financial or other benefit to the Company.
The Company's principal executive offices are located at 6 Sylvan Way,
Parsippany, New Jersey 07054 (telephone number: (973) 428-9700).
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 pari passu,
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
5
<PAGE>
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.
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 Market 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.
RECENT DEVELOPMENTS
1997 FINANCIAL RESULTS. On February 4, 1998, the Company announced its
financial results for the year ended December 31, 1997. The Company reported
diluted earnings per share of $1.00 for 1997, a 49% increase compared to $.67
earnings per share reported for 1996, excluding one-time charges recognized
in both 1997 and 1996. The Company had revenues of $5.3 billion for 1997
compared with $3.9 billion for 1996, an increase of 36%, and net income of
$872.2 million for 1997, excluding one-time charges, compared with $542.3
million of 1996, excluding one-time charges, an increase of 61%. On a pro
forma basis, which assumes that the financial results include all of the
Company's 1996 acquisitions, accounted for under the purchase method, as if
they had occurred as of January 1, 1996, earnings per share for the year
ended December 31, 1997, excluding one-time charges, was $1.00 representing a
43% increase over pro forma $.70 per share for the year ended December 31,
1996.
When giving effect to one-time charges, the Company reported $.06 diluted
earnings per share for the year ended December 31, 1997 and net income of
$55.4 million for 1997 compared to $423.6 million for 1996. In 1997, one-time
charges totaled $1.1 billion ($816.8 million after-tax, or $.94 per share)
for merger related costs and unusual charges coincident with the Merger, as
well as the merger of HFS and PHH Corporation which was consummated in April
1997. In 1996, one-time charges totaled $179.9 million ($118.7 million
after-tax, or $.15 per share) related to three CUC mergers.
Proposed Acquisition of American Bankers. On January 27, 1998, the Company
made a proposal to acquire American Bankers Insurance Group Inc. ("American
Bankers") for $58 per share in cash and stock, for an aggregate purchase
price of approximately $2.7 billion on a fully diluted basis. On January 28,
1998, the Company commenced a tender offer to purchase approximately 23.5
million of American Bankers' common shares at a price of $58 per share in
cash, which together with shares the Company owns will equal approximately
51% of the fully diluted shares of American Bankers. The Company proposes to
exchange, on a tax free basis, shares of its common stock with a fixed value
of $58 per share for the balance of American Bankers' common stock. The
tender offer is subject to customary conditions and there can be no assurance
that the Company will be successful in its proposal to acquire American
Bankers.
In connection with the Company's proposal to acquire American Bankers, the
Company entered into a commitment letter, dated January 23, 1998, with The
Chase Manhattan Bank and Chase Securities Inc. to provide a $1.5 billion
364-Day revolving credit facility (the "New Facility") which will mature 364
days after the execution of the definitive documentation relating thereto.
The New Facility will bear interest, at the option of the Company, at rates
based on competitive bids of lenders participating in such facilities at a
prime rate or at LIBOR plus an applicable variable margin based on the
Company's senior unsecured long-term debt rating.
Harpur Acquisition. On January 20, 1998, the Company completed the
acquisition of Harpur Group, Ltd., a leading fuel card and vehicle management
company in the United Kingdom, from H-G Holdings, Inc. for approximately $186
million in cash plus future contingent payments of up to $20 million over the
next two years.
Jackson Hewitt Acquisition. On January 7, 1998, the Company completed the
acquisition of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480
million in cash, or $68 per share of common stock of Jackson Hewitt. Jackson
Hewitt is the second largest tax preparation service system in the United
6
<PAGE>
States with locations in 41 states. Jackson Hewitt franchises a system of
approximately 2,050 offices that specialize in computerized preparation of
federal and state individual income tax returns.
Interval Divestiture. On December 17, 1997, in connection with the merger
with HFS, the Company completed the divestiture of its timeshare exchange
subsidiary, Interval International Inc., as contemplated by the consent
decree with the Federal Trade Commission.
Providian Acquisition. On December 10, 1997, the Company announced that it
had entered into a definitive agreement to acquire Providian Auto and Home
Insurance Company ("Providian") and its subsidiaries from an Aegon N.V.
subsidiary for approximately $219 million in cash. Providian sells automobile
insurance to consumers through direct response marketing in 45 states and the
District of Columbia. The closing of this transaction is subject to customary
conditions, including regulatory approval and is anticipated to occur in the
spring of 1998.
Hebdo Mag Acquisition. On October 3, 1997, the Company completed the
acquisition of all of the outstanding capital stock of Hebdo Mag
International Inc. ("Hebdo Mag") in exchange for the issuance of shares of
preferred stock of Getting to Know You of Canada Ltd., an indirect
wholly-owned subsidiary of the Company, exchangeable for shares of Common
Stock (the "Hebdo Acquisition Shares") and the assumption of certain options
of Hebdo Mag exchanged for options to acquire shares of Common Stock, such
Hebdo Acquisition Shares or options having an aggregate value of
approximately $440 million. Based in Paris, France, Hebdo Mag is an
international publisher of over 150 titles and distributor of classified
advertising information with operations in twelve countries, including
Canada, France, Sweden, Hungary, the United States, Italy, Russia and
Holland. The Hebdo Mag Acquisition was accounted for in accordance with the
pooling-of-interests method of accounting.
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 following table sets forth the unaudited consolidated ratio of
earnings to fixed charges of the Company for the periods indicated.
HISTORICAL
----------------------------------------------------------
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994 1993 1992
------------------ ------ ------ ------ ------ ------
Ratio of Earnings to
Fixed Charges (1) . 3.48x 3.06x 2.70x 2.94x 2.68x 1.99x
- ------------
(1) The ratio of earnings to fixed charges is computed by dividing income
before income taxes and extraordinary items 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).
7
<PAGE>
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 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.
8
<PAGE>
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, 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,
9
<PAGE>
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
(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):
10
<PAGE>
(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.
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
11
<PAGE>
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.
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
12
<PAGE>
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 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
13
<PAGE>
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) 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
14
<PAGE>
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.
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.
15
<PAGE>
"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;
(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
16
<PAGE>
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.
"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 January 15, 1998, there were
839,992,974 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
17
<PAGE>
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.
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 designate 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.
18
<PAGE>
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 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. The size of the Board of Directors was set by
resolution at 30 and pursuant to the By-Laws (i) until the third anniversary
of the consummation of the merger of HFS and CUC (the "Effective Time"), an
affirmative vote of 80% of the entire Board of Directors will be required in
order to change the number of directors, and (ii) a quorum, at any meeting of
the Board of Directors, shall consist of a majority of the entire Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Pursuant to the Certificate, the Board of Director's authority to
designate committees shall be subject to the provisions of the By-Laws.
Pursuant to the By-Laws, the Board of Directors shall have the following
committees: (i) an Executive Committee consisting of four CUC Directors (as
defined below) and four HFS Directors (as defined below) and whose Chairman
shall be the Chairman of the Board; (ii) a Compensation Committee consisting
of two CUC Directors and two HFS Directors and whose Chairman shall be an HFS
Director; and (iii) an Audit Committee consisting of two CUC Directors and
two HFS Directors and whose Chairman shall be a CUC Director. The Board of
Directors may designate one or more directors as alternate members of any
committee to fill any vacancy on a committee and to fill a vacant
chairmanship of a committee occurring as a result of a member or chairman
leaving the committee, whether through death, resignation, removal or
otherwise. Until the third anniversary of the Effective Time, the affirmative
vote of 80% of the entire Board of Directors will be required in order to
19
<PAGE>
remove a director from a committee, change the chairmanship of a committee,
designate an alternate member to any committee, designate any additional
committee, or amend, modify or repeal or adopt any provision inconsistent
with the provisions described herein.
The term "HFS Director" means (A) any person serving as a Director of HFS
on May 27, 1997 (or any person appointed by the Board of Directors of HFS
after May 27, 1997 to fill a vacancy on the HFS Board of Directors created
other than due to an increase in the size of the Board of Directors of HFS)
who continues as a Director of the Company at the Effective Time and (B) any
person who becomes a Director of the Company and who was designated as such
by the remaining HFS Directors prior to his or her election; and the term
"CUC Director" means (A) any person serving as a Director of the Company on
May 27, 1997 (or any person appointed by the Board of Directors of the
Company after May 27, 1997 but prior to the Effective Time to fill a vacancy
on the Board of Directors created other than due to an increase in the size
of the Board of Directors) who continues as a Director of the Company at the
Effective Time, (B) any of the four persons designated by the CUC Directors
to become a Director of the Company at the Effective Time and (C) any person
who becomes Director of the Company and who was designated as such by the
remaining CUC Directors prior to his or her election.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Pursuant to the By-Laws, until the third anniversary of the Effective
Time, the Board of Directors will delegate to the Executive Committee the
full and exclusive power and authority to nominate directors for election to
the Board of Directors at the next stockholders' meetings at which directors
are to be elected, elect directors to fill vacancies on the Board of
Directors between stockholders' meetings and fill vacancies on any committee
of the Board of Directors to the extent an alternate member has not been
previously designated. Such nominations and elections of directors and
members of committees shall be undertaken by the Executive Committee such
that (i) the number of HFS Directors and CUC Directors on the Board of
Directors or any committee of the Board of Directors shall be equal and (ii)
the remaining HFS Directors (if the number of HFS Directors is less than the
number of CUC Directors) or the remaining CUC Directors (if the number of CUC
Directors is less than the number of HFS Directors) shall designate the
person to be nominated or elected. Any resolution regarding such election or
nomination as described above in a manner that (a) is consistent with the two
preceding sentences will require the approval by only three members of the
Executive Committee (or only two members if there are then two vacancies on
the Executive Committee) or (b) is inconsistent with the two preceding
sentences will require approval by at least seven members of the Executive
Committee. Until the third anniversary of the Effective Time, the affirmative
vote of at least 80% of the entire Board of Directors shall be required in
order for the Board of Directors to amend, modify or repeal, or adopt any
provision inconsistent with, the provisions of the By-Laws described herein.
OFFICERS
Pursuant to the By-Laws, Walter A. Forbes shall be the Chairman of the
Board from and after the Effective Time and until January 1, 2000, at which
time Henry R. Silverman will be the Chairman of the Board. If, for any reason
Mr. Forbes ceases to serve as Chairman of the Board prior to January 1, 2000
and at such time Mr. Silverman is President and Chief Executive Officer, Mr.
Silverman shall become Chairman of the Board. Mr. Silverman will be President
and Chief Executive Officer from and after the Effective Time and until
January 1, 2000, at which time Mr. Forbes will be President and Chief
Executive Officer. If, for any reason Mr. Silverman ceases to serve as
President and Chief Executive Officer prior to January 1, 2000 and at such
time Mr. Forbes is Chairman of the Board, Mr. Forbes shall become President
and Chief Executive Officer. Until January 1, 2002, the affirmative vote of
80% of the entire Board of Directors shall be required in order for the Board
to (i) amend, modify, repeal or adopt any provision inconsistent with the
provisions described herein, (ii) remove Mr. Forbes or Mr. Silverman from the
positions specifically provided for in their employment agreements with the
Company and HFS, respectively, (iii) modify either of the respective roles,
duties or authority of Messrs. Forbes and Silverman.
20
<PAGE>
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 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 which require a
super-majority of stockholders to approve certain amendments to the
Certificate and the By-Laws, the By-Laws require the affirmative vote of 80%
of the entire Board of Directors in order for the Board of Directors to adopt
certain amendments to the By-Laws as described under "--Board of Directors,"
"--Committees of the Board of Directors," "Newly Created Directorships and
Vacancies" and "--Officers."
21
<PAGE>
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.
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.
22
<PAGE>
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 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 pari passu, 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
23
<PAGE>
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).
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.
24
<PAGE>
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 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
25
<PAGE>
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 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.
26
<PAGE>
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 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.
27
<PAGE>
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.
EXPERTS
The consolidated financial statements of the Company and its consolidated
subsidiaries, except PHH Corporation ("PHH"), as of December 31, 1996 and
January 31, 1996 and for the years ended December 31, 1996, January 31, 1996
and 1995 and CUC International Inc. ("CUC") as of January 31, 1997 and 1996
and for each of the three years in the period ended January 31, 1997
incorporated in this Prospectus by reference from the Company Form 8-K dated
January 29, 1998, have been audited by Deloitte & Touche LLP, as stated in
their report which is incorporated herein by reference. The financial
statements of PHH (consolidated with those of the Company) have been audited
by KPMG Peat Marwick LLP, independent auditors of PHH Corporation, as stated
in their report incorporated herein by reference. Their report contains an
explanatory paragraph that states that PHH adopted the provisions of
Statement of Financial Standards No. 122 "Accounting for Mortgage Service
Rights" in the year ended January 31, 1996. The consolidated financial
statements of CUC (consolidated with those of the Company) have been audited
by Ernst & Young LLP, as set forth in their report included in the Current
Report on Form 8-K, dated January 29, 1998 incorporated herein by reference,
which, as to the years ended January 31, 1996 and 1995, is based in part on
the reports of Deloitte & Touche LLP, independent auditors of Sierra On-Line,
Inc., KPMG Peat Marwick LLP, independent auditors of Davidson & Associates,
Inc., and Price Waterhouse LLP, independent accountants of Ideon Group, Inc.
Such supplemental consolidated financial statements of the Company and its
consolidated subsidiaries are 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 Avis Rent A Car, Inc.
incorporated in this Prospectus by reference from the Current Report on Form
8-K, dated February 6, 1998, filed by Cendant Corporation 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.
28
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS, NOR ANY SALE MADE HEREUNDER AND THEREUNDER, SHALL UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS SHALL NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OF SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary ........................................ S-7
Explanatory Diagrams ................................................. S-25
Risk Factors ......................................................... S-29
The Company .......................................................... S-36
Summary Historical and Pro Forma Financial Information of the
Company ............................................................ S-39
The Trust ............................................................ S-41
Price Range of Common Stock and Dividends ........................... S-42
Capitalization ....................................................... S-43
Accounting Treatment ................................................. S-44
Use of Proceeds ...................................................... S-44
Description of the FELINE PRIDES ..................................... S-45
Description of the Purchase Contracts ............................... S-49
Certain Provisions of the Purchase Contract Agreement and the Pledge
Agreement .......................................................... S-58
Description of the Trust Preferred Securities ........................ S-61
Description of the Guarantee ......................................... S-73
Description of the Debentures ........................................ S-75
Effect of Obligations Under the Debentures and the Guarantee ......... S-82
Certain Federal Income Tax Consequences ............................. S-83
Underwriting ......................................................... S-90
Legal Opinions ....................................................... S-92
Index of Terms for Prospectus Supplement ............................ S-93
Index to Financial Statements ........................................ F-1
PROSPECTUS
Available Information ................................................ 2
Incorporation of Certain Documents by Reference ...................... 3
The Company .......................................................... 4
Use of Proceeds ...................................................... 7
Consolidated Ratio of Earnings to Fixed Charges....................... 7
Description of the Debt Securities ................................... 8
General Description of Capital Stock ................................ 17
Description of Warrants .............................................. 22
Description of Preferred Securities of the Cendant Trusts ............ 23
Description of Trust Guarantees ...................................... 24
Description of Stock Purchase Contracts and Stock Purchase Units ..... 27
Plan of Distribution ................................................. 27
Legal Opinions ....................................................... 28
Experts .............................................................. 28
===============================================================================
===============================================================================
[CENDANT CORPORATION LOGO]
CENDANT CAPITAL I
26,000,000 FELINE PRIDES (SERVICE MARK)
2,000,000 TRUST
PREFERRED SECURITIES
6.45% TRUST ORIGINATED
PREFERRED SECURITIES (SERVICE MARK)
("TOPRS" (SERVICE MARK) )
-------------
PROSPECTUS SUPPLEMENT
-------------
MERRILL LYNCH & CO.
CHASE SECURITIES INC.
FEBRUARY 24, 1998
(Service Mark) Service Mark of Merrill Lynch & Co., Inc.
===============================================================================
