SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Form 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 1-10308
---------------
Cendant Corporation
(Exact name of Registrant as specified in its charter)
Delaware 06-0918165
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9 West 57th Street 10019
New York, NY (Zip Code)
(Address of principal executive
office)
212-413-1800
(Registrant's telephone number, including area code)
---------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, Par Value $.01 New York Stock Exchange
Income PRIDES(SM) New York Stock Exchange
Growth PRIDES(SM) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
6.45% Trust Originated
Preferred Securities
7 1/2% Notes due 2000
7 3/4% Notes due 2003
3% Convertible Subordinated Notes Due 2002
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [ ]
The aggregate market value of the Common Stock issued and outstanding
and held by nonaffiliates of the Registrant, based upon the closing price for
the Common Stock on the New York Stock Exchange on April 30, 1999 was
$13,630,401,826. All executive officers and directors of the registrant have
been deemed, solely for the purpose of the foregoing calculation, to be
"affiliates" of the registrant.
The number of shares outstanding of each of the Registrant's classes of
common stock was 768,065,871 shares of Common Stock outstanding as of April 30,
1999.
<PAGE>
PART I
ITEM 1. BUSINESS
Except as expressly indicated or unless the context otherwise requires, the
"Company", "Cendant", "we", "our", or "us" means Cendant Corporation, a Delaware
Corporation, and its subsidiaries.
GENERAL
We are one of the foremost consumer and business services companies in the
world. We were created through the merger (the "Merger") of HFS Incorporated
("HFS") into CUC International, Inc. ("CUC") in December 1997 with the resultant
corporation being renamed Cendant Corporation. We provide the fee-based services
formerly provided by each of CUC and HFS, including travel services, real estate
services and membership-based consumer services, to our customers throughout the
world.
We operate in four principal divisions--travel related services, real
estate related services, alliance marketing related services and other consumer
and business services. Our businesses provide a wide range of complementary
consumer and business services, which together represent eight business
segments. The travel related services businesses facilitate vacation timeshare
exchanges, manage corporate and government vehicle fleets and franchise car
rental and hotel businesses; the real estate related services businesses
franchise real estate brokerage businesses, provide home buyers with mortgages
and assist in employee relocation; and the alliance marketing related services
businesses provide an array of value driven products and services. Our other
consumer and business services include our tax preparation services franchise,
information technology services, car parks and vehicle emergency support and
rescue services in the United Kingdom, credit information services, financial
products and other consumer-related services.
As a franchisor of hotels, residential real estate brokerage offices, car
rental operations and tax preparation services, we license the owners and
operators of independent businesses to use our brand names. We do not own or
operate hotels, real estate brokerage offices, car rental operations or tax
preparation offices (except for certain company-owned Jackson Hewitt offices,
which we intend to franchise). Instead, we provide our franchisee customers with
services designed to increase their revenue and profitability.
Travel Related Services
The travel division is comprised of the travel and fleet segments. In the
travel segment, we franchise hotels primarily in the mid-priced and economy
markets. We are the world's largest hotel franchisor, operating the Days Inn(R),
Ramada(R) (in the United States), Howard Johnson(R), Super 8(R), Travelodge(R)
(in North America), Villager Lodge(R), Knights Inn(R) and Wingate Inn(R) lodging
franchise systems. We own the Avis(R) worldwide vehicle rental franchise system
which, operated by its franchisees, is the second largest car rental system in
the world (based on total revenues and volume of rental transactions). We
currently own approximately 19% of the capital stock of the largest Avis
franchisee, Avis Rent A Car, Inc. ("ARAC"). We also own Resort Condominiums
International, LLC ("RCI"), the world's leading timeshare exchange organization.
Our fleet segment is conducted primarily by our PHH Vehicle Management
Services Corporation subsidiary which operates the second largest provider in
North America of comprehensive vehicle management services and our PHH Vehicle
Management Services PLC subsidiary which is the market leader in the United
Kingdom for fuel and fleet management services.
<PAGE>
Real Estate Related Services
Our real estate division consists of the real estate franchise, relocation
and mortgage segments. In the real estate franchise segment, we franchise real
estate brokerage offices under the CENTURY 21(R), COLDWELL BANKER(R) and ERA(R)
real estate brokerage franchise systems and are the world's largest real estate
brokerage franchisor. In the relocation segment, our Cendant Mobility Services
Corporation subsidiary is the largest provider of corporate relocation services
in the world, offering relocation clients a variety of services in connection
with the transfer of a client's employees. In the mortgage segment, our Cendant
Mortgage Corporation ("Cendant Mortgage") subsidiary originates, sells and
services residential mortgage loans in the United States, marketing such
services to consumers through relationships with corporations, affinity groups,
financial institutions, real estate brokerage firms and mortgage banks.
Alliance Marketing Related Services
Our alliance marketing division is divided into two segments: individual
membership and insurance/ wholesale. The individual membership segment, with
approximately 32 million memberships, provides customers with access to a
variety of discounted products and services in such areas as retail shopping,
travel, auto, dining, and home improvement. The insurance/wholesale segment,
with nearly 31 million customers, markets and administers insurance products,
primarily accidental death and dismemberment insurance and term life insurance,
and also provides products and services such as checking account enhancement
packages, financial products and discount programs to customers of various
financial institutions. Our alliance marketing activities are conducted
principally through our Cendant Membership Services, Inc. subsidiary and certain
of the Company's other wholly-owned subsidiaries, including FISI*Madison
Financial Corporation ("FISI") and Benefit Consultants, Inc. ("BCI").
Other Consumer and Business Services
We also provide a variety of other consumer and business services. Our
Jackson Hewitt Inc. ("Jackson Hewitt") subsidiary operates the second largest
tax preparation service system in the United States with locations in 43 states
and franchises a system of approximately 3,000 offices that specialize in
computerized preparation of federal and state individual income tax returns. Our
National Parking Corporation Limited ("NPC") subsidiary is the largest private
(non-municipally owned) car park operator in the United Kingdom and a leader in
vehicle emergency support and rescue services for approximately 3.5 million
members in the United Kingdom. Our Global Refund subsidiary operates the world's
leading value-added tax refund service for travelers. We also provide
information technology services, credit information services, financial services
and other consumer services.
Recent Developments
Change in Focus; Proposed Sale of Our Entertainment Publications Subsidiary and
Completed Sales of Our Cendant Software and Hebdo Mag International Subsidiaries
General. We recently have changed our focus from making strategic
acquisitions of new businesses to maximizing the opportunities and growth
potential of our existing businesses. In connection with this change in focus,
we intend to review and evaluate our existing businesses to determine if they
continue to meet our business objectives. As part of our ongoing evaluation of
such businesses, we intend from time to time to explore and conduct discussions
with regard to divestitures and related corporate transactions. However, we can
give no assurance with respect to the magnitude, timing, likelihood or financial
or business effect of any possible transaction. We also cannot predict whether
any divestitures or other transactions will be consummated or, if consummated,
will result in a financial or other benefit to us. We intend to use a portion of
the proceeds from any such dispositions and cash from operations, to retire
indebtedness, to repurchase our common stock as our Board of Directors approves
and for other general corporate purposes.
<PAGE>
As a result of our change in focus, on April 21, 1999, we announced that
the Board of Directors has approved management's plan to pursue the sale of our
Entertainment Publications, Inc. ("EPub") subsidiary and that we have engaged
Veronis, Suhler & Associates, Inc. to manage the sale process. As a result, EPub
has been classified as a discontinued operation herein and will be presented as
such in current and prior periods when Cendant releases financial information.
We previously announced first quarter 1999 results with EPub classified as a
discontinued operation.
On January 12, 1999, we completed the sale of our consumer software
division, Cendant Software and its subsidiaries, to Paris-based Havas SA, a
subsidiary of Vivendi SA, for $800 million in cash plus future potential cash
payments.
On December 15, 1998, we completed the sale of our Hebdo Mag International
subsidiary ("Hebdo Mag") to a company organized by Hebdo Mag management for
approximately $450 million, including approximately $315 million in cash and 7.1
million shares of our common stock.
Internet Strategy. As part of the aforementioned change in focus, on
February 10, 1999, we announced our strategy for our Internet business,
following a comprehensive company-wide review. The strategy includes: (i) the
proposed sale of three of our internet companies -- RentNet, Match.com and
Bookstacks, Inc. (Books.com, MusicSpot.com and GoodMovies.com); (ii) continued
investment in our remaining internet membership business, particularly
NetMarket, which is an integral part of our overall individual membership
business; (iii) active pursuit of strategic partnerships that will leverage our
online membership assets, accelerate growth and maximize shareholder value; and
(iv) establishment of an outsourcing services business that manages fulfillment
and distribution for non-competing third party e-commerce providers.
Termination of American Bankers Acquisition and Settlement Agreement
On March 23, 1998, we announced that we had entered into a definitive
agreement (the "ABI Merger Agreement") to acquire American Bankers Insurance
Group Inc. ("American Bankers") for $67 per share in cash and stock, for an
aggregate consideration of approximately $3.1 billion. Because of uncertainties
concerning the eventual completion of this acquisition, on October 13, 1998, we
and American Bankers entered into a settlement agreement pursuant to which we
and American Bankers terminated the ABI Merger Agreement and our then pending
tender offer for American Bankers shares. Pursuant to the settlement agreement:
o we and American Bankers released each other from any claims relating to the
proposed acquisition of American Bankers;
o we paid $400 million, pre-tax, in cash to American Bankers;
o we agreed to withdraw any applications we had pending with
insurance regulatory authorities in order to obtain control of
American Bankers and to withdraw from any proceedings or hearings
in connection with these applications; and
o we agreed not to take any actions or make any statements intended to
frustrate or delay any business combination between
American Bankers and any other party.
In connection with the termination of the American Bankers transaction, we
recorded a $281 million after-tax charge in the fourth quarter of 1998 in
connection with our payment to American Bankers and transaction-related
expenses.
<PAGE>
Termination of Providian Acquisition
On December 10, 1997, we announced that we had entered into a definitive
agreement to acquire Providian Auto and Home Insurance Company and its
subsidiaries ("Providian") from a subsidiary of Aegon N.V. for approximately
$219 million in cash. On October 5, 1998, we announced that we terminated the
agreement to acquire Providian because the acquisition agreement provided that
the closing had to occur on or before September 30, 1998, and certain
representations, covenants and conditions of closing in the acquisition
agreement had not been fulfilled by that date. We did not pursue an extension of
the termination date of the agreement because Providian no longer met our
acquisition criteria.
National Parking Corporation Acquisition
On April 27, 1998, we acquired NPC for $1.6 billion in cash, which included
our repayment of approximately $227 million of outstanding NPC debt. NPC is the
largest private (non-municipally owned) car park operator in the United Kingdom,
with a portfolio of approximately 500 owned, leased and managed car parks in
over 100 towns and city centers and major airport locations. NPC has also
developed a broad-based breakdown assistance group under the brand name of Green
Flag. Green Flag offers a wide range of emergency support and rescue services to
approximately 3.5 million members in the United Kingdom.
Termination of RAC Motoring Services Acquisition
On May 21, 1998, we announced that we reached definitive agreements with
the Board of Directors of Royal Automobile Club ("RAC") to purchase RAC Motoring
Services ("RACMS") for total consideration of pound sterling 450 million, or
approximately $735 million in cash. On February 4, 1999, the U.K. Secretary of
State for Trade and Industry cleared our proposed acquisition of RACMS on the
condition that we divest our Green Flag breakdown assistance business. We did
not regard this proposed condition as reasonably acceptable or commercially
feasible and therefore we have determined not to proceed with the acquisition of
RACMS.
Matters Relating to the Accounting Irregularities and Accounting Policy Change
Accounting Irregularities
On April 15, 1998, we announced that in the course of transferring
responsibility for our accounting functions from Cendant personnel associated
with CUC prior to the Merger to Cendant personnel associated with HFS before the
Merger and preparing for the reporting of first quarter 1998 financial results,
we discovered accounting irregularities in certain CUC business units. As a
result, we, together with our counsel and assisted by auditors, immediately
began an intensive investigation (the "Company Investigation"). In addition, our
Audit Committee engaged Willkie Farr & Gallagher ("Willkie Farr") as special
legal counsel and Willkie Farr engaged Arthur Andersen LLP to perform an
independent investigation into these accounting irregularities (the "Audit
Committee Investigation," and together with the Company Investigation, the
"Investigations").
On July 14, 1998, we announced that the accounting irregularities were
greater than those initially discovered in April and that the irregularities
affected the accounting records of the majority of the CUC business units. On
August 13, 1998, we announced that the Company Investigation was complete. On
August 27, 1998, we announced that our Audit Committee had submitted its report
(the "Report") to the Board of Directors on the Audit Committee Investigation
into the accounting irregularities and its conclusions regarding responsibility
for those actions. A copy of the Report has been filed as an exhibit to the
Company's Current Report on Form 8-K dated August 28, 1998.
As a result of the findings of the Investigations, we restated our
previously reported financial results for 1997, 1996 and 1995 and the six months
ended June 30, 1998 and 1997. The 1997 restated amounts also included certain
adjustments related to the former HFS businesses which are substantially
comprised of $47.8 million in reductions to merger-related costs and other
unusual charges ("Unusual Charges") and a $14.5 million decrease in pre-tax
income excluding Unusual Charges, which on a net basis increased 1997 net income
from continuing operations. The 1997 annual and six months results have also
been restated for a change in accounting, effective January 1, 1997, related to
revenue and expense recognition for memberships with a full refund offer (see
Notes 2 and 18 to the Consolidated Financial Statements).
Restated consolidated results, prior to the reclassification of our
Entertainment Publications business unit as a discontinued operation, included
but were not limited to:
Class Action Litigation and Government Investigation
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Annual Report on Form 10-K/A, 70 lawsuits claiming to be class actions, two
lawsuits claiming to be brought derivatively on our behalf and several
individual lawsuits have been filed against us and other defendants. These
lawsuits assert, among other things, various claims under the federal securities
laws, including claims under sections 11, 12 and 15 of the Securities Act of
1933 and sections 10(b), 14(a) and 20(a) of the Rules 10b-5 and 14a-9 under the
Securities Exchange Act of 1934 andstate statutory and common laws, including
claims that financial statements previously issued by us allegedly were false
and misleading and that we allegedly knew or should have know that these
statements allegedly caused the price of our securities to be artificially
inflated. SEE "ITEM 3. LEGAL PROCEEDINGS".
In addition, the staff of the Securities and Exchange Commission (the
"SEC") and the United States Attorney for the District of New Jersey are
conducting investigations relating to the accounting irregularities. The SEC
staff has advised us that its inquiry should not be construed as an indication
by the SEC or its staff that any violations of law have occurred. While we have
made all adjustments considered necessary as a result of the findings of the
Investigations and the restatement of our financial statements for 1997, 1996
and 1995 and the first six months of 1998, we can provide no assurances that
additional adjustments will not be required as a result of these government
investigations.
<PAGE>
Other than the PRIDES litigation discussed below, we do not believe that it
is feasible to predict or determine the final outcome or resolution of these
proceedings and investigations or to estimate the amounts or potential range of
loss with respect to the resolution of these proceedings and investigations. In
addition, the timing of the final resolution of these proceedings and
investigations is uncertain. The possible outcomes or resolutions of these
proceedings and investigations could include judgments against us or settlements
and could require substantial payments by us. Our management believes that
adverse outcomes in such proceedings and investigations or any other resolutions
(including settlements) could have a material impact on our financial condition,
results of operations and cash flows.
Settlement of PRIDES Class Action Litigation
On March 17, 1999, we announced that we reached a final settlement
agreement with plaintiff's counsel representing the class of holders of our
PRIDES securities who purchased their securities on or prior to April 15, 1998
("eligible persons") to settle their class action lawsuit against us. Under the
final settlement agreement, eligible persons will receive a new security -- a
Right -- for each PRIDES security held on April 15, 1998. Current holders of
PRIDES will not receive any Rights (unless they also held PRIDES on April 15,
1998). We had originally announced a preliminary agreement in principle to
settle such lawsuit on January 7, 1999. The final agreement maintained the basic
structure and accounting treatment as the preliminary agreement.
Based on the settlement agreement, we recorded an after tax charge of
approximately $228 million, or $0.26 per diluted share ($351 million pre-tax),
in the fourth quarter of 1998 associated with the settlement agreement in
principle to settle the PRIDES securities class action. We recorded an increase
in additional paid-in capital of $350 million offset by a decrease in retained
earnings of $228 million resulting in a net increase in stockholders' equity of
$122 million as a result of the prospective issuance of the Rights. As a result,
the settlement should not reduce net book value. In addition, the settlement is
not expected to reduce 1999 earnings per share unless our common stock price
materially appreciates. SEE "ITEM 3. LEGAL PROCEEDINGS" for a more detailed
description of the settlement.
Management and Corporate Governance Changes
On July 28, 1998, Walter A. Forbes resigned as Chairman of the Company and
as a member of the Board of Directors. Henry R. Silverman, Chief Executive
Officer of the Company, was unanimously elected by the Board of Directors to be
Chairman and continues to serve as our Chief Executive Officer and President.
Since July 28, 1998, ten members of the Board formerly associated with CUC also
resigned.
On July 28, 1998, the Board also approved the adoption of Amended and
Restated By-Laws of the Company and voted to eliminate the governance plan
adopted as part of the Merger, resulting in the elimination of the 80%
super-majority vote requirement provisions of our By-Laws relating to the
composition of the Board and the limitations on the removal of the Chairman and
the Chief Executive Officer.
* * *
Financial Information
Financial information about our industry segments may be found in Note 26
to our consolidated financial statements presented in Item 8 of this Annual
Report on Form 10-K/A and incorporated herein by reference.
<PAGE>
Forward Looking Statements
We make statements about our future results in this Annual Report on Form
10-K/A that may constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are based
on our current expectations and the current economic environment. We caution you
that these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed or implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to
integrate and operate successfully acquired businesses and the
risks associated with such businesses, including the merger that
created Cendant and the NPC acquisition;
o our ability to successfully divest non-core assets and implement our new
internet strategy (described in "--Recent Developments");
o our ability to develop and implement operational and financial systems to
manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by
financing arrangements; and
o our ability and our vendors', franchisees' and customers' ability to complete
the necessary actions to achieve a year 2000 conversion for computer systems
and applications.
We derived the forward-looking statements in this Annual Report on Form
10-K/A (including the documents incorporated by reference in this Annual Report
on Form 10-K/A) from the foregoing factors and from other factors and
assumptions, and the failure of such assumptions to be realized as well as other
factors may also cause actual results to differ materially from those projected.
We assume no obligation to publicly correct or update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements or if we later become aware
that they are not likely to be achieved.
Principal Executive Offices
Our principal executive offices are located at 9 West 57th Street, New
York, New York 10019 (telephone number: (212) 413-1800).
<PAGE>
TRAVEL DIVISION
THE TRAVEL SEGMENT
The Travel Segment consists of our lodging franchise services, timeshare
exchange, and Avis car rental franchise businesses and represented approximately
21%, 24% and 14% of our revenues for the year ended December 31, 1998, 1997 and
1996, respectively.
Lodging Franchise Business
General. The lodging industry can be divided into three broad segments
based on price and services: luxury or upscale, which typically charge room
rates above $82 per night; middle market, with room rates generally between $55
and $81 per night; and economy, where room rates generally are less than $54 per
night. Of our franchised brand names, Ramada, Howard Johnson and Wingate Inn
compete principally in the middle market segment and Days Inn, Knights Inn,
Super 8, Travelodge and Villager Lodge ("Villager") compete primarily in the
economy segment, which is currently the fastest growing segment of the industry.
As franchisor of lodging facilities, we provide a number of services
designed to directly or indirectly increase hotel occupancy rates, revenues and
profitability, the most important of which is a centralized brand-specific
national reservations system. Similarly, brand awareness derived from nationally
recognized brand names, supported by national advertising and marketing
campaigns, can increase the desirability of a hotel property to prospective
guests. We believe that, in general, national franchise brands with a greater
number of hotels enjoy greater brand awareness among potential hotel guests, and
thus are perceived as more valuable by existing and prospective franchisees than
brands with a lesser number of properties. Franchise brands can also increase
franchisee property occupancy through national direct sales programs to
businesses, associations and affinity groups.
In determining whether to affiliate with a national franchise brand, hotel
operators compare the costs of affiliation (including the capital expenditures
and operating costs required to meet a brand's quality and operating standards,
plus the ongoing payment of franchise royalties and assessments for the
reservations system and marketing programs) with the increase in gross room
revenue anticipated to be derived from brand membership. Other benefits to brand
affiliation include group purchasing services, training programs, design and
construction advice, and other franchisee support services, all of which provide
the benefits of a national lodging services organization to operators of
independently-owned hotels. We believe that, in general, franchise affiliations
are viewed as enhancing the value of a hotel property by providing economic
benefits to the property.
We entered the lodging franchise business in July 1990 with the acquisition
of the Howard Johnson franchise system and the rights to operate the U.S. Ramada
franchise system. We acquired the Days Inn franchise system in January 1992, the
Super 8 franchise system in April 1993, the Villager Lodge franchise system in
November 1994, the Knights Inn franchise system in August 1995 and the
Travelodge franchise system in January 1996. Each of these acquisitions has
increased our earnings per share. We continue to seek opportunities to acquire
or license additional hotel franchise systems, including established brands in
the upper end of the market, where we are not currently represented. See
"Lodging Franchise Growth" below.
The fee and cost structure of our lodging business provides significant
opportunities for us to increase earnings by increasing the number of franchised
properties. Hotel franchisors, such as our Company, derive substantially all of
their revenue from continuing franchise fees. Continuing franchise fees are
comprised of two components, a royalty portion and a marketing and reservations
portion, both of which are normally charged by the franchisor as a percentage of
the franchisee's gross room revenue. The royalty portion of the franchise fee is
intended to cover the operating expenses of the franchisor, such as expenses
incurred in quality assurance, administrative support and other franchise
services and to provide the franchisor with operating profits. The
marketing/reservations portion of the franchise fee is intended to reimburse the
franchisor for the expenses associated with providing such franchise services as
a national reservations system, national media advertising and certain training
programs.
<PAGE>
Our franchisees are dispersed geographically which minimizes the exposure
to any one hotel owner or geographic region. Of the more than 6,000 properties
and 4,000 franchisees in our systems, no individual hotel owner accounts for
more than 2% of our lodging revenue.
Lodging Franchise Growth. Growth of the franchise systems through the sale
of long-term franchise agreements to operators of existing and newly constructed
hotels is the leading source of revenue and earnings growth in our lodging
franchise business. Franchises are terminated primarily for not paying the
required franchise fees and/or not maintaining compliance with brand quality
assurance standards required pursuant to the applicable franchise agreement.
Lodging Franchise Sales. We market franchises principally to independent
hotel and motel owners, as well as to owners whose property affiliation with
other hotel brands can be terminated. We believe that our existing franchisees
also represent a significant potential market because many own, or may own in
the future, other hotels, which can be converted to our brand names.
Accordingly, a significant factor in our sales strategy is maintaining the
satisfaction of our existing franchisees by providing quality services.
We employ a national franchise sales force consisting of approximately 80
salespeople and sales management personnel, which is divided into several brand
specific sales groups, with regional offices around the country. The sales force
is compensated primarily through commissions. In order to provide broad
marketing of our brands, sales referrals are made among the sales groups and a
referring salesperson is entitled to a commission for a referral which results
in a franchise sale.
We seek to expand our franchise systems and provide marketing and other
franchise services to franchisees on an international basis through a series of
master license agreements with internationally based developers and franchisors.
As of December 31, 1998, our franchising subsidiaries (other than Ramada) have
entered into international master licensing agreements for part or all of 46
countries on six continents. The agreements typically include minimum
development requirements and require payment of an initial development fee in
connection with the execution of the license agreement as well as recurring
franchise fees.
Lodging Franchise Systems. The following is a summary description of our
lodging franchise systems. Information reflects properties that are open and
operating and is presented as of December 31, 1998.
<TABLE>
<CAPTION>
PRIMARY AVG. ROOMS # OF # OF DOMESTIC
BRAND MARKET SERVED PER PROPERTY PROPERTIES ROOMS INTERNATIONAL*
- ----------------- --------------- ------------ ---------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Days Inn Lower Economy 90 1,830 163,999 International(1)
Howard Johnson Mid-market 106 489 51,807 International(2)
Knights Inn Lower Economy 82 222 18,196 International
Ramada Mid-market 131 1004 131,591 Domestic
Super 8 Economy 61 1759 108,111 International(3)
Travelodge Upper Economy 82 521 42,857 Domestic(1)(5)
Villager Lodge Lower Economy 74 99 7,284 International(4)
Wingate Upper Mid-market 94 54 5,051 International(4)
</TABLE>
- ---------------
* Description of rights owned or licensed.
(1) Includes properties in Mexico, Canada, China, South Africa, India, Uruguay
and the Philippines.
(2) Includes Mexico, Canada, Colombia, Israel, Venezuela, Malta, U.A.E. and the
Dominican Republic.
(3) Includes properties in Canada and Singapore.
(4) No international properties currently open and operating.
(5) Rights include all of North America.
<PAGE>
Operations - Lodging. Our organization is designed to provide a high level
of service to our franchisees while maintaining a controlled level of overhead
expense. In the lodging segment, expenses related to marketing and reservations
services are budgeted to match marketing and reservation fees each year.
National Reservations Systems. Unlike many other franchise businesses (such
as restaurants), the lodging business is characterized by remote purchasing
through travel agencies and through use by consumers of toll-free telephone
numbers. Each of our reservation systems is independently operated, focusing on
its specific brand and franchise system, and is comprised of one or more
nationally advertised toll-free telephone numbers, reservation agents who accept
inbound calls, a computer operation that processes reservations, and automated
links which accept reservations from travel agents and other travel providers,
such as airlines, and which report reservations made through the system to each
franchisee property. Each reservation agent handles reservation requests and
inquiries for only one of our franchise systems and there is no "cross selling"
of franchise systems to consumers. We maintain seven reservations centers that
are located in Knoxville and Elizabethton, Tennessee; Phoenix, Arizona; Winner
and Aberdeen, South Dakota; Orangeburg, South Carolina and Saint John, New
Brunswick, Canada.
Lodging Franchise Agreements. Our lodging franchise agreements grant the
right to utilize one of the brand names associated our lodging franchise systems
to lodging facility owners or operators under long-term franchise agreements. An
annual average of 2.1% of our existing franchise agreements are scheduled to
expire from January 1, 1999 through December 31, 2006, with no more than 2.8%
(in 2002) scheduled to expire in any one of those years.
The current standard agreements generally are for 15-year terms for
converted properties and 20-year terms for newly constructed properties and
generally require, among other obligations, franchisees to pay a minimum initial
fee based on property size and type, as well as continuing franchise fees
comprised of royalty fees and marketing/reservation fees based on gross room
revenues.
Under the terms of the standard franchise agreements in effect at December
31, 1998, franchisees are typically required to pay recurring fees comprised of
a royalty portion and a reservation/marketing portion, calculated as a
percentage of annual gross room revenue that range from 7.0% to 8.8%. We
discount fees from the standard rates from time to time and under certain
circumstances.
Our typical franchise agreement is terminable by us upon the franchisee's
failure to maintain certain quality standards, to pay franchise fees or other
charges or to meet other specified obligations. In the event of such
termination, we are typically entitled to be compensated for lost revenues in an
amount equal to the franchise fees accrued during periods specified in the
respective franchise agreements which are generally between one and five years.
Lodging Service Marks and Other Intellectual Property. The service marks
"Days Inn," "Ramada," "Howard Johnson," "Super 8," "Travelodge" and related
logos are material to our business. We, through our franchisees, actively use
these marks. All of the material marks in each franchise system are registered
(or have applications pending for registration) with the United States Patent
and Trademark Office. We own the marks relating to the Days Inn system, the
Howard Johnson system, the Knights Inn system, the Super 8 system, the
Travelodge system (in North America), the Villager Lodge system and the Wingate
Inn system through our subsidiaries.
We franchise the service mark "Ramada" and related marks, Ramada brands and
logos (the "Ramada Marks") to lodging facility owners in the United States
pursuant to two license agreements (the "Ramada License Agreements") between an
indirect subsidiary of Marriott Corporation ("Licensor") and Ramada Franchise
Systems, Inc. ("RFS"), our wholly-owned subsidiary. The Ramada License
Agreements limit RFS's use of the Ramada Marks to the U.S. market.
<PAGE>
The Ramada License Agreements have initial terms terminating on March 31,
2024. At the end of the initial terms, RFS has the right either (i) to extend
the Ramada License Agreements, (ii) to purchase the Ramada Marks for their fair
market value at the date of purchase, subject to certain minimums after the
initial terms, or (iii) to terminate the Ramada License Agreements. The Ramada
License Agreements require that RFS pay license fees to the Licensor calculated
on the basis of percentages of annual gross room sales, subject to certain
minimums and maximums as specified in each Ramada License Agreement. RFS
received approximately $46 million in royalties from its Ramada franchisees in
1998 and paid the Licensor approximately $23 million in license fees.
The Ramada License Agreements are subject to certain termination events
relating to, among other things, (i) the failure to maintain aggregate annual
gross room sales minimum amounts stated in the Ramada License Agreements, (ii)
the maintenance by us of a minimum net worth of $50 million (however, this
minimum net worth requirement may be satisfied by a guaranty of an affiliate of
ours with a net worth of at least $50 million or by an irrevocable letter of
credit (or similar form of third-party credit support)), (iii) non-payment of
royalties, (iv) failure to maintain registrations on the Ramada Marks and to
take reasonable actions to stop infringements, (v) failure to pay certain
liabilities specified by the Restructuring Agreement, dated July 15, 1991, by
and among New World Development Co., Ltd. (a predecessor to Licensor), Ramada
International Hotels and Resorts, Inc., Ramada Inc., Franchise System Holdings,
Inc., the Company and RFS and (vi) failure to maintain appropriate hotel
standards of service and quality. A termination of the Ramada License Agreements
would result in the loss of the income stream from franchising the Ramada brand
names and could result in the payment by us of liquidated damages equal to three
years of license fees. We do not believe that it will have difficulty complying
with all of the material terms of the Ramada License Agreements.
Lodging Competition. Competition among the national lodging brand
franchisors to grow their franchise systems is intense. Our primary national
lodging brand competitors are the Holiday Inn(R)and Best Western(R) brands and
Choice Hotels, which franchises seven brands, including the Comfort Inn(R),
Quality Inn(R)and Econo Lodge(R) brands. Days Inn, Travelodge and Super 8
properties principally compete with Comfort Inn, Red Roof Inn(R), and Econo
Lodge in the limited service economy sector of the market. The chief competitor
of Ramada, Howard Johnson and Wingate Inn properties, which compete in the
middle market segment of the hotel industry, is Holiday Inn(R) and Hampton
Inn(R). Our Knights Inn and Travelodge brands compete with Motel 6(R)
properties. In addition, a lodging facility owner may choose not to affiliate
with a franchisor but to remain independent.
We believe that competition for the sale of franchises in the lodging
industry is based principally upon the perceived value and quality of the brand
and services offered to franchisees, as well as the nature of those services. We
believe that prospective franchisees value a franchise based upon their view of
the relationship of conversion costs and future charges to the potential for
increased revenue and profitability. The reputation of the franchisor among
existing franchisees is also a factor, which may lead a property owner to select
a particular affiliation. We also believe that the perceived value of its brand
names to prospective franchisees is, to some extent, a function of the success
of its existing franchisees.
The ability of our lodging franchisees to compete in the lodging industry
is important to our prospects for growth, although, because franchise fees are
based on franchisee gross room revenue, our revenue is not directly dependent on
franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
and local economic conditions. The effect of these conditions on our results of
operations is substantially reduced by virtue of the diverse geographical
locations of our franchises.
<PAGE>
Lodging Seasonality. The principal source of lodging revenue for us is
based upon the annual gross room revenue of franchised properties. As a result,
our revenue from the lodging franchise business experiences seasonal lodging
revenue patterns similar to those of the hotel industry wherein the summer
months, because of increases in leisure travel, produce higher revenues than
other periods during the year. Therefore, any occurrence that disrupts travel
patterns during the summer period could have a material adverse effort on the
franchisee's annual performance and effect our annual performance.
The Timeshare Exchange Business
General. We acquired Resort Condominiums International, Inc. (now Resort
Condominiums International, LLC), on November 12, 1996. Our RCI subsidiary is
the world's largest provider of timeshare vacation exchange opportunities and
timeshare services for more than 2.5 million timeshare households from more than
200 nations and more than 3,400 resorts in more than 90 countries around the
world. RCI's business consists primarily of the operation of an exchange program
for owners of condominium timeshares or whole units at affiliated resorts, the
publication of magazines and other periodicals related to the vacation and
timeshare industry, travel related services, resort management, integrated
software systems and service and consulting services. RCI has significant
operations in North America, Europe, the Middle East, Latin America, Africa,
Australia, and the Pacific Rim. RCI has more than 3,900 employees worldwide.
The resort component of the leisure industry is primarily serviced by two
alternatives for overnight accommodations: commercial lodging establishments and
timeshare resorts. Commercial lodging consists principally of: a) hotels and
motels in which a room is rented on a nightly, weekly or monthly basis for the
duration of the visit and b) rentals of privately-owned condominium units or
homes. Oftentimes, this segment is designed to serve both the leisure and
business traveler. Timeshare resorts present an economical and reliable
alternative to commercial lodging for many vacationers who want to experience
the added benefits associated with ownership. Timeshare resorts are purposely
designed and operated for the needs and enjoyment of the leisure traveler.
Resort timesharing -- also referred to as vacation ownership -- is the
shared ownership and/or periodic use of property by a number of users or owners
for a defined period of years or in perpetuity. An example of a simple form of
timeshare is a condominium unit that is owned by fifty-one persons, with each
person having the right to use the unit for one week of every year and with one
week set aside for maintenance. In the United States, industry sources estimate
that the average price of such a timeshare is about $10,000, plus a yearly
maintenance fee of approximately $350 per interval owned. Based upon information
published about the industry, we believe that 1998 sales of timeshares exceeded
$6 billion worldwide. Two principal segments make up the timeshare exchange
industry: owners of timeshare interest (consumers) and resort properties
(developers/operators). Industry sources have estimated that the total number of
owner households of timeshare interests is nearly 4.5 million worldwide, while
the total number of timeshare resorts worldwide has been estimated to be nearly
5,000. The timeshare exchange industry derives revenue from annual subscribing
membership fees paid by owners of timeshare interests, fees paid by such owners
for each exchange and fees paid by members and resort affiliates for various
other products and services.
The "RCI Network" provides RCI members who own timeshares at RCI-affiliated
resorts the capability to exchange their timeshare vacation accommodations in
any given year for comparable value accommodations at other RCI-affiliated
resorts. Approximately 1.2 million members of the RCI Network, representing
approximately 50% of the total members of the RCI Network reside outside of the
United States. RCI's membership volume has grown at a compound annual rate for
the last five years of approximately 8%, while exchange volumes have grown at a
compound annual rate of approximately 8% for the same time period.
RCI provides members of the RCI Network with access to both domestic and
international timeshare resorts, publications regarding timeshare exchange
opportunities and other travel-related services, including discounted purchasing
programs. In 1998, members in the United States paid an average annual
subscribing membership fee of $66 as well as an average exchange fee of $120 for
every exchange arranged by RCI. In 1998, membership and exchange fees totaled
approximately $330 million and RCI arranged more than 1.8 million exchanges.
<PAGE>
Developers of resorts affiliated with the RCI Network typically pay the
first year subscribing membership fee for new owner/members upon the sale of the
timeshare interest.
Timeshare Exchange Business Growth. The timeshare exchange industry has
experienced significant growth over the past decade. We believe that the factors
driving this growth include the demographic trend toward older, more affluent
Americans who travel more frequently; the entrance of major hospitality and
entertainment companies into timeshare development; a worldwide acceptance of
the timeshare concept; and an increasing focus on leisure activities, family
travel and a desire for value, variety and flexibility in a vacation experience.
We believe that future growth of the timeshare exchange industry will be
determined by general economic conditions both in the U.S. and worldwide, the
public image of the industry, improved approaches to marketing and sales, a
greater variety of products and price points, the broadening of the timeshare
market and a variety of other factors. Accordingly, we cannot predict if future
growth trends will continue at rates comparable to those of the recent past.
Operations. Our timeshare exchange business is designed to provide high
quality, leisure travel services to its members and cost-effective,
single-source support services to its affiliated timeshare resorts. Most members
are acquired from timeshare developers who purchase an initial RCI subscribing
membership for each buyer at the time the timeshare interval is sold. A small
percentage of members are acquired through direct solicitation activities of
RCI.
Member Services. International Exchange System. Members are served through
a network of call centers located in more than 20 countries throughout the
world. These call centers are staffed by approximately 1,900 people. Major
regional call and information support centers are located in Indianapolis, Saint
John (Canada), Kettering (England), Cork (Ireland), Mexico City and Singapore.
All members receive a directory that lists resorts available through the
exchange system, a periodic magazine and other information related to the
exchange system and available travel services. These materials are published in
various languages.
Travel Services. In addition to exchange services, RCI's call centers also
engage in telemarketing and cross selling of other ancillary travel and
hospitality services. These services are offered to a majority of members
depending on their location. RCI provides travel services to U.S. members of the
RCI Network through its affiliate, RCI Travel, Inc. ("RCIT"). On a global basis,
RCI provides travel services through entities operating in local jurisdictions
(hereinafter, RCIT and its local entities are referred to as "Travel Agencies").
Travel Agencies provide airline reservations and airline ticket sales to members
in conjunction with the arrangement of their timeshare exchanges, as well as
providing other types of travel services, including hotel accommodations, car
rentals, cruises and tours. Travel Agencies also from time to time offer travel
packages utilizing resort developers' unsold inventory to generate both revenue
and prospective timeshare purchasers to affiliated resorts.
Resort Services. Resort Affiliations. Growth of the timeshare business is
dependent on the sale of timeshare units by affiliated resorts. RCI affiliates
international brand names and independent developers, owners' associations and
vacation clubs. We believe that national lodging and hospitality companies are
attracted to the timeshare concept because of the industry's relatively low
product cost and high profit margins, and the recognition that timeshare resorts
provide an attractive alternative to the traditional hotel-based vacation and
allow the hotel companies to leverage their brands into additional resort
markets where demand exists for accommodations beyond traditional rental-based
lodging operations. Today, 7 of every 10 timeshare resorts worldwide are
affiliated with RCI. We also believe that RCI's existing affiliates represent a
significant potential market because many developers and resort managers may
become involved in additional resorts in the future which can be affiliated with
RCI. Accordingly, a significant factor in RCI's growth strategy is maintaining
the satisfaction of its existing affiliates by providing quality support
services.
Timeshare Consulting. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. ("RCIC"). These services include
comprehensive market research, site selection, strategic planning, community
economic impact studies, resort concept evaluation, financial feasibility
assessments, on-site studies of existing resort developments, and tailored sales
and marketing plans.
<PAGE>
Resort Management Software. RCI provides computer software systems to
timeshare resorts and developers through its affiliate, Resort Computer
Corporation ("RCC"). RCC provides software that integrates resort functions such
as sales, accounting, inventory, maintenance, dues and reservations. Our RCC
Premier information management software is believed to be the only technology
available today that can fully support timeshare club operations and points
based reservation systems.
Property Management. RCI provides resort property management services
through its affiliate, RCI Management, Inc. ("RCIM"). RCIM is a single source
for any and all resort management services, and offers a menu including
hospitality services, a centralized reservations service center, advanced
reservations technology, human resources expertise and owners' association
administration.
Timeshare Property Affiliation Agreements. More than 3,400 timeshare
resorts are affiliated with the RCI Network, of which more than 1,400 resorts
are located in the United States and Canada, more than 1,260 in Europe and
Africa, more than 475 in Mexico and Latin America, and more than 320 in the
Asia-Pacific region. The terms of RCI's affiliation agreement with its
affiliates generally require that the developer enroll each new timeshare
purchaser at the resort as a subscribing member of RCI, license the affiliated
resort to use the RCI name and trademarks for certain purposes, set forth the
materials and services RCI will provide to the affiliate, and generally describe
RCI's expectations of the resort's management. The affiliation agreement also
includes stipulations for representation of the exchange program, minimum
enrollment requirements and treatment of exchange guests. Affiliation agreements
are typically for a term of five years, and automatically renew thereafter for
terms of one to five years unless either party takes affirmative action to
terminate the relationship. RCI makes available a wide variety of goods and
services to its affiliated developers, including publications, advertising,
sales and marketing materials, timeshare consulting services, resort management
software, travel packaging and property management services.
RCI Licensed Marks and Intellectual Property. The service marks "RCI",
"Resort Condominiums International" and related trademarks and logos are
material to RCI's business. RCI and its subsidiaries actively use the marks. All
of the material marks used in RCI's business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office as well as major countries worldwide where RCI or its
subsidiaries have significant operations. We own the marks used in RCI's
business.
Competition. The global timeshare exchange industry is comprised of a
number of entities, including resort developers and owners. RCI's largest
competitor is Interval International Inc. ("Interval"), formerly our wholly
owned subsidiary, and a few other smaller firms. Based upon industry sources, we
believe that 98% of the nearly 5,000 timeshare resorts in the world are
affiliated with either RCI or Interval. Based upon 1997 published statistics and
our information, RCI had over 2.5 million timeshare households that are members,
while Interval had approximately 850,000 timeshare households that are members.
Also, in 1997, RCI confirmed more than 1.8 million exchange transactions while
Interval confirmed approximately 480,000 transactions. As a result, based on
1997 business volume, RCI services approximately 73% of members and
approximately 79% of exchange transactions. RCI is bound by the terms of a
Consent Order issued by the Federal Trade Commission which restricts the right
of RCI to solicit, induce, or attempt to induce clients of Interval
International Inc. to either terminate or not to renew their existing Interval
contracts. The proposed Consent Order contains certain other restrictions. The
restrictions generally expire on or before December 17, 1999.
Seasonality. A principal source of timeshare revenue relates to exchange
services to members. Since members have historically shown a tendency to plan
their vacations in the first quarter of the year, revenues are generally
slightly higher in the first quarter in comparison to other quarters of the
year. The Company cannot predict whether this trend will continue in the future
as the timeshare business expands outside of the United States and Europe, and
as global travel patterns shift with the aging of the world population.
<PAGE>
Avis Car Rental Franchise Business
General. On October 17, 1996, we completed the acquisition of all of the
outstanding capital stock of Avis, Inc. which together with its subsidiaries,
licensees and affiliates, operated the Avis Worldwide Vehicle System (the "Avis
System"). As part of its previously announced plan, on September 24, 1997, we
completed the initial public offering ("IPO") of our subsidiary, Avis Rent A
Car, Inc. ("ARAC"), which owned and operated the company-owned Avis car rental
operations. We currently own approximately 19% of the outstanding Common Stock
of ARAC. We no longer operate any car rental locations but own the Avis brand
name and the Avis System, which we license to our franchisees, including ARAC,
the largest Avis System franchisee.
The Avis System is comprised of approximately 4,200 rental locations,
including locations at the largest airports and cities in the United States and
approximately 160 other countries and territories and a fleet of approximately
404,000 vehicles during the peak season, all of which are granted by
franchisees. Approximately 90% of the Avis System rental revenues in the United
States are received from locations operated by ARAC directly or under agency
arrangements, with the remainder being received from locations operated by
independent licensees. The Avis System in Europe, Africa, part of Asia and the
Middle East is operated under franchise by Avis Europe Ltd. ("Avis Europe").
Industry. The car rental industry provides vehicle rentals to business and
individual customers worldwide. The industry has been composed of two principal
segments: general use (mainly at airport and downtown locations) and local
(mainly at downtown and suburban locations). The car rental industry rents
primarily from on-airport, near-airport, downtown and suburban locations to
business and leisure travelers and to individuals who have lost the use of their
vehicles through accident, theft or breakdown. In addition to revenue from
vehicle rentals, the industry derives significant revenue from the sale of
rental related products such as insurance, refueling services and loss damage
waivers (a waiver of the franchisee's right to make a renter pay for damage to
the rented car).
Car renters generally are (i) business travelers renting under negotiated
contractual arrangements between specified rental companies and the travelers'
employers, (ii) business travelers who do not rent under negotiated contractual
arrangements (but who may receive discounts through travel, professional or
other organizations), (iii) leisure travelers and (iv) renters who have lost the
use of their own vehicles through accident, theft or breakdown. Contractual
arrangements normally are the result of negotiations between rental companies
and large corporations, based upon rates, billing and service arrangements, and
influenced by reliability and renter convenience. Business travelers who are not
parties to negotiated contractual arrangements and leisure travelers generally
are influenced by advertising, renter convenience and access to special rates
because of membership in travel, professional and other organizations.
Avis System and Wizard System Services. The Avis System provides Avis
System franchisees access to the benefits of a variety of services, including
(i) comprehensive safety initiatives, including the "Avis Cares" Safe Driving
Program, which offers vehicle safety information, directional assistance such as
satellite guidance, regional maps, weather reports and specialized equipment for
travelers with disabilities; (ii) standardized system identity for rental
location presentation and uniforms; (iii) training program and business
policies, quality of service standards and data designed to monitor service
commitment levels; (iv) marketing/advertising/public relations support for
national consumer promotions including Frequent Flyer/Frequent Stay programs and
the Avis System internet website; and (v) brand awareness of the Avis System
through the familiar "We try harder" service announcements.
Avis System franchisees are also provided with access to the Wizard System,
a reservations, data processing and information management system for the
vehicle rental business. The Wizard System is linked to all major travel
networks on six continents through telephone lines and satellite communications.
Direct access with other computerized reservations systems allows real-time
processing for travel agents and corporate travel departments. Among the
principal features of the Wizard System are:
<PAGE>
o an advanced graphical interface reservation system;
o "Roving Rapid Return," which permits customers who are returning
vehicles to obtain completed charge records from radio-connected
"Roving Rapid Return" agents who complete and deliver the charge
record at the vehicle as it is being returned;
o "Preferred Service," an expedited rental service that provides
customers with a preferred service rental record printed prior to
arrival, a pre-assigned vehicle and fast convenient check out;
o "Wizard on Wheels," which enables the Avis System locations to
assign vehicles and complete rental agreements while customers are
being transported to the vehicle;
o "Flight Arrival Notification," a flight arrival notification
system that alerts the rental location when flights have arrived
so that vehicles can be assigned and paperwork prepared
automatically;
o "Avis Link," which automatically identifies the fact that a user
of a major credit card is entitled to special rental rates and
conditions, and therefore sharply reduces the number of instances
in which the Company inadvertently fails to give renters the
benefits of negotiated rate arrangements to which they are
entitled;
o interactive interfaces through third-party computerized
reservation systems; and
o sophisticated automated ready-line programs that, among other
things, enable rental agents to ensure that a customer who rents a
particular type of vehicle will receive the available vehicle of
that type which has the lowest mileage.
In 1998, the Wizard System processed approximately 30.8 million incoming
customer calls, during which customers inquired about locations, rates and
availability and placed or modified reservations. In addition, millions of
inquiries and reservations come to franchisees through travel agents and travel
industry partners, such as airlines. Regardless of where in the world a customer
may be located, the Wizard System is designed to ensure that availability of
vehicles, rates and personal profile information is accurately delivered at the
proper time to the customer's rental destination.
Avis Licensed Marks and Intellectual Property. The service mark "Avis",
related marks incorporating the word "Avis", and related logos are material to
our business. Our subsidiaries, joint ventures and licensees, actively use these
marks. All of the material marks used in Avis's business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office. We own the marks used in Avis's business. The purposes for
which we are authorized to use the marks include use in connection with
businesses in addition to car rental and related businesses, including, but not
limited to, equipment rental and leasing, hotels, insurance and information
services.
Licensees and License Agreements. We have 68 independent licensees that
operate locations in the United States. The largest licensee, ARAC, accounts for
approximately 89% of all United States licensees' rentals. Other than ARAC,
certain licensees in the United States pay us a fee equal to 5% of their total
time and mileage charges, less all customer discounts, of which we are required
to pay 40% for corporate licensee-related programs, while 6 licensees pay 8% of
their gross revenue. Licensees outside the United States normally pay higher
fees. Other than ARAC, our United States licensees currently pay .54 cents per
rental agreement for use of certain portions of the Wizard System, and they are
charged for use of other aspects of the Wizard System.
<PAGE>
ARAC has entered into a Master License Agreement with the Company, which
grants ARAC the right to operate the Avis vehicle rental business in certain
specified territories. Pursuant to the Master License Agreement, ARAC has agreed
to pay us a monthly base royalty of 3.0% of ARAC's gross revenue. In addition,
ARAC has agreed to pay a supplemental royalty of 1.1 % of gross revenue payable
quarterly in arrears which will increase 0.1% per year in each of the following
three years thereafter to a maximum of 1.5% (the "Supplemental Fee"). These fees
have been paid by ARAC since January 1, 1997. Until the fifth anniversary of the
effective date of the Master License Agreement, the Supplemental Fee or a
portion thereof may be deferred by ARAC if ARAC does not attain certain
financial targets.
In 1997, Avis Europe's previously paidup license for Europe, the Middle
East and Africa was modified to provide for a paid-up license only as to Europe
and the Middle East. Avis Europe will pay us annual royalties for Africa and a
defined portion of Asia which covers the area between 60E longitude and 150E
longitude, excluding Australia, New Zealand and Papua New Guinea. The Avis
Europe license expires on November 30, 2036, unless earlier termination is
effected in accordance with the license terms. Avis Europe also entered into a
Preferred Alliance Agreement with us under which Avis Europe became a preferred
alliance provider for car rentals to RCI customers in Europe, Asia and Africa,
and for car rentals to PHH customers needing replacement vehicles for fleets
managed by PHH in Europe, Asia and Africa.
Competition. The vehicle rental industry is characterized by intense price
and service competition. In any given location, franchisees may encounter
competition from national, regional and local companies, many of which,
particularly those owned by the major automobile manufacturers, have greater
financial resources than Avis and us. However, because the Company's royalty
fees are based upon the gross revenue of Avis and the other Avis System
franchisees, our revenue is not directly dependent on franchisee profitability.
The franchisees' principal competitors for commercial accounts in the
United States are the Hertz Corporation ("Hertz") and National Car Rental
System, Inc. ("National"). Principal competitors for unaffiliated business and
leisure travelers in the United States are Budget Rent A Car Corporation, Hertz
and National, and, particularly with regard to leisure travelers, Alamo
Rent-A-Car Inc. In addition, the franchisees compete with a variety of smaller
vehicle rental companies throughout the country.
Seasonality. The car rental franchise business is subject to seasonal
variations in customer demand, with the third quarter of the year, which covers
the summer vacation period, representing the peak season for vehicle rentals.
Therefore, any occurrence that disrupts travel patterns during the summer period
could have a material adverse effect on the franchisee's annual performance and
affect our annual financial performance. The fourth quarter is generally the
weakest financial quarter for the Avis System because there is limited leisure
travel and a greater potential for adverse weather conditions at such time.
FLEET SEGMENT
General. The Fleet Segment represented approximately 8%, 8% and 10% of our
revenues for the year ended December 31, 1998, 1997 and 1996, respectively.
Through our PHH Vehicle Management Services Corporation and PHH Management
Services PLC subsidiaries, we offer a full range of fully integrated fleet
management services to corporate clients and government agencies comprising over
780,000 vehicles under management on a worldwide basis. These services include
vehicle leasing, advisory services and fleet management services for a broad
range of vehicle fleets. Advisory services include fleet policy analysis and
recommendations, benchmarking, and vehicle recommendations and specifications.
In addition, we provide managerial services which include ordering and
purchasing vehicles, arranging for their delivery through dealerships located
throughout the United States, Canada, the United Kingdom, Germany and the
Republic of Ireland, as well as capabilities throughout Europe, administration
of the title and registration process, as well as tax and insurance
requirements, pursuing warranty claims with vehicle manufacturers and
re-marketing used vehicles. We also offer various leasing plans for our vehicle
leasing programs, financed primarily through the issuance of commercial paper
and medium-term notes and through unsecured borrowings under revolving credit
agreements, securitization financing arrangements and bank lines of credit.
Through our PHH Vehicle Management Services and Wright Express subsidiaries
in the United States and our Harper Group Limited subsidiary in the U.K., we
also offer fuel and expense management programs to corporations and government
agencies for the effective management and control of automotive business travel
expenses. By utilizing our service cards issued under the fuel and expense
management programs, a client's representatives are able to purchase various
products and services such as gasoline, tires, batteries, glass and maintenance
services at numerous outlets.
<PAGE>
We also provide fuel and expense management programs and a centralized
billing service for companies operating truck fleets in each of the United
Kingdom, Republic of Ireland and Germany. Drivers of the clients' trucks are
furnished with courtesy cards together with a directory listing the names of
strategically located truck stops and service stations, which participate in
this program. Service fees are earned for billing, collection and record keeping
services and for assuming credit risk. These fees are paid by the truck stop or
service stations and/or the fleet operator and are based upon the total dollar
amount of fuel purchased or the number of transactions processed.
Products. Our fleet management services are divided into two principal
products: (1) Asset Based Products, and (2) Fee Based Products.
Asset Based Products represent the services our clients require to lease a
vehicle that includes vehicle acquisition, vehicle re-marketing, financing, and
fleet management consulting. We lease in excess of 350,000 units on a worldwide
basis through both open-end lease structures and closed end structures. Open-end
leases are the prevalent structure in North America representing 96% of the
total vehicles financed in North America and 86% of the total vehicles financed
worldwide. The open-end leases can be structured on either a fixed rate or
floating rate basis (where the interest component of the lease payment changes
month to month based upon an index) depending upon client preference. The
open-end leases are typically structured with a 12-month minimum lease term,
with month to month renewals thereafter. The typical unit remains under lease
for approximately 34 months. A client receives a full range of services in
exchange for a monthly rental payment that includes a management fee. The
residual risk on the value of the vehicle at the end of the lease term remains
with the lessee under an open-end lease, except for a small amount that is
retained by the lessor.
Closed-end leases are structured with a fixed term with the lessor
retaining the vehicle residual risk. The most prevalent lease terms are 24
months, 36 months, and 48 months. The closed end structure is preferred in
Europe due to certain accounting regulations. The closed-end lease structure is
utilized by approximately 71% of the vehicles leased in Europe, but only 14% of
the vehicles leased on a worldwide basis. We utilize independent third party
valuations and internal projections to set the residuals utilized for these
leases.
The Fee Based Products are designed to effectively manage costs and enhance
driver productivity. The three main Fee Based Products are Fuel Services,
Maintenance Services and Accident Management. Fuel Services represents the
utilization of our proprietary cards to access fuel through a network of
franchised and independent fuel stations. The cards operate as a universal card
with centralized billing designed to measure and manage costs. In the United
States, Wright Express is the leading fleet fuel cards supplier with over
125,000 fuel facilities in its network and in excess of 1.6 million cards
issued. Wright Express distributes its fuel cards and related offerings through
three primary channels: (1) the WEX-branded Universal Card, which is issued
directly to fleets by Wright Express, (2) the Private Label Card, under which
Wright Express provides private label fuel cards and related services to
commercial fleet customers of major petroleum companies, and (3) Co-Branded
Marketing, under which Wright Express fuel cards are co-branded and issued in
conjunction with products and services of partners such as commercial vehicle
leasing companies. In the UK, our Harper Group Limited and Cendant Business
Answers PLC subsidiaries, utilizing the All Star and Dial brands, maintain the
largest independent fueling network with more than 12,000 fueling sites and more
than 1.2 million cards in circulation.
<PAGE>
We offer customer vehicle maintenance charge cards that are used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provide customers with benefits such as (1) negotiated discounts off full retail
prices through our convenient supplier network, (2) access to our in-house team
of certified maintenance experts that monitor each card transaction for policy
compliance, reasonability, and cost effectiveness, and (3) inclusion of vehicle
maintenance card transactions in a consolidated information and billing database
that helps evaluate overall fleet performance and costs. We maintain an
extensive network of service providers in the United States, Canada, and the
United Kingdom to ensure ease of use by the client's drivers.
We also provide our clients with comprehensive accident management services
such as (1) providing immediate assistance after receiving the initial accident
report from the driver (i.e. facilitating emergency towing services and car
rental assistance, etc.) (2) organizing the entire vehicle appraisal and repair
process through a network of preferred repair and body shops, and (3)
coordinating and negotiating potential accident claims. Customers receive
significant benefits from our accident management services such as (1)
convenient coordinated 24-hour assistance from our call center, (2) access to
our leverage with the repair and body shops included in our preferred supplier
network (the largest in the industry), which typically provides customers with
extremely favorable repair terms and (3) expertise of our damage specialists,
who ensure that vehicle appraisals and repairs are appropriate, cost-efficient,
and in accordance with each customer's specific repair policy.
Competitive Conditions. The principal factors for competition in vehicle
management services are service quality and price. We are competitively
positioned as a fully integrated provider of fleet management services with a
broad range of product offerings. We rank second in the United States in the
number of vehicles under management and first in the number of proprietary fuel
and maintenance cards for fleet use in circulation. There are four other major
providers of fleet management service in the United States, hundreds of local
and regional competitors, and numerous niche competitors who focus on only one
or two products and do not offer the fully integrated range of products provided
by us. In the United States, it is estimated that only 45% of fleets are leased
by third party providers. The unpenetrated market and the continued focus by
corporations on cost efficiency and outsourcing will provide the growth platform
in the future.
In the UK, we rank first in both vehicles under management and proprietary
fuel and maintenance cards. We continue to compete against numerous local and
regional competitors. The UK operation has been able to differentiate itself
through its breadth of product offerings.
REAL ESTATE DIVISION
REAL ESTATE FRANCHISE SEGMENT
General. Our Real Estate Franchise Segment represented approximately 9%, 8%
and 8% of our revenue for the year ended December 31, 1998, 1997 and 1996,
respectively. In August 1995, we acquired Century 21 Real Estate Corporation
("CENTURY 21"). Century 21 is the world's largest franchisor of residential real
estate brokerage offices with approximately 6,300 independently owned and
operated franchised offices with approximately 102,000 active sales agents
worldwide. In February 1996, we acquired the ERA franchise system. The ERA
system is a leading residential real estate brokerage franchise system with over
2,600 independently owned and operated franchised offices and more than 29,000
sales agents worldwide. In May 1996, we acquired Coldwell Banker Corporation
("COLDWELL BANKER"), the owner of the world's premier brand for the sale of
million-dollar-plus homes and now the third largest residential real estate
brokerage franchise system with approximately 3,000 independently owned and
operated franchised offices and approximately 72,000 sales agents worldwide.
We believe that application of our franchisee focused management strategies
and techniques can significantly increase the revenues produced by our real
estate brokerage franchise systems while also increasing the quality and
quantity of services provided to franchisees. We believe that independent real
estate brokerage offices currently affiliate with national real estate
franchisors principally to gain the consumer recognition and credibility of a
nationally known and promoted brand name. Brand recognition is especially
important to real estate brokers since homebuyers are generally infrequent users
of brokerage services and have often recently arrived in an area, resulting in
little ability to benefit from word-of-mouth recommendations.
During 1996, we implemented a preferred alliance program which seeks to
capitalize on the dollar volume of home sales brokered by CENTURY 21, COLDWELL
BANKER and ERA agents and the valuable access point these brokerage offices
provide for service providers who wish to reach these home buyers and sellers.
Preferred alliance marketers include providers of property and casualty
insurance, moving and storage services, mortgage and title insurance,
environmental testing services, and sellers of furniture, fixtures and other
household goods.
Our real estate brokerage franchisees are dispersed geographically, which
minimizes the exposure to any one broker or geographic region. During 1997, we
acquired a preferred equity interest in NRT Incorporated ("NRT"), a newly formed
corporation created to acquire residential real estate brokerage firms. NRT
acquired the assets of National Realty Trust, the largest franchisee of the
COLDWELL BANKER system, in August 1997. NRT has also acquired other independent
regional real estate brokerage businesses during 1998 and 1997 which NRT has
converted to COLDWELL BANKER, CENTURY 21 and ERA franchises. As a result, NRT is
the largest franchisee of our franchise systems, based on gross commissions, and
represents 6% of the franchised offices. Of the nearly 12,000 franchised offices
in our real estate brokerage franchise systems, no individual broker, other than
NRT, accounts for more than 1% of our real estate brokerage revenues.
Real Estate Franchise Systems. CENTURY 21. CENTURY 21 is the world's
largest residential real estate brokerage franchisor, with approximately 6,300
independently owned and operated franchise offices with more than 102,000 active
sales agents located in 25 countries and territories.
The primary component of CENTURY 21's revenue is service fees on
commissions from real estate transactions. Service fees are 6% of gross
commission income. CENTURY 21 franchisees who meet certain levels of annual
gross revenue (as defined in the franchise agreements) are eligible for the
CENTURY 21 Incentive Bonus ("CIB") Program, which results in a rebate payment to
qualifying franchisees determined in accordance with the applicable franchise
agreement (up to 2% of gross commission income in current agreements) of such
annual gross revenue. For 1998, approximately 15% of CENTURY 21 franchisees
qualified for CIB payments and such payments aggregated less than 1% of gross
commissions.
CENTURY 21 franchisees generally contribute 2% (subject to specified
minimums and maximums) of their brokerage commissions each year to the CENTURY
21 National Advertising Fund (the "NAF") which in turn disburses them for local,
regional and national advertising, marketing and public relations campaigns. In
1998, the NAF spent approximately $45 million on advertising and marketing
campaigns.
Coldwell Banker. COLDWELL BANKER is the world's premier brand for the sale
of million-dollar-plus homes and the third largest residential real estate
brokerage franchisor, with approximately 3,000 independently owned and operated
franchise offices in the United States, Canada and the Caribbean, with
approximately 72,000 sales agents. The primary revenue from the COLDWELL BANKER
system is derived from service and other fees paid by franchisees, including
initial franchise fees and ongoing services. COLDWELL BANKER franchisees pay us
annual fees consisting of ongoing service and advertising fees, which are
generally 6.0% and 2.5%, respectively, of a franchisee's annual gross revenues
(subject to annual rebates to franchisees who achieve certain threshold levels
of gross commission income annually, and to minimums and maximums on advertising
fees).
COLDWELL BANKER franchisees who meet certain levels of annual gross revenue
(as defined in the franchise agreements) are eligible for the Performance
Premium Award ("PPA") Program, which results in a rebate payment to qualifying
franchisees determined in accordance with the applicable franchise agreement (up
to 3% in current agreements) of such annual gross revenue. For 1998,
approximately 28% of COLDWELL BANKER franchisees qualified for PPA payments and
such payments aggregated approximately less than 1% of gross commissions.
Advertising fees collected from COLDWELL BANKER franchisees are generally
expended on local, regional and national marketing activities, including media
purchases and production, direct mail and promotional activities and other
marketing efforts. In 1998, the COLDWELL BANKER National Advertising Fund
expended approximately $21 million for such purposes.
ERA. The ERA franchise system is a leading residential real estate
brokerage franchise system, with more than 2,600 independently owned and
operated franchise offices, and more than 29,000 sales agents located in 20
countries. The primary revenue from the ERA franchise system results from (i)
franchisees' payments of monthly membership fees ranging from $216 to $852 per
month, based on volume, plus $196 per branch and a per transaction fee of
approximately $121, and (ii) for franchise agreements entered into after July
1997, royalty fees equal to 6% of the franchisees' gross revenues (5.0% until
December 31, 1999). For franchise agreements dated after January 1, 1998, the
Volume Incentive Program may result in a rebate payment to qualifying
franchisees determined in accordance with the applicable franchise agreement.
In addition to membership fees and transaction fees, franchisees of the ERA
system pay (i) a fixed amount per month, which ranges from $233 to $933, based
on volume, plus an additional $233 per month for each branch office, into the
ERA National Marketing Fund (the "ERA NMF") and (ii) for franchise agreements
entered into after July 1997, an NMF equal to 2% of the franchisees' gross
revenues, subject to minimums and maximums. The funds in the ERA NMF are
utilized for local, regional and national marketing activities, including media
purchases and production, direct mail and promotional activities and other
marketing efforts. In 1998, the ERA NMF spent approximately $10 million on
marketing campaigns.
Real Estate Brokerage Franchise Sales. We market real estate brokerage
franchises primarily to independent, unaffiliated owners of real estate
brokerage companies as well as individuals who are interested in establishing
real estate brokerage businesses. We believe that our existing franchisee base
represents another source of potential growth, as franchisees seek to expand
their existing business to additional markets. Therefore, our sales strategy
focuses on maintaining satisfaction and enhancing the value of the relationship
between the franchisor and the franchisee.
Our real estate brokerage franchise systems employ a national franchise
sales force consisting of approximately 125 salespersons and sales management
personnel, which is divided into separate sales organizations for the CENTURY
21, COLDWELL BANKER and ERA systems. These sales organizations are compensated
primarily through commissions on sales concluded. Members of the sales forces
are also encouraged to provide referrals to the other sales forces when
appropriate.
Operations - Real Estate Brokerage. Our brand name marketing programs for
the real estate brokerage business focus on increasing brand awareness
generally, in order to increase the likelihood of potential homebuyers and home
sellers engaging franchise brokers' services. Each brand has a dedicated
marketing staff in order to develop the brand's marketing strategy while
maintaining brand integrity. The corporate marketing services department
provides services related to production and implementation of the marketing
strategy developed by the brand marketing staffs.
Each brand provides its franchisees and their sales associates with
training programs that have been developed by such brand. The training programs
include mandatory programs instructing the franchisee and/or the sales associate
on how to best utilize the methods of the particular system and additional
optional training programs that expand upon such instruction. Each brand's
training department is staffed with instructors experienced in both real estate
practice and instruction. In addition, we have established regional support
personnel who provide consulting services to the franchisees in their respective
regions.
Each system provides a series of awards to brokers and their sales
associates who are outstanding performers in each year. These awards signify the
highest levels of achievement within each system and provide a significant
incentive for franchisees to attract and retain sales associates.
Each system provides its franchisees with referrals of potential customers,
which referrals are developed from sources both within and outside of the
system.
Through our Cendant Supplier Services operations, we provide our
franchisees with volume purchasing discounts for products, services, furnishings
and equipment used in real estate brokerage operations. In addition to the
preferred alliance programs described hereinafter, Cendant Supplier Services
establishes relationships with vendors and negotiates discounts for purchases by
its customers. We do not maintain inventory, directly supply any of the products
or, generally, extend credit to franchisees for purchases. See "COMBINED
OPERATIONS -- Preferred Alliance and CoMarketing Arrangements" below.
Real Estate Brokerage Franchise Agreements. Our real estate brokerage
franchise agreements grant the franchises the right to utilize one of the brand
names associated with our real estate brokerage franchise systems to real estate
brokers under franchise agreements.
Our current form of franchise agreement for all real estate brokerage
brands is terminable by us for the franchisee's failure to pay fees thereunder
or other charges or for other material default under the franchise agreement. In
the event of such termination, the Century 21 and ERA agreements generally
provide that we are entitled to be compensated for lost revenues in an amount
equal to the average monthly franchise fees calculated for the remaining term of
the agreement. Pre-1996 agreements do not provide for liquidated damages of this
sort. See "CENTURY 21," "COLDWELL BANKER" and "ERA" above for more information
regarding the commissions and fees payable under our franchise agreements.
NRT is the largest franchisee, based on gross commission income, for our
real estate franchise systems. NRT's status as a franchisee is governed by
franchise agreements (the "Franchise Agreements") with our wholly owned
subsidiaries (the "Real Estate Franchisors") pursuant to which NRT has the
non-exclusive right to operate as part of the COLDWELL BANKER, ERA and CENTURY
21 real estate franchise systems at locations specified in the Franchise
Agreements. In February 1999, NRT entered into new fifty year franchise
agreements with the Real Estate Franchisors. These agreements require NRT to pay
royalty fees and advertising fees of 6.0% and 2.0% (2.5% for its COLDWELL BANKER
offices), respectively, on its annual gross revenues. Lower royalty fees apply
in certain circumstances. The Franchise Agreements generally provide
restrictions on NRT's ability to close offices beyond certain limits.
Real Estate Brokerage Service Marks. The service marks "CENTURY 21,"
"COLDWELL BANKER," and "ERA" and related logos are material to our business.
Through our franchisees, we actively use these marks. All of the material marks
in each franchise system are registered (or have applications pending for
registration) with the United States Patent and Trademark Office. The marks used
in the real estate brokerage systems are owned by us through our subsidiaries.
Competition. Competition among the national real estate brokerage brand
franchisors to grow their franchise systems is intense. The chief competitors to
our real estate brokerage franchise systems are the Prudential, Better Homes &
Gardens and RE/MAX real estate brokerage brands. In addition, a real estate
broker may choose to affiliate with a regional chain or not to affiliate with a
franchisor but to remain independent.
We believe that competition for the sale of franchises in the real estate
brokerage industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. We also believe that the perceived value of its brand names to
prospective franchisees is, to some extent, a function of the success of its
existing franchisees.
The ability of our real estate brokerage franchisees to compete in the
industry is important to our prospects for growth, although, because franchise
fees are based on franchisee gross commissions or volume, our revenue is not
directly dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
and local economic conditions. The effect of these conditions on our results of
operations is substantially reduced by virtue of the diverse geographical
locations of our franchises. At December 31, 1998, the combined real estate
franchise systems had approximately 8,400 franchised brokerage offices in the
United States and approximately 12,000 offices worldwide. The real estate
franchise systems have offices in 31 countries and territories in North America,
Europe, Asia, Africa and Australia.
Seasonality. The principal sources of our real estate segment revenue are
based upon the timing of residential real estate sales, which are lower in the
first calendar quarter each year, and relatively level the other three quarters
of the year. As a result, our revenue from the real estate brokerage segment of
its business is less in the first calendar quarter of each year.
RELOCATION SEGMENT
General. Our Relocation Segment represented approximately 9%, 10% and 11%
of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. Our Cendant Mobility Services Corporation ("Cendant Mobility")
subsidiary is the largest provider of employee relocation services in the world.
Our Cendant Mobility subsidiary assists more than 100,000 transferring employees
annually, including approximately 15,000 employees internationally each year in
92 countries and 300 destination cities. At December 31, 1998, we employed
approximately 2,400 people in our relocation business.
Services. The employee relocation business offers a variety of services in
connection with the transfer of our clients' employees. The relocation services
provided to our customers include primarily evaluation, inspection and selling
of transferees' homes or purchasing a transferee's home which is not sold for at
least a price determined on the estimated value within a specified time period,
equity advances (generally guaranteed by the corporate customer), certain home
management services, assistance in locating a new home at the transferee's
destination, consulting services and other related services.
Corporate clients pay a fee for the services performed. Another source of
revenue is interest on the equity advances. Substantially, all costs associated
with such services are reimbursed by the corporate client, including, if
necessary, repayment of equity advances and reimbursement of losses on the sale
of homes purchased in most cases (other than government clients and one
corporate client). As a result of the obligations of most corporate clients to
pay the losses and guarantee repayment of equity advances, our exposure on such
items is limited to the credit risk of the corporate clients of our relocation
businesses and not on the potential changes in value of residential real estate.
We believe such risk is minimal, due to the credit quality of the corporate
clients of our relocation subsidiaries. In transactions with government clients
and one corporate client, which comprise approximately 5% of net revenue, we
assume the risk for losses on the sale of homes, but we control all facets of
the resale process, thereby limiting our exposure.
The homesale program service is the core service for many domestic and
international programs. This program gives employees guaranteed offers for their
homes and assists clients in the management of employees' productivity during
their relocation. Cendant Mobility allows clients to outsource their relocation
programs by providing clients with professional support for planning and
administration of all elements of their relocation programs. The majority of new
proposals involve outsourcing due to corporate downsizing, cost containment, and
increased need for expense tracking.
Our relocation accounting services supports auditing, reporting, and
disbursement of all relocation-related expense activity.
Our group move management services provides coordination for moves
involving a number of employees. Services include planning, communications,
analysis, and assessment of the move. Policy consulting provides customized
consultation and policy review, as well as industry data, comparisons and
recommendations. Cendant Mobility also has developed and/or customized numerous
non-traditional services including outsourcing of all elements of relocation
programs, moving services, and spouse counseling.
Our moving service, with nearly 70,000 shipments annually, provides support
for all aspects of moving an employee's household goods. We also handle
insurance and claim assistance, invoice auditing, and control the quality of van
line, driver, and overall service.
Our marketing assistance service provides assistance to transferees in the
marketing and sale of their own home. A Cendant Mobility professional assists in
developing a custom marketing plan and monitors its implementation through the
broker. The Cendant Mobility contact also acts as an advocate, with the local
broker, for employees in negotiating offers which helps clients' employees
benefit from the highest possible price for their homes.
Our affinity services provide value-added real estate and relocation
services to organizations with established members and/or customers.
Organizations, such as insurance and airline companies that have established
members offer our affinity services' to their members at no cost. This service
helps the organizations attract new members and to retain current members.
Affinity services provide home buying and selling assistance, as well as
mortgage assistance and moving services to members of applicable organizations.
Personal assistance is provided to over 40,000 individuals with approximately
17,500 real estate transactions annually.
Our international assignment service provides a full spectrum of services
for international assignees. This group coordinates the services previously
discussed; however, they also assist with immigration support, candidate
assessment, intercultural training, language training, and repatriation
coaching.
Vendor Networks. Cendant Mobility provides relocation services through
various vendor networks that meet the superior service standards and quality
deemed necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 340 principal
brokers and 420 associate brokers. Our van line, insurance, appraisal and
closing networks allow us to receive deep discounts while maintaining control
over the quality of service provided to clients' transferees.
Competitive Conditions. The principal methods of competition within
relocation services are service, quality and price. In the United States, there
are two major national providers of such services. We are the market leader in
the United States and third in the United Kingdom.
Seasonality. Our principal sources of relocation service revenue are based
upon the timing of transferee moves, which are lower in the first and last
quarter each year, and at the highest levels in the second quarter.
MORTGAGE SEGMENT
General. Our Mortgage Segment represented approximately 7%, 4% and 4% of
our revenues for the year ended December 31, 1998, 1997 and 1996, respectively.
Through our Cendant Mortgage Corporation ("Cendant Mortgage") subsidiary, we are
the tenth largest originator of residential first mortgage loans in the United
States as reported by Inside Mortgage Finance in 1998, and, on a retail basis,
we are the sixth largest originator in 1998. We offer services consisting of the
origination, sale and servicing of residential first mortgage loans. A full line
of first mortgage products are marketed to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms, including CENTURY 21, COLDWELL BANKER and ERA franchisees, and other
mortgage banks. Cendant Mortgage is a centralized mortgage lender conducting its
business in all 50 states. At December 31, 1998, Cendant Mortgage had
approximately 4,000 employees.
Cendant Mortgage customarily sells all mortgages it originates to investors
(which include a variety of institutional investors) either as individual loans,
as mortgage backed securities or as participation certificates issued or
guaranteed by Fannie Mae Corp., the Federal Home Loan Mortgage Corporation or
the Government National Mortgage Association. Cendant Mortgage also services
mortgage loans. We earn revenue from the sale of the mortgage loans to
investors, as well as from fees earned on the servicing of the loans for
investors. Mortgage servicing consists of collecting loan payments, remitting
principal and interest payments to investors, holding escrow funds for payment
of mortgage related expenses such as taxes and insurance, and otherwise
administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Teleservices. Mortgages are offered to consumers through an 800
number teleservices operation based in New Jersey under programs
including Phone In-Move In(Registered Trademark) for real estate
organizations, private label programs for financial institutions
and for relocation clients in conjunction with the operations of
Cendant Mobility. The teleservices operation provides us with
retail mortgage volume that contributes to Cendant Mortgage
ranking as the sixth largest retail originator (Inside Mortgage
Finance) in 1998.
o Point of Sale. Mortgages are offered to consumers through 175
field sales professionals with all processing, underwriting and
other origination activities based in New Jersey. These field
sales professionals generally are located in real estate offices
and are equipped with software to obtain product information,
quote interest rates and prepare a mortgage application with the
consumer. Originations from these point of sale offices are
generally more costly than teleservices originations.
o Wholesale/Correspondent. We purchase closed loans from financial
institutions and mortgage banks after underwriting the loans.
Financial institutions include banks, thrifts and credit unions.
Such institutions are able to sell their closed loans to a large
number of mortgage lenders and generally base their decision to
sell to Cendant Mortgage on price, product menu and/or
underwriting. We also have wholesale/correspondent originations
with mortgage banks affiliated with real estate brokerage
organizations. Originations from our wholesale/correspondent
platform are more costly than point of sale or teleservices
originations.
Strategy. Our strategy is to increase market share by expanding all of our
sources of business with emphasis on the Phone In-Move In(R) program. Phone
In-Move In(R) was developed for real estate firms approximately 21 months ago
and is currently established in over 4,000 real estate offices at December 31,
1998. We are well positioned to expand our relocation and financial institutions
business channels as it increases our linkage to Cendant Mobility clients and
works with financial institutions which desire to outsource their mortgage
originations operations to Cendant Mortgage. Each of these market share growth
opportunities is driven by our low cost teleservices platform, which is
centralized in Mt. Laurel, New Jersey. The competitive advantages of using a
centralized, efficient and high quality teleservices platform allows us to
capture a higher percentage of the highly fragmented mortgage market more cost
effectively.
Competitive Conditions. The principal methods of competition in mortgage
banking services are service, quality and price. There are an estimated 20,000
national, regional or local providers of mortgage banking services across the
United States. Cendant Mortgage has increased its mortgage origination market
share in the United States to 1.8% in 1998 from 0.9% in 1996. The market share
leader reported a 7.7% market share in the United States according to Insider
Mortgage Finance for 1998.
Seasonality. The principal sources of mortgage services segment revenue are
based principally on the timing of mortgage origination activity, which is based
upon the timing of residential real estate sales. Real estate sales are lower in
the first calendar quarter each year and relatively level the other three
quarters of the year. As a result, our revenue from the mortgage services
business is less in the first calendar quarter of each year.
ALLIANCE MARKETING DIVISION
Our Alliance Marketing division is divided into two segments: individual
membership and insurance/wholesale. The individual membership segment, with
approximately 32 million memberships, provides customers with access to a
variety of discounted products and services in such areas as retail shopping,
travel, auto and home improvement. The individual membership products and
services are designed to enhance customer loyalty by delivering value to the
customer. The insurance/wholesale segment, with nearly 31 million customers,
markets and administers insurance products, primarily accidental death
insurance, and also provides products and services such as checking account
enhancement packages, financial products and discount programs to customers of
various financial institutions. The Alliance Marketing activities are conducted
principally through our Cendant Membership Services, Inc. subsidiary and certain
of our other wholly owned subsidiaries, including FISI and BCI.
We derive our Alliance Marketing revenue principally from membership
service fees, insurance premiums and product sales. We solicit members and
customers for many of our programs by direct marketing and by using a direct
sales force to call on financial institutions, schools, community groups,
companies and associations. Some of the our individual memberships are available
online to interactive computer users via major online services and the
Internet's World Wide Web.
See "--Distribution Channels".
INDIVIDUAL MEMBERSHIP SEGMENT
Our Individual Membership segment represented approximately 18%, 19% and
24% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. We affiliate with business partners such as leading financial
institutions, retailers, and oil companies to offer membership as an enhancement
to their credit card customers. Participating institutions generally receive
commissions on initial and renewal memberships, based on a percentage of the net
membership fees. Individual memberships are marketed, primarily using direct
marketing techniques, through participating institutions with the Company
generally paying for the marketing costs to solicit the prospective members. The
member pays our business partners directly for the service and, in most
instances, is billed via a credit card. Membership fees vary depending upon the
particular membership program, and annual fees generally range from $49 to $79
per year. Most of our memberships are for one-year renewable terms, and members
are generally entitled to unlimited use during the membership period of the
service for which the members have subscribed. Members generally may cancel
their memberships and obtain a full refund at any point during the membership
term. As of November 1998, all new online individual memberships are refundable
on a pro-rata basis over the term of the membership. The services may be
accessed either through the Internet (online) or through the mail or by
telephone (off-line).
Off-Line Products
Individual membership programs offer consumers discounts on over 500,000
products and services by providing shop at home convenience in areas such as
retail shopping, travel, automotive, dining and home improvement. Membership
programs include among others Shoppers Advantage(R), Travelers Advantage(R),
AutoVantage(R), Credit Card Guardian(R), and PrivacyGuard(R), and other
membership programs. A brief description of the different types of membership
programs is as follows:
Shopping. Shoppers Advantage(R) is a discount shopping program whereby we
provide product price information and home shopping services to our members. Our
merchandise database contains information on over 100,000 brand name products,
including a written description of the product, the manufacturer's suggested
retail price, the vendor's price, features and availability. All of these
products may be purchased through our independent vendor network. Vendors
include manufacturers, distributors and retailers nationwide. Individual members
are entitled to an unlimited number of toll free calls seven days a week to our
shopping consultants, who access the merchandise database to obtain the lowest
available fully delivered cost from participating vendors for the product
requested and accept any orders that the member may place. We inform the vendor
providing the lowest price of the member's order and that vendor then delivers
the requested product directly to the member. We act as a conduit between our
members and the vendors; accordingly, we do not maintain an inventory of
products.
As part of our individual member Shoppers Advantage(R) program, we
distribute catalogs four to ten times per year to certain members. In addition,
we automatically extend the manufacturer's warranty on all products purchased
through the Shoppers Advantage(R) program and offer a low price guarantee.
Travel. Travelers Advantage(R) is a discount travel service program whereby
our Cendant Travel, Inc. ("Cendant Travel") subsidiary (one of the ten largest
full service travel agencies in the U.S.), obtains information on schedules and
rates for major scheduled airlines, hotel chains and car rental agencies from
the American Airlines Sabre(R) Reservation System. In addition, we maintain our
own database containing information on tours, travel packages and short notice
travel arrangements. Members book their reservations through Cendant Travel,
which earns commissions (ranging from 5%-25%) on all travel sales from the
providers of the travel services. Certain Travelers Advantage(R) members can
earn cash awards from the Company equal to a specified percentage (generally 5%)
of the price of travel arrangements purchased by the member through Cendant
Travel. Travel members may book their reservations by making toll-free telephone
calls seven days a week, generally twenty-four hours a day to agents at Cendant
Travel. Cendant Travel provides its members with special negotiated rates on
many air, car and hotel bookings. Cendant Travel's agents reserve the lowest
air, hotel and car rental fares available for the members' travel requests and
offer a low price guarantee on such fares.
Auto. Our auto service, AutoVantage(R), offers members comprehensive new
car summaries and preferred prices on new domestic and foreign cars purchased
through our independent dealer network (which includes over 1,800 dealer
franchises); discounts on maintenance, tires and parts at more than 25,000
locations, including over 35 chains, including nationally known names, such as
Goodyear(R)and Firestone(R), plus regional chains and independent locations; and
used car valuations. AutoVantage Gold(R) offers members additional services
including road and tow emergency assistance 24 hours a day in the United States
and trip routing.
Credit Card Registration. Our Credit Card Guardian(R) and "Hot-Line"
services enable consumers to register their credit and debit cards with us so
that the account numbers of these cards may be kept securely in one place. If
the member notifies us that any of these credit or debit cards are lost or
stolen, we will notify the issuers of these cards, arrange for them to be
replaced and reimburse the member for any amount for which the card issuer may
hold the member liable.
PrivacyGuard Service. The PrivacyGuard(R) and Credentials(R) services
provide members with a comprehensive and understandable means of monitoring key
personal information. The service offers a member access to information in
certain key areas including: credit history and monitoring, driving records
maintained by state motor vehicle authorities, and medical files maintained by
third parties. This service is designed to assist members in obtaining and
monitoring information concerning themselves that is used by third parties in
making decisions such as granting or denying credit or setting insurance rates.
Buyers Advantage. The Buyers Advantage(R) service extends the
manufacturer's warranty on products purchased by the member. This service also
rebates 20% of repair costs and offers members price protection by refunding any
difference between the price the member paid for an item and its reduced price,
should the item be sold at a lower price within sixty days after purchase. In
addition, the service offers return guarantee protection by refunding the
purchase price of an item that the member wishes to return.
CompleteHome. The CompleteHome(R) service is designed to save members time
and money in maintaining and improving their homes. Members can order
do-it-yourself "How-To Guides" or call the service for a tradesperson referral.
Tradespersons are available in all 50 states through a toll-free phone line.
Members also receive discounts ranging from 10% to 50% off on a full range of
home-related products and services.
Family FunSaver Club. The Family FunSaver Club(R) provides its members with
a variety of benefits, including the opportunity to inquire about and purchase
family travel services and family related products, the opportunity to buy new
cars at a discount, a discounted family dining program and a Family Values Guide
offering coupon savings on family related products such as movie tickets, casual
restaurants, and theme parks.
The Family Software Club. The Family Software ClubSM has no membership fee
and offers members a way to purchase educational and entertainment CD-ROM
titles, often at an introductory price with a small commitment to buy titles at
regular club prices over a specified time period. Approximately every six to
eight weeks, members receive information on CD-ROM titles and other related
products and have the opportunity to purchase their featured selection,
alternate titles or no selections at that time. The club also provides its
members with special offers and discounts on software and other related products
from time to time.
Health Services. The HealthSaverSM membership provides discounts ranging
from 10% to 60% off retail prices on prescription drugs, eyewear, eye care,
dental care, selected health-related services and fitness equipment, including
sporting goods. Members may also purchase prescription and over-the-counter
drugs through the mail.
Other Clubs. Our North American Outdoor Group, Inc. subsidiary ("NAOG")
owns and operates the North American Hunting Club(R), the North American Fishing
Club(R), the Handyman Club of America(R), the National Home Gardening Club(R)
and the PGA Tour Partners Club(R), among others. Members of these clubs receive
fulfillment kits, discounts on related goods and services, magazines and other
benefits.
Online Products
We operate Netmarket (www.netmarket.com), our flagship online,
membership-based, value-oriented consumer site which offers discounts on over
800,000 products and services. Netmarket offers discounted shopping and other
benefits to both members and non-members, with members receiving preferred
pricing, access to specials, cash back benefits, low price guarantees and
extended warranties on certain items. In addition, we also offer the following
online products and services: AutoVantage(R), Travelers Advantage(R) and
PrivacyGuard(R) membership programs and Haggle Zone(TM) and Fair Agent(R)
consumer services.
We also currently operate other online consumer offerings such as Books.com
(www.books.com), one of the largest online booksellers in the world with more
than four million titles available in its database with discounts of up to 20 to
40 percent below retail prices; Musicspot (www.musicspot.com) an online music
store with more than 145,000 titles discounted up to 20 percent below retail
prices; and GoodMovies (www.goodmovies.com) an online movie store offering more
than 30,000 movie titles up to 20 to 40 percent below retail cost. Through our
Match.com, Inc. ("Match") subsidiary, we are the leading matchmaking service on
the Internet, servicing over 100,000 consumers. Subscriptions to the Match
service range from approximately $10 per month to just under $60 for one year.
Through our Rent Net operation (www.rent.net) subsidiary, we are the
leading apartment information and rental service on the Internet, with listings
in more than 2,000 North American cities. Rent Net's clients include many of the
top 50 property management companies across North America, and its apartment and
relocation information has been seen by more than one million users monthly. The
RentNet operation principally derives revenues from advertising or listing fees
of products and service providers.
As part of our new internet strategy which we developed following a
comprehensive company-wide review, we intend to: (i) sell RentNet, Match and
Bookstacks, Inc. (Books.com, MusicSpot.com and GoodMovies.com); (ii) continue to
invest in our remaining Internet membership business, particularly NetMarket,
which is an integral part of our overall individual membership business; (iii)
actively pursue strategic partnerships that will leverage our online membership
assets, accelerate growth and maximize shareholder value; and (iv) establish an
outsourcing services business that manages fulfillment and distribution for
non-competing third party e-commerce providers.
INSURANCE/WHOLESALE SEGMENT
Our Insurance/Wholesale segment represented approximately 11%, 12% and 15%
of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. We affiliate with financial institutions, including credit unions
and banks, to offer their respective customer base competitively priced
insurance products, primarily accidental death and dismemberment insurance and
term life insurance, as well as an array of services associated with the
Individual Membership division segment.
Enhancement Package Service. Primarily through our FISI subsidiary, we sell
enhancement packages for financial institution consumer and business checking
and deposit account holders. FISI's financial institution clients select a
customized package of our products and services and then usually adds its own
services (such as unlimited check writing privileges, personalized checks,
cashiers' or travelers' checks without issue charge, or discounts on safe
deposit box charges or installment loan interest rates). With our marketing and
promotional assistance, the financial institution then offers the complete
package of account enhancements to its checking account holders as a special
program for a monthly fee. Most of these financial institutions choose a
standard enhancement package, which generally includes $10,000 of accidental
death insurance, travel discounts and a nationwide check cashing service. Others
may our shopping and credit card registration services, a financial newsletter
or pharmacy, eyewear or entertainment discounts as enhancements. The accidental
death coverage is underwritten under group insurance policies with independent
insurers. We continuously seek to develop new enhancement features, which may be
added to any package at an additional cost to the financial institution. We
generally charge a financial institution client an initial fee to implement this
program and monthly fees thereafter based on the number of customer accounts
participating in that financial institution's program. Our enhancement packages
are designed to enable a financial institution to generate additional fee
income, because the institution should be able to charge participating accounts
more than the combined costs of the services it provides and the payments it
makes to us.
Primarily through our National Card Control Inc. ("NCCI") subsidiary, we
also sell enhancement services to credit card issuers who make these services
available to their credit card holders to foster increased product usage and
loyalty. NCCI's clients create a customized package of our products and
services. These enhancements include loyalty products, such as frequent
flyer/buyer programs, as well as shopping, travel, concierge, insurance and
credit card registration services. Like FISI, NCCI generally charges its credit
card issuer clients an initial fee to implement the program and monthly fees
thereafter, based on the number of accounts participating in that institution's
program.
Insurance Products. Through our BCI subsidiary, we serve as a third party
administrator for marketing accidental death insurance throughout the country to
the customers of BCI's financial institution clients. This accidental death
insurance is often combined with our other services to enhance their value.
These products are generally marketed through direct mail solicitations, which
generally offer $1,000 of accidental death insurance at no cost to the customers
and the opportunity to choose additional coverage of up to $300,000. The annual
premium generally ranges from $10 to $250. BCI also acts as an administrator for
term life, graded term life and hospital accident insurance. BCI's insurance
products and other services are offered through banks and credit unions to their
account holders.
Alliance Marketing Distribution Channels
We market our Individual Membership and Insurance/Wholesale products
through a variety of distribution channels. The consumer is ultimately reached
in the following ways: 1) at financial institutions or other associations
through direct marketing; 2) at financial institutions or other associations
through a direct sales force, participating merchants or general advertising;
and 3) through schools, community groups and companies. Some of our individual
memberships, such as shopping, travel, privacy guard and auto services, are
available to computer users via online services and the Internet's World Wide
Web. These users are solicited primarily through major online services such as
America Online, traditional offline direct marketing channels, major destination
sites on the World Wide Web, such as portals, and through our affinity partners.
We believe that our interactive members account for approximately 4% of our
total Individual Membership Segment members. Strategic alliances have been
formed with online services and various other companies, including the major
Internet portals.
Alliance Marketing International Operations
Individual Membership and Insurance/Wholesale. Our Cendant International
Membership Services subsidiary has developed the international distribution of
Enhancement Package Service and Insurance Products together with certain
Individual Memberships including Shopping, Auto and Payment Card Protection.
As of December 31, 1998, Cendant International Membership Services had
expanded its international membership and customer base to almost four million
individuals. This base is driven by retail and wholesale membership through over
35 major banks in Europe and Asia, as well as through other distribution
channels. We also have exclusive licensing agreements covering the use of our
merchandising systems in Canada, Australia, Japan and certain other Asian
countries under which licensees paid initial license fees and agree to pay
royalties to us on membership fees, access fees and merchandise service fees
paid to them. Royalties to us from these licenses were less than 1% of our
Alliance Marketing revenues and profits in the years ended December 31, 1998,
1997 and 1996, respectively.
The economic impact of currency exchange rate movements on the Company is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because we operate in a mix of services and numerous
countries, management believes currency exposures are fairly well diversified.
See Item 7A: "Quantitative and Qualitative Disclosure About Market Risk".
Alliance Marketing Seasonality
Our Alliance Marketing businesses are not seasonal.
Alliance Marketing Competition
Individual Membership. We believe that there are competitors, which offer
membership programs similar to ours, and some of these entities, which include
large retailers, travel agencies, insurance companies and financial service
institutions, have financial resources, product availability, technological
capabilities or customer bases greater than ours. To date, we have been able to
compete effectively with such competitors. However, there can be no assurances
that we will continue to be able to do so. In addition, we compete with
traditional methods of merchandising that enjoy widespread consumer acceptance,
such as catalog and in-store retail shopping and shopping clubs (with respect to
its discount shopping service), and travel agents (with respect to its discount
travel service). Our systems are, for the most part, not protected by patent.
Insurance/Wholesale. Each of our account enhancement services competes with
similar services offered by other companies, including insurance companies. Many
of the competitors are large and more established, with greater resources and
financial capabilities than ours. Finally, in attempting to attract any
relatively large financial institution as a client, we also compete with that
institution's in-house marketing staff and the institution's perception that it
could establish programs with comparable features and customer appeal without
paying for the services of an outside provider.
OTHER CONSUMER AND BUSINESS SERVICES DIVISION
Our Other Consumer and Business Services Division represented approximately
8%, 14% and 14% of our revenues for the year ended December 31, 1998, 1997 and
1996, respectively.
Tax Preparation Business. In January 1998, we acquired Jackson Hewitt, the
second largest tax preparation service in the United States. The Jackson Hewitt
franchise system is comprised of a 43-state network (plus the District of
Columbia) with approximately 3,000 offices operating under the trade name
"Jackson Hewitt Tax Service". We believe that the application of our focused
management strategies and techniques for franchise systems to the Jackson Hewitt
network can significantly increase revenues produced by the Jackson Hewitt
franchise system while also increasing the quality and quantity of services
provided to franchisees.
Office locations range from stand-alone store front offices to offices
within Wal-Mart Stores, Inc. and Montgomery Ward & Co., Inc. locations. Through
the use of proprietary interactive tax preparation software, we are engaged in
the preparation and electronic filing of federal and state individual income tax
returns (collectively referred to as "tax returns"). During 1998, Jackson Hewitt
prepared approximately 1.2 million tax returns, which represented an increase of
37% from the approximately 875,000 tax returns it prepared during 1997. To
complement our tax preparation services, we also offer accelerated check refunds
and refund anticipation loans to our tax preparation customers.
National Car Parks. Our National Car Parks ("NCP") subsidiary is the
largest single, commercial car park operating company in the UK and Europe, with
over 60 years experience of owning and/or managing a portfolio of nearly 500 car
parks, mostly located in city and town centers and at airports.
NCP owns or operates nearly 500 car parks across the UK and has
approximately 2,800 full and part-time employees. NCP provides a high-quality,
professional service, developing a total solution for its customers and for
organizations such as town and city administrations that wish to develop modern
and professionally managed parking and traffic management facilities, tailored
towards local business.
NCP owns and operates car parks in over 100 city and town centers
throughout the UK, most of which are regularly patrolled and many of which have
closed-circuit television surveillance. NCP is the only car park manager that
can provide the motorist with such a comprehensive geographical coverage and
such levels of investment in security facilities. In addition, NCP is a leader
in on-airport car parking at UK airports, with over 35,000 car parking spaces in
facilities close to passenger terminals at ten airports across the UK. Booking
facilities are available through NCP's telesales service for convenient car
parking reservation at these airports, with free courtesy coach transfers to and
from airport terminals at most locations.
The brand names of NCP and Flightpath (NCP's airport brand) are registered
in the UK as trademarks. Furthermore, the NCP trademark is in the process of
being registered in the rest of the European Community.
NCP's business has a distinct seasonal trend with revenue from parking in
city and town centers being closely associated with levels of retail business.
Therefore, peaks in revenue are experienced particularly around the Christmas
period. In respect of the airport parking side of the business, seasonal peaks
are experienced in line with summer vacations.
NCP's main competition is from non-commercial, local government authorities
who usually choose to operate car parking facilities themselves in their
respective cities and towns.
There is increasing government regulation over all aspects of transport
within the UK. Therefore, an objective of NCP is to work together with its
customers, local and national government and other service organizations in
order to maintain the mutually beneficial partnership between motorists and city
center environment.
Green Flag. Green Flag is the third largest assistance group in the UK
providing a wide range of emergency, support and rescue services to millions of
drivers and home owners in the UK through its Green Flag Motor, Green Flag Truck
and Green Flag Home services. Green Flag has approximately 900 full and
part-time employees.
Using a well established network of 6,000 mechanics and 1,500 fully
equipped garages, Green Flag Motor provides roadside recovery and assistance
services to over 3.5 million members who can choose from five levels of cover. A
distinctive feature of the Green Flag Motor service is its partnership with
independent operators who provide emergency assistance to motorists throughout
the UK and Europe. Using a network of specialists allows Green Flag to offer its
customers a fast service in emergency situations. Through regular inspections
and strictly enforced performance measures, Green Flag's teams of operators are
able to delivery reassurance to the customer, as well as a highly reliable
service.
In the truck assistance sector, the Green Flag Truck service has developed
to include pay-on-use services in the UK and Europe and a service in the UK
suited to operators who run local delivery businesses. Service is provided using
the same network of independent operators that provide fast and efficient
expertise for businesses who cannot afford to be off the road.
A network of specialists is also available to provide Green Flag's
Emergency Home Assistance and Property Repair Services. Reassurance is key for
homeowners who take an insured assistance service or choose a pay-on-use option.
Two levels of coverage are available to insure against a wide range of problems,
including central heating, roofing, gas and electrical appliances. Through its
specially selected network of operators, 75% of Green Flag's calls for
assistance are completed within one hour, 90% within two hours.
Green Flag operates in a number of principal markets. Direct services to
the consumer is one route to market, but also through insurance companies, car
manufacturers and dealers and a large number of businesses that sell on Green
Flag assistance services as an optional or a mandatory product linked to their
own service, i.e. with car insurance or via a bank or building society account.
The brand name of 'Green Flag' (together with the LOGO) is registered in
the United Kingdom. There is also a pending registration for a European Union
Community Mark. In addition, we have registered or pending marks for other key
brands used within the business. These include names such as:
Fleetcall/Truckcall/Dialassist/React/ Locator/Home-call and Home Assistance
Services. Also registered is the CHEQUERED SIDE STRIPE used in connection with
the MOTOR Roadside Assistance and Recovery service. (This is a safety device for
use on vehicles, which attend at the roadside.)
Green Flag's operations are seasonally influenced in that the purchase of
motoring assistance follows holiday patterns and used car purchase, as well as
by weather conditions. This has a great impact on call volumes especially in the
winter.
Information Technology Services. Our WizCom International, Ltd. ("WizCom")
subsidiary owns and operates the Wizard System more fully described under
"TRAVEL SERVICES -- Avis Car Rental Franchise Business -- Avis System and Wizard
System" above. In 1995, Budget Rent A Car Corporation ("Budget") entered into a
computer services agreement with WizCom that provides Budget with certain
reservation system computer services that are substantially similar to computer
services provided to the Avis System. WizCom has also entered into agreements
with hotel and other rental car companies to provide travel related reservation
and distribution system services.
Credit Information Business. In 1995, we acquired Central Credit Inc.
("CCI"), a gambling patron credit information business. CCI maintains a database
of information provided by casinos regarding the credit records of casino gaming
patrons, and provides, for a fee, such information and related services to its
customers, which primarily consist of casinos.
Financial Products. Our former Essex Corporation ("Essex") subsidiary is a
third-party marketer of financial products for banks, primarily marketing
annuities, mutual funds and insurance products through financial institutions.
Essex generally markets annuities issued by insurance companies or their
affiliates, mutual funds issued by mutual fund companies or their affiliates,
and proprietary mutual funds of banks. Essex's contracts with the insurance
companies whose financial products it distributes generally entitle Essex to a
commission of slightly less than 1% on the premiums generated through Essex's
sale of annuities for these insurance companies. In January 1999, Essex was sold
to John Hancock Subsidiaries, Inc.
Mutual Funds. In August 1997, we formed an alliance with Frederick R.
Kobrick, a longtime mutual fund manager, to form a mutual fund company known as
Kobrick-Cendant Funds, Inc. (Kobrick which was subsequently renamed the Kobrick
Funds). Kobrick currently offers three no-load funds, Kobrick Capital Fund,
Kobrick Emerging Growth Fund and Kobrick Growth Fund.
Tax Refund Business. Through our Global Refund subsidiary, we assist
travelers to receive valued added tax ("VAT") refunds in 22 European countries,
Canada and Singapore. Global Refund is the world's leading VAT refund service,
with over 125,000 affiliated retailers and seven million transactions per year.
Global Refund operates over 400 cash refund offices at international airports
and other major points of departure and arrival worldwide. We plan to expand the
services Global Refund provides to travelers to include Entertainment(R) coupon
book memberships and the Travelers Advantage(R) service product.
Other Services. Spark Services, Inc. ("Spark") provides database-driven
dating services to over 300 radio stations throughout the United States and
Canada. Spark is the leading provider of dating and personals services to the
radio industry. Spark has also begun to test television distribution of its
services through infomercials, as well as through short form advertising and
affiliation deals with various programs. Consumers pay for Spark's services on a
per minute of usage transaction basis.
Our Numa Corporation subsidiary publishes personalized heritage
publications, including publications under the Halbert's name, and markets and
sells personalized merchandise.
Operating under the trade name "Welcome Wagon", we distribute complimentary
welcoming packages which provide new homeowners and other consumers throughout
the United States and Canada with discounts for local merchants. These
activities are conducted through our Welcome Wagon International Inc. and Getko
Group, Inc. subsidiaries. We are exploring opportunities to leverage the assets
and the distribution channels of such subsidiaries.
COMBINED OPERATIONS
Preferred Alliance and Co-Marketing Arrangements. We believe that there are
significant opportunities to capitalize on the significant and increasing amount
of aggregate purchasing power and marketing outlets represented by the
businesses in our business units. We initially tapped the potential of these
synergies within the lodging franchise systems in 1993 when we launched our
Preferred Alliance Program, under which hotel industry vendors provide
significant discounts, commissions and co-marketing revenue to hotel franchisees
plus preferred alliance fees to us in exchange for being designated as the
preferred provider of goods or services to the owners of our franchised hotels
or the preferred marketer of goods and services to the millions of hotel guests
who stay in the hotels and customers of our real estate brokerage franchisees
each year.
We currently participate in preferred alliance relationships with more than
95 companies, including some of the largest corporations in the United States.
The operating profit generated by most new preferred alliance arrangements
closely approximates the incremental revenue produced by such arrangements since
the costs of the existing infrastructure required to negotiate and operate these
programs are largely fixed.
DISCONTINUED OPERATIONS
On August 12, 1998, we announced that our Executive Committee of the Board
of Directors committed to discontinue our consumer software and classified
advertising businesses by disposing of our wholly owned subsidiaries Cendant
Software Corporation ("Software") and Hebdo Mag, respectively. On December 15,
1998, we completed the sale of Hebdo Mag to a company organized by Hebdo Mag
management for approximately $450 million, including approximately $315 million
in cash and 7.1 million shares of our common stock. On January 12, 1999, we
completed the sale of Software to Paris based Havas SA, a subsidiary of Vivendi
SA, for $800 million in cash plus future potential cash payments.
On April 21, 1999, we announced that the Board of Directors approved our
plan to pursue the sale of our Entertainment Publications, Inc. ("EPub")
business segment.
Software. Our Software subsidiary offered consumer software in various
multimedia forms, predominately on CD-ROM for personal computers. The Software
unit was one of the largest personal computer consumer software groups in the
world, and a leader in entertainment, educational and personal productivity
software. It included Sierra On-Line, Inc., Blizzard Entertainment and Knowledge
Adventure, Inc., and offered such titles as Diablo, Starcraft, You Don't Know
Jack, King's Quest, JumpStart, Math Blaster, Reading Blaster and many others.
These products were offered through a variety of distribution channels,
including specialty retailers, mass merchandisers, discounters and schools.
The entertainment, education and productivity software industry is
competitive. Software competed primarily with other developers of multimedia PC
based software. Products in the market compete primarily on the basis of
subjective factors such as entertainment value and objective factors such as
price, graphics and sound quality. Large diversified entertainment, cable and
telecommunications companies, in addition to large software companies, are
increasing their focus on the interactive entertainment and education software
market, which will result in greater competition.
The software segment had seasonal elements. Revenues were typically highest
during the third and fourth quarters and lowest during the first and second
quarters. This seasonal pattern was due primarily to the increased demand for
software products during the holiday season.
Classified Advertising. Hebdo Mag is an international publisher of over 180
titles and distributor of classified advertising information with operations in
fifteen countries including Canada, France, Sweden, Hungary, Taiwan, the United
States, Italy, Russia, the Netherlands, Australia, Argentina and Spain. Hebdo
Mag is involved in the publication, printing and distribution, via print and
electronic media, of branded classified advertising information products. Hebdo
Mag has also expanded into other related business activities, including the
distribution of third-party services and classified advertising web sites.
Hebdo Mag publishes over 11 million advertisements per year in over 180
publications. With a total annual circulation of over 85 million, management
estimates Hebdo Mag publications are read by over 200 million people. Unlike
newspapers, which contain significant editorial content, Hebdo Mag publications
contain primarily classified and display advertisements. These advertisements
target buyers and sellers of goods and services in the markets for used and new
cars, trucks, boats, real estate, computers, second-hand general merchandise and
employment as well as personals.
Hebdo Mag owns leading local classified advertising publishing franchises
in most of the regional markets where it has a presence. In addition to its
print titles, Hebdo Mag generates revenues by distributing third-party services
related to its classified business such as vehicle financing, vehicle and life
insurance and warranty protection.
The classified advertising information industry is highly fragmented, with
a large number of small, independent companies publishing local or regional
titles. Hebdo Mag is the only major company focused exclusively on this industry
on an international basis. In most of its major markets, Hebdo Mag owns leading
classified advertising franchises that have long standing, recognized
reputations with readers and advertisers. Among Hebdo Mag's leading titles, many
of which have been in existence for over 15 years, are: La Centrale des
Particuliers (France), Expressz (Hungary), The Trader (Indianapolis), Traders
Post (Nashville), Car News (Taiwan), Secondamano (Italy), Auto Trader, Renters
News, The Computer Paper (Canada), Iz Ruk v Ruki (Russia), Gula Tidningen
(Sweden), Segundamano (Argentina) and The Melbourne Trading Post (Australia).
Entertainment Publications. The Entertainment Publications Segment includes
numerous businesses established to provide unique products and services that are
designed to enhance a customer's purchasing power.
Products. Primarily through our EPub subsidiary, we offer discount programs
in specific markets throughout North America and certain international markets
and enhance other of our Individual and Insurance/Wholesale segment products. We
believe that EPub is the largest marketer of discount program books of this type
in the United States. EPub has a sales force of approximately 1,100 people with
approximately 800 people soliciting schools and approximately 300 people
soliciting merchants.
EPub solicits restaurants, hotels, theaters, sporting events, retailers and
other businesses which agree to offer services and/or merchandise at discount
prices (primarily on a two-for-the-price-of-one or 50% discount basis). EPub
sells discount programs, under its Entertainment(R), Entertainment(R) Values,
Gold C(R) and other trademarks, which typically provides discount offers to
individuals in the form of local discount coupon books. These books typically
contain coupons and/or a card entitling individuals to hundreds of discount
offers from participating establishments. Targeting middle to upper income
consumers, many of EPub's products also contain selected discount travel offers,
including offers for hotels, car rentals, airfare, cruises and tourist
attractions. More than 70,000 merchants with over 275,000 locations participate
in these programs. EPub also uses this national base of merchants to develop
other products, most notably, customized discount programs for major
corporations. These programs also may contain additional discount offers,
specifically designed for customized discount programs.
EPub's discount coupon books are sold annually by geographic area.
Customers are solicited primarily through schools and community groups that
distribute the discount coupon books and retain a portion of the proceeds for
their nonprofit causes. To a lesser extent, distribution occurs through
corporations as an employee benefit or customer incentive, as well as through
retailers and directly to the public. The discount coupon books are generally
provided to schools and community groups on a consignment basis. Customized
discount programs are distributed primarily by major corporations as loyalty
incentives for their current customers and/or as premiums to attract new
customers.
While prices of local discount coupon books vary, the customary price for
Entertainment(R), Entertainment(R) Values and Gold C(R) coupon books range
between $10 and $45. Customized discount programs are generally sold at
significantly lower prices. In 1998, over nine million Entertainment(R),
Entertainment(R) Values, Gold C(R) and other trademarked local discount coupon
books were published in North America.
Sally Foster, Inc., a subsidiary of EPub, provides elementary and middle
schools and selected youth community groups with gift-wrap and other seasonal
products for sale in their fund-raising efforts. EPub uses the same sales force
that sells the discount coupon books to schools, attempting to combine the sale
of gift-wrap with the sale of discount coupon books. In addition, EPub has a
specialized Sally Foster sales force.
REGULATION
Alliance Marketing Regulation. We market our products and services through
a number of distribution channels including telemarketing, direct mail and
on-line. These channels are regulated on the state and federal level and we
believe that these activities will increasingly be subject to such regulation.
Such regulation may limit our ability to solicit new members or to offer one or
more products or services to existing members.
A number of our products and services (such as Travelers Advantage(R) and
certain insurance products) are also subject to state and local regulations. We
believe that such regulations do not have a material impact on our business or
revenues.
Franchise Regulation. The sale of franchises is regulated by various state
laws, as well as by the Federal Trade Commission (the "FTC"). The FTC requires
that franchisors make extensive disclosure to prospective franchisees but does
not require registration. A number of states require registration or disclosure
in connection with franchise offers and sales. In addition, several states have
"franchise relationship laws" or "business opportunity laws" that limit the
ability of the franchisor to terminate franchise agreements or to withhold
consent to the renewal or transfer of these agreements. While our franchising
operations have not been materially adversely affected by such existing
regulation, we cannot predict the effect of any future legislation or
regulation.
Real Estate Regulation. The federal Real Estate Settlement Procedures Act
and state real estate brokerage laws restrict payments which real estate brokers
and mortgage brokers and other parties may receive or pay in connection with the
sales of residences and referral of settlement services (e.g., mortgages,
homeowners insurance, title insurance). Such laws may to some extent restrict
preferred alliance arrangements involving our real estate brokerage franchisees,
mortgage business and relocation business. Our mortgage banking services
business is also subject to numerous federal, state and local laws and
regulations, including those relating to real estate settlement procedures, fair
lending, fair credit reporting, truth in lending, federal and state disclosure,
and licensing.
Timeshare Exchange Regulation. Our timeshare exchange business is subject
to foreign, federal, state and local laws and regulations including those
relating to taxes, consumer credit, environmental protection and labor matters.
In addition, we are subject to state statutes in those states regulating
timeshare exchange services, and must prepare and file annually, with regulators
in states that require it, the "RCI Disclosure Guide to Vacation Exchange". We
are not subject to those state statutes governing the development of timeshare
condominium units and the sale of timeshare interests, but such statutes
directly affect the members and resorts that participate in the RCI Network.
Therefore, the statutes indirectly impact our timeshare exchange business.
EMPLOYEES
As of December 31, 1998, we employed approximately 35,000 persons full
time. Management considers our employee relations to be satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are located in leased space and located at
9 West 57th Street, New York, NY 10019. Many of our general corporate functions
are conducted at a building owned by us and located at 6 Sylvan Way, Parsippany,
New Jersey 07054 and at a building leased by us and located at 1 Sylvan Way,
Parsippany, New Jersey 07054 with a lease term expiring in 2008.
Our Travel Division has two properties which we own, a 166,000 square foot
facility in Virginia Beach, Virginia which serves as a satellite administrative
and reservations facility for Wizcom and ARAC, and a property located in
Kettering, UK which is the European office for RCI. The Travel Division also
leases space for its reservations centers and data warehouse in Winner and
Aberdeen, South Dakota; Phoenix, Arizona; Knoxville and Elizabethtown,
Tennessee; Tulsa and Drumright, Oklahoma; Indianapolis, Indiana; Orangeburg,
South Carolina and St. John, New Brunswick, Canada pursuant to leases that
expire in 2000, 2003, 2007, 2004, 1999, 2001, 2000, 2001, 2008, 2001 and 2008,
respectively. The Tulsa and Drumright, Oklahoma location serves as an Avis car
rental reservations center. In addition, the Travel Division has 18 leased
offices spaces located within the United States and an additional 30 leased
spaces in various countries outside the United States.
The Real Estate Division shares approximately six leases with the Travel
Division in various locations that function as sales offices.
The Individual Membership Segment has its principal offices located in
Stamford and Trumbull, Connecticut. The Individual Membership Segment leases
space for several of its call centers in Aurora, Colorado; Westerville, Ohio;
Brentwood, Tennessee; Houston and Arlington, Texas; Woburn, Massachusetts and
Great Falls, Montana pursuant to leases that expire in 2000, 2005, 2002, 2000,
2000, 2001 and 1999, respectively. We also own one building located in Cheyenne,
Wyoming which serves as a call center. In addition, the Individual Membership
Segment has leased smaller space in various locations for business unit and
ancillary needs. Internationally, the Individual Membership Segment has
approximately seven leased offices spaces located in various countries.
The main offices for the Fleet Segment are located in two leased spaces;
one in Hunt Valley, Maryland (200,000 square feet) and three in South Portland,
Maine (91,000 square feet) pursuant to leases that expire in 2003, 2008, 2004
and 2007, respectively. In addition, there are nine smaller leased spaces that
function as sales/distribution locations.
The Relocation Segment has their main corporate operations located in a
leased building in Danbury, Connecticut with a lease term expiring in 2008.
There are also five regional offices located in Walnut Creek, California;
Oakbrook and Schaumburg, Illinois; Irving, Texas and Mission Viejo, California
which provide operation support services for the region pursuant to leases that
expire in 2004, 2003, 2001 and 2003, respectively. We own the office in Mission
Viejo.
The Mortgage Segment has centralized its operations to one main area
occupying various leased offices in Mt. Laurel, New Jersey for a total of
approximately 600,000 square feet. The lease terms expire over the next ten
years.
The Insurance/Wholesale Segment leases domestic space in Nashville,
Tennessee; San Carlos, California; and Crozier, Virginia with lease terms ending
in 2002, 2003 and 1999, respectively. In addition, there are 11 leased locations
internationally that function as sales and administrative offices for
international membership with the main office located in Portsmouth, UK.
The primary office for the Entertainment Publication Segment (classified as
a discontinued operation) is located in Troy, Michigan (75,000 square feet) with
a lease term expiring in 2004. EPub also leases approximately 100 small office
locations throughout the United States and 10 internationally to conduct
distribution activities.
We own properties in Virginia Beach, Virginia and Westbury, New York and
lease space in Garden City, New York that supports the Other Consumer and
Business Services Segment. The Garden City location is the main operation and
administrative center for Wizcom. In addition, there are approximately six
leased office locations in the United States. Internationally, we lease office
space in London, UK (18,000 square feet) and own two buildings in Leeds, UK
(86,000 square feet) and one building in Bradford, England (25,000 square feet)
to support this segment.
We believe that such properties are sufficient to meet our present needs
and we do not anticipate any difficulty in securing additional space, as needed,
on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
Class Action Litigation
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Annual Report on Form 10-K/A, more than 70 lawsuits claiming to be class
actions, two lawsuits claiming to be brought derivatively on our behalf and
several individual lawsuits have been filed in various courts against us and
other defendants.
In re: Cendant Corporation Litigation, Master File No. 98-1664 (WHW)
(D.N.J.) (the "Calpers Action"), is a consolidated action consisting of over
sixty constituent class action lawsuits, and several individual lawsuits, that
were originally filed in the District of New Jersey, the District of
Connecticut, and the Eastern District of Pennsylvania. The Calpers Action is
brought on behalf of all persons who acquired securities of the Company and CUC,
except our PRIDES securities, between May 31, 1995 and August 28, 1998. The
Court granted the plaintiffs' unopposed motion for class certification on
January 27, 1999. Named as defendants are the Company; twenty-eight current and
former officers and directors of the Company, CUC and HFS Incorporated ("HFS");
and Ernst & Young LLP, CUC's former independent accounting firm.
The Amended and Consolidated Class Action Complaint in the Calpers Action
alleges that, among other things, the plaintiffs were damaged when they acquired
securities of the Company and CUC because, as a result of accounting
irregularities, the Company's and CUC's previously issued financial statements
were materially false and misleading, and the allegedly false and misleading
financial statements caused the prices of the Company's and CUC's securities to
be inflated artificially. The Amended and Consolidated Complaint alleges
violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the
"Securities Act") and Sections 10(b), 14(a), 20(a), and 20A of the Securities
Exchange Act of 1934 (the "Exchange Act"). The Calpers Action seeks damages in
unspecified amounts. Actions making substantially similar allegations have been
filed in the United States District Courts for the Eastern and Central Districts
of California, the Sourthern District of Florida, the Eastern District of
Louisiana, and the District of Connecticut. The Company has filed a motion
before the Judicial Panel on Multidistrict Litigation to transfer these actions
to the District of New Jersey for consolidation with the Calpers Action.
On December 14, 1998, the plaintiffs in the Calpers Action moved for
partial summary judgment, on liability only, against the Company on the claims
under Section 11 of the Securities Act. The plaintiffs adjourned this motion
sine die, however, without prejudice to the plaintiffs' right to re-notice the
motion. In connection with the plaintiffs' agreement to withdraw their summary
judgment motion, the Company agreed not to assert any automatic stay of
discovery that would otherwise apply to the Calpers Action if any defendant were
to file a motion to dismiss the Calpers Action.
On January 25, 1999, the Company answered the Amended Consolidated
Complaint and asserted Cross-Claims against Ernst & Young LLP ("Ernst & Young").
The Company's Cross-Claims allege that Ernst & Young failed to follow
professional standards to discover, and recklessly disregarded, the accounting
irregularities, and is therefore liable to the Company for damages. The
Cross-Claims assert breaches of Ernst & Young's audit agreements with the
Company, negligence, breaches of fiduciary duty, fraud, and contribution.
On March 26, 1999, Ernst & Young filed Cross-Claims against Cendant and
certain of the Company's present and former officers and directors, alleging
that any failure to discover the accounting irregularities was caused by
misrepresentations and omissions made to Ernst & Young in the course of its
audits and other reviews of the Company's financial statements. Ernst & Young's
Cross-Claims assert claims for breach of contract, fraud, fraudulent inducement,
negligent misrepresentation and contribution. Damages in unspecified amounts are
sought for the costs to Ernst & Young associated with defending the various
shareholder lawsuits and for harm to Ernst & Young's reputation.
Welch & Forbes, Inc. v. Cendant Corp., et al., No. 98-2819 (WHW) (the
"PRIDES Action") is a class action brought on behalf of purchasers of the
Company's PRIDES securities between February 24 and July 15, 1998. Named as
defendants are the Company; Cendant Capital I, a statutory business trust formed
by the Company to participate in the offering of PRIDES securities; seventeen
current and former officers and directors of the company, CUC and HFS; Ernst &
Young; and the underwriters for the PRIDES offering, Merrill Lynch & Co.;
Merrill Lynch, Pierce, Fenner & Smith Incorporated; and Chase Securities Inc. A
substantially similar action filed in the Superior Court of New Jersey, entitled
First Trust Corp. IRA of Gloria Rosenberg v. Cendant Corp., et al., No.
L-1406-98 (Law Div.), was dismissed on August 7, 1998, without prejudice to the
plaintiff's right to re-file the case in the United States District Court for
the District of New Jersey.
The allegations in the Amended Consolidated Complaint in the PRIDES Action
are substantially similar to those in the Calpers Action, and violations of
Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a)
of the Exchange Act are asserted. Damages in unspecified amounts are sought.
On November 11, 1998, the plaintiffs in the PRIDES Action brought motions
for (i) certification of a proposed class of PRIDES purchasers; (ii) summary
judgment against the Company under Section 11 of the Securities Act; and (iii)
an injunction requiring the Company to place $300 million in a trust account for
the benefit of the PRIDES investors pending final resolution of their claims.
These motions were withdrawn in connection with a partial settlement of the
PRIDES Action (see Note 6).
On April 27, 1998, a purported shareholder derivative action, Deutch v.
Silverman, et al., No. 98-1998 (WHW), was filed in the District of New Jersey
against certain of the Company's current or former directors and officers; The
Bear Stearns Companies, Inc.; Bear Stearns & Co., Inc.; and, as a nominal party,
the Company. The complaint in the Deutch action, as amended on December 7, 1998,
alleges that certain individual officers and directors of the Company breached
their fiduciary duties by selling shares of the Company's stock while in
possession of non-public material information concerning the accounting
irregularities. The complaint also alleges various other breaches of fiduciary
duty and gross negligence in connection with, among other things, the accounting
irregularities discussed above. Damages are sought on behalf of Cendant in
unspecified amounts. The Company and the other defendants have each moved to
dismiss the Deutch Action, which motions are shceduled to be heard by the Court
on June 7, 1999.
Semerenko v. Cendant Corp., et al., Civ. Action No. 98-5384 (D. N.J.) and
P. Schoenfeld Asset Management LLC v. Cendant Corp., et al., (Civ. Action No.
98-4734) (D. N.J) (the "ABI Actions") were initially commenced in October and
November of 1998, respectively, on behalf of a putative class of persons who
purchased securities of American Bankers Insurance Group, Inc. ("ABI") between
March 23, 1998 and October 13, 1998. Named as defendants are the Company, four
former CUC officers and directors, and Ernst & Young. The complaints in the ABI
Actions, as amended on February 8, 1999, assert violations of Sections 10(b),
14(e) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder,
relating to the accounting irregularities discussed above. Plaintiffs allege,
among other things, that the Company made misrepresentations and omissions
regarding its ability and intent to complete a tender offer and subsequent
merger with ABI. Plaintiffs allege that such misrepresentations and omissions
caused the price of ABI securities to be artificially inflated. Plaintiffs seek,
among other things, unspecified compensatory damages. The Company filed a motion
to dismiss the ABI Actions on March 10, 1999. The other defendants had also
moved to dismiss. The United States District Court for the District of New
Jersey found that the class action failed to state a claim upon which relief
could be granted and, accordingly, dismissed the class action by order dated
April 30, 1999.
Kennilworth Partners, L.P., et al. v. Cendant Corp., et al., 98 Civ. 8939
(DC) (the "Kennilworth Action") was filed on December 18, 1998 in the Southern
District of New York on behalf of three investment companies. Named as
defendants are the Company; thirty of its present and former officers and
directors; HFS; and Ernst & Young. The complaint in the Kennilworth Action, as
amended on January 26, 1999, alleges that the plaintiffs purchased convertible
notes issued by HFS pursuant to an indenture dated February 28, 1996 and were
damaged because they converted their notes into shares of common stock in the
Company in the weeks prior to the Company's April 15, 1998 announcement. The
amended complaint also alleges that plaintiffs were damaged by purchasing in
March 1998 additional notes issued by the Company, whose market value declined
as a result of the April 15, 1998 announcement and the subsequent events
described above. The amended complaint asserts violations of Sections 11, 12 and
15 of the Securities Act and Sections 10(b) and 20 of the Exchange Act; a
common-law breach of contract claim is also asserted. Damages are sought in an
amount estimated to be in excess of $13.6 million. On February 4, 1999, the
Court ordered the Kennilworth Action transferred to the District of New Jersey,
with the consent of the plaintiff and the Company. On April 29, 1999, the
Company moved to dismiss the Securities Act claims brought against it, which
motion is scheduled to be heard by the Court on June 7, 1999.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC (the
"Corwin Action"), was filed on April 29, 1998 in the Court of Chancery for the
State of Delaware. The Corwin Action is purportedly brought derivatively, on
behalf of the Company, and as a class action, on behalf of all shareholders of
HFS who exchanged their HFS shares for CUC shares in connection with the Merger.
The Corwin Action names as defendants HFS and twenty-eight individuals who are
or were directors of the Company and HFS. The complaint in the Corwin Action, as
amended on July 28, 1998, alleges that HFS and its directors breached their
fiduciary duties of loyalty, good faith, care and candor in connection with the
Cendant Merger, in that they failed to properly investigate the operations and
financial statements of CUC before approving the Merger at an allegedly
inadequate price. The amended complaint also alleges that the Company's
directors breached their fiduciary duties by entering into an employment
agreement with our former Chairman, Walter A. Forbes, in connection with the
Merger that purportedly amounted to corporate waste. The Corwin Action seeks,
among other things, recision of the Merger and compensation for all losses and
damages allegedly suffered in connection therewith. On October 7, 1998, Cendant
filed a motion to dismiss the Corwin Action or, in the alternative, for a stay
of the Corwin Action pending determination of the Calpers Action and the Deutch
Action. The plaintiffs in the Corwin Action have moved for leave to file a
second amended complaint, which motion Cendant has opposed. A decision by the
Court is pending.
Kevlin, et al. v. Cendant Corp., No. C-98-12602-B (the "Kevlin Action"),
was commenced in Deecember 1998 in the County Court of Dallas County, Texas.
According to the complaint, plaintiffs are former shareholders of an entity
known as Kevlin Services, Inc. In 1996, a subsidiary of Cendant acquired all of
the assets of the Kevlin Services, Inc. in exchange for approximately 1,155,733
shares of common stock of CUC International, Inc. According to the plaintiffs'
complaint, plaintiffs were to receive CUC shares worth $26,370,000 and instead
received shares worth substantially less than that amount. Plaintiffs have
asserted claims against Cendant, its subsidiary and Ernst & Young LLP for fraud,
negligent misrepresentation, breach of duty of good faith and fair dealing,
breach of contract, conspiracy, negligence and gross negligence. Plaintiffs seek
compensatory and exemplary damages in unspecified amounts. Cendant and its
subsidiary has filed a general denial to the allegations in the complaint.
On December 17, 1998, Janice G. and Robert M. Davidson, former majority
shareholders of a California computer software firm acquired by the Company in a
July 1996 merger (the "Davidson Merger"), served Cendant with a Demand for
Arbitration of claims against Cendant in connection with the Davidson Merger and
a settlement agreement purporting to settle all disputes arising out of the
Davidson Merger (the "Davidson Settlement"). The Demand asserts claims for: (i)
securities fraud under federal, state and common law theories relating to the
Davidson Merger, through which the Davidsons received approximately 21,670,000
common shares of CUC stock and options on CUC stock, based upon CUC's accounting
irregularities and alleged misrepresentations concerning the Davidsons'
employment as CUC executives; (ii) fraudulent taking of trust property and
unjust enrichment in connection with the Davidson Merger; and (iii) recision of
the Davidson Settlement on grounds of unilateral mistake, failure of
consideration, and prejudice to the public interest. The Demand seeks
unspecified damages and punitive damages and a declaratory judgment that the
Davidsons are entitled to rescind the Davidson Settlement and that the claims in
the Demand are arbitrable.
Cendant answered the Demand on January 12, 1999, denying all the material
allegations in the Demand, and also filed a Complaint for Injunctive and
Declaratory Relief against the Davidsons in the United States District Court for
the Central District of California (the "Cendant Complaint"), seeking to enjoin
the arbitration based upon Cendant's belief that the parties agreed in the
Davidson Settlement not to arbitrate ten of the eleven claims contained in the
Demand, and upon Cendant's belief that the arbitration clauses under which the
Davidsons bring their claims are inapplicable to the dispute. In February 1999,
Cendant filed a Motion for Preliminary Injunction seeking to enjoin the
arbitration proceedings pending the Court's final resolution of the dispute on
the merits. The Davidsons filed a motion to dismiss the Cendant Complaint (or
for summary judgment). On April 14, 1999 the Court entered an order granting
summary judgment for the Davidsons, denying Cendant's Motion for Preliminary
Injunction and dismissing Cendant's Complaint. Arbitration is pending.
On April 14, 1999, the Davidsons filed a complaint in the Central District
of California against Cendant alleging essentially the same claims asserted in
the Demand. The complaint seeks unspecified damages and punitive damages, and
was filed purportedly to toll the statute of limitations pending arbitration of
the claims in the Demand.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC has
advised us that its inquiry should not be construed as an indication by the SEC
or its staff that any violations of law have occurred. While our management has
made all adjustments considered necessary as a result of the findings of the
Investigations and the restatement of our financial statements for 1997, 1996
and 1995, and the first six months of 1998, we can provide no assurances that
additional adjustments will not be necessary as a result of these government
investigations.
In connection with the Merger, certain officers and directors of HFS
exchanged their shares of HFS common stock and options exercisable for HFS
common stock for shares of the Company's Common Stock and options exercisable
for the Company's Common Stock, respectively. As a result of the aforementioned
accounting irregularities, such officers and directors have advised the Company
that they believe they have claims against the Company in connection with such
exchange. In addition, certain current and former officers and directors of the
Company would consider themselves to be members of any class ultimately
certified in the Federal Securities Actions now pending in which the Company is
named as a defendant by virtue of their having been HFS stockholders at the time
of the Merger.
Other than with respect to the PRIDES class action litigation described
below, we do not believe it is feasible to predict or determine the final
outcome or resolution of these proceedings or to estimate the amounts or
potential range of loss with respect to these proceedings and investigations. In
addition, the timing of the final resolution of these proceedings and
investigations is uncertain. The possible outcomes or resolutions of these
proceedings and investigations could include judgments against us or settlements
and could require substantial payments by us. Our management believes that
adverse outcomes with respect to such proceedings and investigations could have
a material adverse impact on our financial condition, results of operations and
cash flows.
Settlement of PRIDES Class Action Litigation
On March 17, 1999, we entered into a stipulation of settlement with
plaintiff's counsel representing the class of holders of our PRIDES securities
who purchased their securities on or prior to April 15, 1998 ("eligible
persons") to settle their class action lawsuit against us. Under the stipulation
of settlement, eligible persons will receive a new security -- a Right -- for
each PRIDES security held on April 15, 1998. Current holders of PRIDES will not
receive any Rights (unless they also held PRIDES on April 15, 1998). We had
originally announced a preliminary agreement in principle to settle such lawsuit
on January 7, 1999. The final agreement maintained the basic structure and
accounting treatment as the preliminary agreement.
Based on the settlement agreement, we recorded an after tax charge of
approximately $228 million, or $0.26 per share ($351 million pre-tax), in the
fourth quarter of 1998 associated with the settlement agreement in principle to
settle the PRIDES securities class action. We recorded an increase in additional
paid-in capital of $350 million offset by a decrease in retained earnings of
$228 million resulting in a net increase in stockholders' equity of $122 million
as a result of the prospective issuance of the Rights. As a result, the
settlement should not reduce net book value. In addition the settlement is not
expected to reduce 1999 earnings per share unless our common stock price
materially appreciates.
At any time during the life of the Rights, holders may (a) sell them or (b)
exercise them by delivering to us three Rights together with two PRIDES in
exchange for two new PRIDES (the "New PRIDES"). The terms of the New PRIDES will
be the same as the currently outstanding PRIDES, except that the conversion rate
will be revised so that, at the time the Rights are distributed, each of the New
PRIDES will have a value equal to $17.57 more than each original PRIDES, based
upon a generally accepted valuation model. Based upon the closing price per
share of $16.6875 of our Common Stock on March 17, 1999, the effect of the
issuance of the New PRIDES will be to distribute approximately 19 million more
shares of our common stock when the mandatory purchase of our common stock
associated with the PRIDES occurs in February of 2001. This represents
approximately 2% more shares of common stock than are currently outstanding.
The settlement agreement also requires us to offer to sell 4 million
additional PRIDES (having identical terms to currently outstanding PRIDES) (the
"Additional PRIDES") at "theoretical value" to holders of Rights for cash.
Theoretical value will be based on the same valuation model utilized to set the
conversion rate of the New PRIDES. Based on that valuation model, the currently
outstanding PRIDES have a theoretical value of $28.07 based on the closing price
for our common stock on March 17, 1999, which is less than their current trading
price. The offering of Additional PRIDES will be made only pursuant to a
prospectus filed with the SEC. We currently expect to use the proceeds of such
an offering to repurchase our common stock and for other general corporate
purposes. The arrangement to offer Additional PRIDES is designed to enhance the
trading value of the Rights by removing up to 6 million Rights from circulation
via exchanges associated with the offering and to enhance the open market
liquidity of New PRIDES by creating 4 million New PRIDES via exchanges
associated with the offering. If holders of Rights do not acquire all such
PRIDES, they will be offered to the public.
Under the settlement agreement, we have also agreed to file a shelf
registration statement for an additional 15 million PRIDES, which could be
issued by us at any time for cash. However, during the last 30 days prior to the
expiration of the Rights in February 2001, we will be required to make these
additional PRIDES available to holders of Rights at a price in cash equal to
105% of the theoretical value of the additional PRIDES as of a specified date.
The PRIDES, if issued, would have the same terms as the currently outstanding
PRIDES and could be used to exercise Rights.
The Rights will be distributed following final court approval of the
settlement and after the effectiveness of the registration statement filed with
the SEC covering the New PRIDES. It is presently expected that if the court
approves the settlement and such conditions are fulfilled, the Rights will be
distributed in August or September 1999. This summary of the settlement does not
constitute an offer to sell any securities, which will only be made by means of
a prospectus after a registration statement is filed with the SEC. There can be
no assurance that the court will approve the agreement or that the conditions
contained in the agreement will be fulfilled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an annual meeting of our shareholders on October 30, 1998, pursuant
to a Notice of Annual Meeting and Proxy Statement dated September 28, 1998, a
copy of which has been filed previously with the Securities and Exchange
Commission, at which our shareholders considered and approved the election of
six directors for a term of three years, the Company's 1998 Employee Stock
Purchase Plan, and ratification of Deloitte & Touche LLP as auditors. The
results of such matters are as follows:
Proposal 1: To elect six directors for a three-year term and until their
successors are duly elected and qualified.
Results: For Withheld
729,374,048 21,047,428
Proposal 2: To approve the Company's 1998 Employee Stock Purchase Plan
Results: For Against Abstain
714,345,354 33,516,760 1,938,144
Proposal 3: To ratify and approve the appointment of Deloitte & Touche LLP as
the Company's Independent Auditors for the year ending December 31, 1998.
Results: For Against Abstain
744,191,719 5,471,312 758,445
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
Market Price on Common Stock
Our Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "CD". At March 22, 1999 the number of stockholders of record was
approximately 10,841. The following table sets forth the quarterly high and low
sales prices per share as reported by the NYSE for 1998 and 1997 based on a year
ended December 31.
1997 HIGH LOW
First Quarter 26 7/8 22 1/2
Second Quarter 26 3/4 20
Third Quarter 31 3/4 23 11/16
Fourth Quarter 31 3/8 26 15/16
1998 HIGH LOW
First Quarter 41 32 7/16
Second Quarter 41 3/8 18 9/16
Third Quarter 22 7/16 10 7/16
Fourth Quarter 20 5/8 7 1/2
On March 22, 1999, the last sale price of our Common Stock on the NYSE was
$16 5/16 per share.
All stock price information has been restated to reflect a three-for-two
stock split effected in the form of a dividend to stockholders of record on
October 7, 1996, payable on October 21, 1996.
Dividend Policy
We expect to retain our earnings for the development and expansion of its
business and the repayment of indebtedness and do not anticipate paying
dividends on Common Stock in the foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (1) (2)
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(In millions, except per share amounts)
Operations
Net revenues $ 5,086.6 $ 4,051.9 $ 3,063.1 $ 2,417.6
----------- ---------- ---------- ----------
Operating expense 1,721.5(3) 1,179.4 1,042.6 882.9
Marketing and reservation expense 1,158.5 1,031.8 909.1 743.6
General and administrative expense 648.7 627.8 330.7 271.0
Depreciation and amortization expense 314.0 229.0 138.5 93.9
Other charges 838.3(4) 704.1(5) 109.4(6) 97.0(7)
Interest expense, net 113.9 50.6 14.2 16.4
Provision for income taxes 95.4 180.1 214.1 128.5
Minority interest, net 50.6 -- -- --
----------- ---------- ---------- ---------
Income from continuing operations $ 145.7 $ 49.1 $ 304.5 $ 184.3
Income from continuing operations per share:
Basic $ 0.17 $ 0.06 $ 0.40 $ 0.27
Diluted 0.16 0.06 0.38 0.25
Financial Position
Total assets $ 20,202.1 $ 14,041.5 $ 12,747.6 $ 8,514.4
Long-term debt 3,362.9 1,246.0 780.8 336.0
Assets under management and mortgage programs 7,511.9 6,443.7 5,729.2 4,955.6
Debt under management and mortgage programs 6,896.8 5,602.6 5,089.9 4,427.9
Mandatorily redeemable securities issued by subsidiary 1,472.1 -- -- --
Shareholders' equity 4,835.6 3,921.4 3,955.7 1,898.2
Other Information (8)
Adjusted EBITDA (9) $ 1,557.9 $ 1,212.9 $ 780.7 $ 520.1
Cash flows provided by (used in):
Operating activities 790.8 1,196.3 1,457.9 1,144.3
Investing activities (4,346.2) (2,308.6) (3,087.2) (1,789.0)
Financing activities 4,689.6 900.1 1,781.0 661.2
</TABLE>
- -------------
(1) Selected financial data is presented for four years. Financial data
subsequent to December 31, 1994 had been restated as a result of findings
from investigations into accounting irregularities discovered at the former
business units of CUC International, Inc. ("CUC").
<PAGE>
Financial data for periods prior to December 31, 1994 was not restated and
therefore should not be relied on (see Note 18 to the consolidated
financial statements).
(2) Selected financial data includes the operating results of acquisitions
accounted for under the purchase method of accounting since the respective
dates of acquisition, including: (i) National Parking Corporation in April
1998; (ii) Harpur Group in January 1998; (iii) Jackson Hewitt, Inc. in
January 1998; (iv) Resort Condominiums International, Inc. in November
1996; (v) Avis, Inc. in October 1996; (vi) Coldwell Banker Corporation in
May 1996; and (vii) Century 21 Real Estate Corporation in August 1995.
(3) Includes a non-cash charge of $50.0 million ($32.2 million, after tax or
$0.04 per diluted share) related to the write off of certain equity
investments in interactive membership businesses and impaired goodwill
associated with the National Library of Poetry, a Company subsidiary.
(4) Represents charges of: (i) $433.5 million ($281.7 million, after tax or
$0.32 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers Insurance Group, Inc. and Providian Auto
and Home Insurance Company; (ii) $351.0 million ($228.2 million, after tax
or $0.26 per diluted share) associated with the final agreement to settle
the PRIDES securities class action suit; and (iii) $121.0 million ($78.7
million, after tax or $0.09 per diluted share) comprised of the costs of
the investigations into previously discovered accounting irregularities at
the former CUC business units, including incremental financing costs and
separation payments, principally to the Company's former chairman. The
aforementioned charges were partially offset by a credit of $67.2 million
($43.7 million, after tax or $0.05 per diluted share) associated with
changes in the original estimate of 1997 merger-related costs and other
unusual charges.
(5) Represents merger-related costs and other unusual charges related to
continuing operations of $704.1 million ($504.7 million, after tax or $0.58
per diluted share) primarily associated with the Cendant merger in December
1997 and merger with PHH Corporation ("PHH") in April 1997.
(6) Represents merger-related costs and other unusual charges related to
continuing operations of $109.4 million ($70.0 million, after tax or $0.09
per diluted share) substantially related to the Company's August 1996
merger with Ideon Group, Inc. ("Ideon").
(7) Represents a provision for costs related to the abandonment of certain
Ideon development efforts and the restructuring of certain Ideon
operations. The charges aggregated $97.0 million ($62.1 million, after tax
or $0.08 per diluted share).
(8) There were no dividends declared during the periods presented above except
for PHH and Ideon, which declared and paid dividends to their shareholders
prior to their respective mergers with the Company.
(9) Adjusted EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization, adjusted to exclude other charges, which are
of a non-recurring or unusual nature. Adjusted EBITDA is a measure of
performance which is not recognized under generally accepted accounting
principles and should not replace income from continuing operations or cash
flows in measuring operating results or liquidity. However, management
believes such measure is an informative representation of how management
evaluates the operating performance of the Company and its underlying
business segments (see Note 26 to the consolidated financial statements).
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are one of the foremost consumer and business services companies in the
world. We were created through the December 1997 merger (the "Cendant Merger")
of HFS Incorporated ("HFS") and CUC International Inc. ("CUC"). We provide
business services to our customers, many of which are consumer services
companies, and also provide fee-based services directly to consumers, generally
without owning the assets or sharing the risks associated with the underlying
businesses of our customers or collaborative partners.
We operate in four principal divisions -- travel related services, real estate
related services, alliance marketing related services and other consumer and
business services. Our businesses provide a wide range of complementary consumer
and business services, which together represent nine business segments. The
travel related services businesses facilitate vacation timeshare exchanges,
manage corporate and government vehicle fleets and franchise car rental and
hotel businesses; the real estate related services businesses franchise real
estate brokerage businesses, provide home buyers with mortgages and assist in
employee relocation; and the alliance marketing related services businesses,
provide an array of value driven products and services. Our other consumer and
business services include our tax preparation services franchise, information
technology services, car parking facility services, vehicle emergency support
and rescue services, credit information services, financial products and other
consumer-related services.
As a franchisor of hotels, real estate brokerage offices, car rental operations
and tax preparation services, we license the owners and operators of independent
businesses to use our brand names. We do not own or operate hotels, real estate
brokerage offices, car rental operations or tax preparation offices (except for
certain company-owned Jackson Hewitt offices, which we intend to franchise).
Instead, we provide our franchisee customers with services designed to increase
their revenue and profitability.
We have recently changed our focus from making strategic acquisitions of new
businesses to maximizing the opportunities and growth potential of our existing
businesses. In connection with this change in focus, we intend to review and
evaluate our existing businesses to determine whether certain businesses
continue to meet our business objectives. As part of our ongoing evaluation of
such businesses, we intend from time to time to explore and conduct discussions
with regard to divestitures and related corporate transactions. However, we can
give no assurance with respect to the magnitude, timing, likelihood or business
effect of any possible transaction. We also cannot predict whether any
divestiture or other transactions will be consummated or, if consummated, will
result in a financial or other benefit to us. We intend to use a portion of the
proceeds from future dispositions, if any, together with the proceeds of
potential future debt issues and bank borrowings and cash from operations, to
retire indebtedness, to repurchase our common stock commensurate with approvals
from our Board of Directors and for other general corporate purposes. As a
result of our aforementioned change in focus and since our implementation of a
program to divest non-strategic businesses and assets, we completed the sale of
two of our business segments; announced our intention to dispose of a third
business segment and divested or announced our intention to divest certain other
businesses (see "Liquidity and Capital Resources - Divestitures").
Prior to the Cendant Merger, both HFS and CUC had grown significantly through
mergers and acquisitions accounted for under both the pooling of interests
method, the most significant being the merger of HFS with PHH Corporation
("PHH") in April 1997 (the "PHH Merger"), and purchase method of accounting. The
underlying Results of Operations discussions are presented as if all businesses
acquired in mergers and acquisitions accounted for as poolings of interests have
operated as one entity since inception.
Results of Operations
This discussion should be read in conjunction with the information contained in
our Consolidated Financial Statements and accompanying Notes thereto included
elsewhere herein.
Our operating results and the operating results of certain of our underlying
business segments are comprised of business combinations accounted for under the
purchase method of accounting. Accordingly, the results of operations of such
acquired companies have been included in our consolidated operating results and
our applicable business segments from the respective dates of acquisition. See
"Liquidity and Capital Resources" for a discussion of our purchase method
acquisitions.
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization, adjusted for Other charges which
are of a non-recurring or unusual nature, and are not included in assessing
segment performance or are not segment-specific. Our management believes such
discussion is the most informative representation of how management evaluates
performance. We have determined that we have eight reportable operating segments
based primarily on the types of services we provide, the consumer base to which
marketing efforts are directed and the methods we use to sell services. For
additional information, including a description of the services provided in each
of our reportable operating segments, see Note 26 to the Consolidated Financial
Statements.
Consolidated Results - 1998 vs. 1997
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
(Dollars in millions) 1998 1997 % Change
---------- ----------- ----------
<S> <C> <C> <C>
Net revenues $ 5,086.6 $ 4,051.9 26%
Operating expenses (1) 3,528.7 2,839.0 24%
---------- -----------
Adjusted EBITDA 1,557.9 1,212.9 28%
Other charges
Litigation settlement 351.0 - *
Termination of proposed acquisitions 433.5 - *
Executive terminations 52.5 - *
Investigation-related costs 33.4 - *
Merger-related costs and other unusual
charges (credits) (67.2) 704.1 *
Financing costs 35.1 - *
Depreciation and amortization expense 314.0 229.0 37%
Interest expense, net 113.9 50.6 125%
---------- -----------
Pre-tax income from continuing operations
before minority interest, extraordinary
gain and cumulative effect of accounting
change 291.7 229.2 27%
Provision for income taxes 95.4 180.1 (47%)
Minority interest, net of tax 50.6 - *
---------- -----------
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change 145.7 49.1 *
Loss from discontinued operations, net of tax (10.8) (9.6) *
Gain on sale of discontinued operations, net of tax 404.7 - *
Extraordinary gain, net of tax - 26.4 *
Cumulative effect of accounting
change, net of tax - (283.1) *
---------- -----------
Net income (loss) $ 539.6 $ (217.2) *
========== ===========
</TABLE>
- ---------
(1) Exclusive of Other charges and depreciation and amortization expense.
* Not meaningful.
Revenues and Adjusted EBITDA
Revenues and Adjusted EBITDA increased $1.0 billion (26%) and $345.0 million
(28%), respectively, in 1998 over 1997, which reflected growth in substantially
all of our reportable operating segments. Significant contributing factors which
gave rise to such increases included substantial growth in the volume of
mortgage services provided and an increase in the amount of royalty fees
received from our franchised brands, principally within the real estate
franchise segment. In addition, revenues and Adjusted EBITDA in 1998 included
the operating results of 1998 acquisitions, including National Parking
Corporation Limited ("NPC") and Jackson Hewitt Inc. ("Jackson Hewitt"). A
detailed discussion of revenues and Adjusted EBITDA trends from 1997 to 1998 is
included in the section entitled "Results of Reportable Operating Segments --
1998 vs. 1997."
1998 Other Charges
Litigation Settlement. We recorded a non-cash charge of $351.0 million in the
fourth quarter of 1998 in connection with an agreement to settle a class action
lawsuit that was brought on behalf of the holders of our Income or Growth FELINE
PRIDES securities who purchased their securities on or prior to April 15, 1998,
the date on which we announced the discovery of accounting irregularities in the
former business units of CUC (see "Liquidity and Capital Resources -- FELINE
PRIDES and Trust Preferred Securities").
Termination of Proposed Acquisitions. We incurred $433.5 million of costs, which
included a $400.0 million cash payment to American Bankers Insurance Group, Inc.
("American Bankers"), in connection with terminating the proposed acquisitions
of American Bankers and Providian Auto and Home Insurance Company ("Providian")
(see "Liquidity and Capital Resources -Termination of Proposed Acquisitions").
Executive Terminations. We incurred $52.5 million of costs in 1998 related to
the termination of certain of our former executives, principally Walter A.
Forbes, who resigned as our Chairman and as a member of our Board of Directors
in July 1998. The severance agreement reached with Mr. Forbes entitled him to
the benefits required by his employment contract relating to a termination of
Mr. Forbes' employment with us for reasons other than for cause. Aggregate
benefits given to Mr. Forbes resulted in a charge of $50.9 million comprised of
$38.4 million in cash payments and 1.3 million of immediately vested Company
stock options, with a Black-Scholes value of $12.5 million.
Investigation-Related Costs. We incurred $33.4 million of professional fees,
public relations costs and other miscellaneous expenses in connection with our
discovery of accounting irregularities in the former business units of CUC and
the resulting investigations into such matters.
Financing Costs. In connection with our discovery and announcement of accounting
irregularities and the corresponding lack of audited financial statements, we
were temporarily disrupted in accessing public debt markets. As a result, we
paid $27.9 million in fees associated with waivers and various financing
arrangements. Additionally, during 1998, we exercised our option to redeem our
4-3/4% Convertible Senior Notes (the "4 3/4% Notes"). At such time, we
anticipated that all holders of the 4 3/4% Notes would elect to convert the 4
3/4% Notes to our common stock. However, at the time of redemption, holders of
the 4 3/4% Notes elected not to convert the 4 3/4% Notes to our common stock and
as a result, we redeemed such notes at a premium. Accordingly, we recorded a
$7.2 million loss on early extinguishment of debt.
1997 Merger-Related Costs and Other Unusual Charges
We incurred merger-related costs and other unusual charges ("Unusual Charges")
in 1997 related to continuing operations of $704.1 million primarily associated
with the Cendant Merger (the "Fourth Quarter 1997 Charge") and the PHH Merger
(the "Second Quarter 1997 Charge").
<TABLE>
<CAPTION>
Net Balance at
Unusual Reductions December 31,
(In millions) Charges 1997 1998 1998
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Fourth Quarter 1997 Charge $ 454.9 $ (257.5) $ (130.2) $ 67.2
Second Quarter 1997 Charge 283.1 (207.0) (59.7) 16.4
------------- ------------- ----------- -------------
Total 738.0 (464.5) (189.9) 83.6
Reclassification for discontinued
operations (33.9) 33.9 - -
------------- ------------- ----------- -------------
Total Unusual Charges related to
continuing operations $ 704.1 $ (430.6) $ (189.9) $ 83.6
============= ============== ============ =============
</TABLE>
Fourth Quarter 1997 Charge. We incurred Unusual Charges in the fourth quarter of
1997 totaling $454.9 million substantially associated with the Cendant Merger
and our merger in October 1997 with Hebdo Mag International, Inc. ("Hebdo Mag"),
a classified advertising business. Reorganization plans were formulated prior to
and implemented as a result of the mergers. We determined to streamline our
corporate organization functions and eliminate several office locations in
overlapping markets. Our management's plan included the consolidation of
European call centers in Cork, Ireland and terminations of franchised hotel
properties.
Unusual Charges included $93.0 million of professional fees primarily consisting
of investment banking, legal and accounting fees incurred in connection with the
aforementioned mergers. We also incurred $170.7 million of personnel-related
costs including $73.3 million of retirement and employee benefit plan costs,
$23.7 million of restricted stock compensation, $61.4 million of severance
resulting from consolidations of European call centers and certain corporate
functions and $12.3 million of other personnel-related costs. Unusual Charges
included $78.3 million of business termination costs which consisted of a $48.3
million non-cash impairment write-down of hotel franchise agreement assets
associated with a quality upgrade program and $30.0 million of costs incurred to
terminate a contract which may have restricted us from maximizing opportunities
afforded by the Cendant Merger. We also provided for facility-related and other
costs of $112.9 million including $70.0 million of irrevocable contributions
made to independent technology trusts for the direct benefit of lodging and real
estate franchisees, $16.4 million of building lease termination costs and a
$22.0 million reduction in intangible assets associated with our wholesale
annuity business for which impairment was determined in 1997. During the year
ended December 31, 1998, we recorded a net credit of $28.1 million to Unusual
Charges with a corresponding reduction to liabilities primarily as a result of a
change in the original estimate of costs to be incurred. We made cash payments
of $102.6 million and $152.2 million during 1998 and 1997, respectively, related
to the Fourth Quarter 1997 Charge. Liabilities of $67.2 million remained at
December 31, 1998 which were primarily attributable to future severance costs
and executive termination benefits.
Second Quarter 1997 Charge. We incurred $295.4 million of Unusual Charges in the
second quarter of 1997 primarily associated with the PHH Merger. During the
fourth quarter of 1997, as a result of changes in estimate, we adjusted certain
merger-related liabilities, which resulted in a $12.3 million credit to Unusual
Charges. Reorganization plans were formulated in connection with the PHH Merger
and were implemented upon consummation. The PHH Merger afforded us, at such
time, an opportunity to rationalize our combined corporate, real estate and
travel-related businesses, and enabled our corresponding support and service
functions to gain organizational efficiencies and maximize profits. We initiated
a plan just prior to the PHH Merger to close hotel reservation call centers,
combine travel agency operations and continue the downsizing of fleet operations
by reducing headcount and eliminating unprofitable products. In addition, we
initiated plans to integrate our relocation, real estate franchise and mortgage
origination businesses to capture additional revenues through the referral of
one business unit's customers to another. We also formalized a plan to
centralize the management and headquarters functions of our corporate relocation
business unit subsidiaries. Such initiatives resulted in write-offs of abandoned
systems and leasehold assets commencing in the second quarter of 1997. The
aforementioned reorganization plans included the elimination of PHH corporate
functions and facilities in Hunt Valley, Maryland.
Unusual Charges included $154.1 million of personnel-related costs associated
with employee reductions necessitated by the planned and announced consolidation
of our corporate relocation service businesses worldwide as well as the
consolidation of our corporate activities. Personnel-related charges also
included termination benefits such as severance, medical and other benefits and
provided for retirement benefits pursuant to pre-existing contracts resulting
from a change in control. Unusual Charges also included professional fees of
$30.3 million, primarily comprised of investment banking, accounting and legal
fees incurred in connection with the PHH Merger. We incurred business
termination charges of $55.6 million, which were comprised of $38.8 million of
costs to exit certain activities primarily within our fleet business (including
$35.7 million of asset write-offs associated with discontinued activities), a
$7.3 million termination fee associated with a joint venture that competed with
our PHH Mortgage Services business (now known as Cendant Mortgage Corporation)
and $9.6 million of costs to terminate a marketing agreement with a third party
in order to replace the function with internal resources. We also incurred
facility-related and other charges totaling $43.1 million including costs
associated with contract and lease terminations, asset disposals and other
expenses related to the consolidation and closure of excess office space. During
the year ended December 31, 1998, we recorded a net credit of $39.6 million to
Unusual Charges with a corresponding reduction to liabilities primarily as a
result of a change in the original estimate of costs to be incurred. We made
cash payments of $27.8 million and $150.2 million during 1998 and 1997,
respectively, related to the Second Quarter 1997 Charge. Liabilities of $16.4
million remained at December 31, 1998, which were attributable to future
severance and lease termination payments.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $85.0 million (37%) in 1998 over
1997 as a result of incremental amortization of goodwill and other intangible
assets from 1998 acquisitions and increased capital spending primarily to
accommodate growth in our businesses.
Interest Expense and Minority Interest, net
Interest expense, net, increased $63.3 million (125%) in 1998 over 1997
primarily as a result of incremental average borrowings during 1998 and a
nominal increase in the cost of funds. We primarily used debt to finance $2.9
billion of acquisitions and investments during 1998, which resulted in an
increase in the average debt balance outstanding as compared to 1997. The
weighted average interest rate on long-term debt increased from 6.0% in 1997 to
6.2% in 1998. In addition to interest expense on long-term debt, we also
incurred $50.6 million of minority interest, net of tax, primarily related to
the preferred dividends payable in cash on our FELINE PRIDES and trust preferred
securities issued in March 1998 (see "Liquidity and Capital Resources --
Financing Exclusive of Management and Mortgage Financing -- FELINE PRIDES and
Trust Preferred Securities").
Provision for Income Taxes
Our effective tax rate was reduced from 78.6% in 1997 to 32.7% in 1998 due to
the non-deductibility of a significant amount of Unusual Charges recorded during
1997 and the favorable impact in 1998 of reduced rates in international tax
jurisdictions in which we commenced business operations during 1998. The 1997
effective income tax rate included a tax benefit on 1997 Unusual Charges, which
were deductible at an effective rate of only 29.1%. Excluding Unusual Charges,
the effective income tax rate on income from continuing operations in 1997 was
40.7%.
Discontinued Operations
Pursuant to our program to divest non-strategic businesses and assets, we
committed to discontinue our consumer software and classified advertising
businesses in August 1998 (the "Measurement Date") and subsequently sold such
businesses in January 1999 and December 1998, respectively. Also, in April 1999
we committed to selling our Entertainment Publications business (see "Liquidity
and Capital Resources -- Divestitures -- Discontinued Operations"). Loss from
discontinued operations, net of tax, was $10.8 million in 1998 compared to $9.6
million in 1997. Loss from discontinued operations in 1998 includes the
operating results of our former classified advertising and consumer software
businesses through the Measurement Date, and the full year operating results of
our Entertainment Publications segment. The operating results of discontinued
operations in 1997 included $24.4 million of Unusual Charges, net of tax and a
$15.2 million extraordinary loss, net of tax. Unusual Charges, net of tax, in
1997 primarily consisted of $19.4 million of severance associated with
terminated consumer software company executives and $5.0 million of compensation
related to a stock appreciation rights plan which was paid in connection with
our merger with Hebdo Mag in October 1997. Such merger also resulted in a $15.2
million extraordinary loss, net of tax, associated with the early extinguishment
of debt.
Revenues within the Entertainment Publications segment increased $9.1 million
(5%) to $197.2 million in 1998 while net income declined $3.0 million from $17.2
million in 1997 to $14.2 million in 1998. Revenue growth was primarily driven by
a $4.0 million (2%) increase in coupon book sales, a $3.4 million (29%) increase
in related advertising revenues and a $3.4 million (11%) increase in gift wrap
sales. The decline in Entertainment Publications net income is primarily
attributable to certain increased infrastructure costs in 1998 compared to 1997.
We recorded a $404.7 million gain, net of tax, on the sale of discontinued
operations in 1998, related to the dispositions of our classified advertising
and consumer software businesses.
Extraordinary Gain, net
In 1997, we recorded a $26.4 million extraordinary gain, after tax, on the sale
of Interval International, Inc. ("Interval") in December 1997. The Federal Trade
Commission requested that we sell Interval in connection with the Cendant Merger
as a result of their anti-trust concerns within the timeshare industry.
Cumulative Effect of Accounting Change, net
In 1997, we recorded a non-cash after-tax charge of $283.1 million to account
for the cumulative effect of an accounting change. In August 1998, the
Securities and Exchange Commission ("SEC") requested that we change our
accounting policies with respect to revenue and expense recognition for our
membership businesses, effective January 1, 1997. Although we believed that our
accounting for memberships had been appropriate and consistent with industry
practice, we complied with the SEC's request and adopted new accounting policies
for our individual membership businesses.
Results of Reportable Operating Segments -- 1998 vs. 1997
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------
Adjusted EBITDA
Revenues Adjusted EBITDA Margin
----------------------------------- -------------------------- ---------------------
1998 1997 % Change 1998 (1) 1997 (2) % Change 1998 1997
--------- --------- -------- --------- ------------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Travel $ 1,063.3 $ 971.6 9% $ 542.5 $ 467.3 16% 51% 48%
Individual
Membership 929.1 778.7 19% (57.8) 5.3 * (6%) 1%
Insurance/
Wholesale 544.0 482.7 13% 137.8 111.0 24% 25% 23%
Real Estate
Franchise 455.8 334.6 36% 348.6 226.9 54% 76% 68%
Relocation 444.0 401.6 11% 124.5 92.6 34% 28% 23%
Fleet 387.4 324.1 20% 173.8 120.5 44% 45% 37%
Mortgage 353.4 179.2 97% 187.6 74.8 151% 53% 42%
Other 909.6 579.4 57% 100.9 (3) 114.5 (12%) 11% 20%
--------- --------- -------- --------
Total $ 5,086.6 $ 4,051.9 26% $1,557.9 $1,212.9 28% 31% 30%
========= ========= ======== ========
</TABLE>
- ------------------
(1) Excludes the following Other charges or credits: (i) $433.5 million for the
costs of terminating the proposed acquisitions of American Bankers and
Providian; (ii) $351.0 million of costs associated with an agreement to
settle the PRIDES securities class action suit; (iii) $121.0 million
comprised of the costs of the investigations into previously discovered
accounting irregularities at the former CUC business units, including
incremental financing costs and separation payments, principally to our
former chairman; and (iv) $67.2 million of net credits associated with
changes to the original estimate of costs to be incurred in connection with
1997 Unusual Charges.
(2) Excludes Unusual Charges of $704.1 million primarily associated with the
Cendant Merger and the PHH Merger.
(3) Includes a $50.0 million non-cash write-off of certain equity investments
in interactive membership businesses and impaired goodwill associated with
our National Library of Poetry subsidiary.
* Not meaningful.
Travel
Revenues and Adjusted EBITDA increased $91.7 million (9%) and $75.2 million
(16%), respectively, in 1998 over 1997. Contributing to the revenue and Adjusted
EBITDA increase was a $35.4 million (7%) increase in franchise fees, consisting
of increases of $23.5 million (6%) and $11.9 million (8%) in lodging and car
rental franchise fees, respectively. Our franchise businesses experienced
increases during 1998 in worldwide available rooms (29,800 incremental rooms,
domestically), revenue per available room, car rental days and average car
rental rates per day. Timeshare subscription and exchange revenue increased
$27.1 million (9%) as a result of a 7% increase in average membership volume and
a 4% increase in the number of exchanges. Also contributing to the revenue and
Adjusted EBITDA increase was $16.4 million of incremental fees received from
preferred alliance partners seeking access to our franchisees and their
customers, $12.7 million of fees generated from the execution of international
master license agreements and a $17.7 million gain on our sale of one million
shares of Avis common stock in 1998. The aforementioned drivers supporting
increases in revenues and Adjusted EBITDA were partially offset by a $37.8
million reduction in the equity in earnings of our investment in the car rental
operations of Avis, Inc. ("ARAC") as a result of reductions in our ownership
percentage in such investment during 1997 and 1998 (see "Liquidity and Capital
Resources -- 1996 Purchase Acquisitions and Investments -- Avis"). A $16.7
million (7%) increase in marketing and reservation costs resulted in a $16.5
million increase in total expenses while other operating expenses were
relatively flat due to leveraging our corporate infrastructure among more
businesses, which contributed to an improvement in the Adjusted EBITDA margin
from 48% in 1997 to 51% in 1998.
Individual Membership
Revenues increased $150.4 million (19%) in 1998 over 1997 while Adjusted EBITDA
and Adjusted EBITDA margin decreased $63.1 million and 7 percentage points,
respectively, for the same period. The revenue growth was primarily attributable
to an incremental $27.9 million associated with an increase in the average price
of a membership, $25.8 million of increased billings as a result of incremental
marketing arrangements, primarily with telephone and mortgage companies, and
$35.9 million from the acquisition of a company in April 1998 that, among other
services, provides members access to their personal credit information. Also
contributing to the revenue growth are increased product sales and service fees,
which are offered and provided to individual members. The reduction in Adjusted
EBITDA and Adjusted EBITDA margin is a direct result of a $104.3 million (25%)
increase in membership solicitation costs. We increased our marketing efforts
during 1998 to solicit new members and as a result increased our gross average
annual membership base by approximately 3.3 million members (11%) at December
31, 1998, compared to the prior year. The growth in members during 1998 resulted
in increased servicing costs during 1998 of approximately $33.2 million (13%).
While the costs of soliciting and acquiring new members were expensed in 1998,
the revenue associated with these new members will not begin to be recognized
until 1999, upon expiration of the membership period.
Insurance/Wholesale
Revenues and Adjusted EBITDA increased $61.3 million (13%) and $26.8 million
(24%), respectively, in 1998 over 1997, primarily due to customer growth. This
growth generally resulted from increases in affiliations with financial
institutions. Domestic operations, which comprised 77% of segment revenues in
1998, generated higher Adjusted EBITDA margins than the international businesses
as a result of continued expansion costs incurred internationally to penetrate
new markets.
Domestic revenues and Adjusted EBITDA increased $25.4 million (6%) and $23.6
million (22%), respectively. Revenue growth, which resulted from an increase in
customers, also contributed to an improvement in the overall Adjusted EBITDA
margin from 23% in 1997 to 25% in 1998, as a result of the absorption of such
increased volume by the existing domestic infrastructure. International revenues
and Adjusted EBITDA increased $35.9 million (41%) and $3.2 million (54%),
respectively, due primarily to a 42% increase in customers while the Adjusted
EBITDA margin remained relatively flat at 7%.
Real Estate Franchise
Revenues and Adjusted EBITDA increased $121.2 million (36%) and $121.7 million
(54%), respectively, in 1998 over 1997. Royalty fees collectively increased for
our CENTURY 21, COLDWELL BANKER and ERA franchise brands by $102.0 million (35%)
as a result of a 20% increase in home sales by franchisees and a 13% increase in
the average price of homes sold. Home sales by franchisees benefited from
existing home sales in the United States reaching a record 4.8 million units in
1998, according to data from the National Association of Realtors, as well as
from expansion of our franchise systems. Because many costs associated with the
real estate franchise business, such as franchise support and information
technology, do not vary directly with home sales volumes or royalty revenues,
the increase in royalty revenues contributed to an improvement in the Adjusted
EBITDA margin from 68% to 76%.
Relocation
Revenues and Adjusted EBITDA increased $42.4 million (11%) and $31.9 million
(34%), respectively, in 1998 over 1997. The Adjusted EBITDA margin improved from
23% to 28%. The primary source of revenue growth was a $29.3 million increase in
revenues from the relocation of government employees. We also experienced growth
in the number of relocation-related services provided to client corporations and
in the number of household goods moves handled, partially offset by lower home
sale volumes. The divestiture of certain niche-market property management
operations accounted for other revenue of $8.2 million. Expenses associated with
government relocations increased in conjunction with the volume and revenue
growth, but economies of scale and a reduction in overhead and administrative
expenses permitted the reported improvement in Adjusted EBITDA margin.
Fleet
Revenues and Adjusted EBITDA increased $63.3 million (20%) and $53.3 million
(44%), respectively, in 1998 over 1997, contributing to an improvement in the
Adjusted EBITDA margin from 37% to 45%. We acquired The Harpur Group Ltd.
("Harpur"), a leading fuel card and vehicle management company in the United
Kingdom ("UK"), on January 20, 1998. Harpur contributed incremental revenues and
Adjusted EBITDA in 1998 of $31.8 million and $20.8 million, respectively. The
revenue increase is further attributable to a 12% increase in fleet leasing fees
and a 31% increase in service fee revenue. The fleet leasing revenue increase is
due to a 5% increase in pricing and a 7% increase in the number of vehicles
leased, while the service fee revenue increase is the result of a 40% increase
in number of fuel cards and vehicle maintenance cards partially offset by a 7%
decline in pricing. The Adjusted EBITDA margin improvement reflects streamlining
of costs at newly acquired Harpur and a leveraging of our corporate
infrastructure among more businesses.
Mortgage
Revenues and Adjusted EBITDA increased $174.2 million (97%) and $112.8 million
(151%), respectively, in 1998 over 1997, primarily due to strong mortgage
origination growth and average fee improvement. The Adjusted EBITDA margin
improved from 42% to 53%. Mortgage origination grew across all lines of
business, including increased refinancing activity and a shift to more
profitable sale and processing channels and was responsible for substantially
all of the segment's revenue growth. Mortgage closings increased $14.3 billion
(122%) to $26.0 billion and average origination fees increased 12 basis points,
resulting in a $180.3 million increase in origination revenues. Although the
servicing portfolio grew $9.6 billion (36%), net servicing revenue was
negatively impacted by average servicing fees declining 7 basis points due to
the increased refinancing levels in the 1998 mortgage market, which shortened
the servicing asset life and increased amortization charges. Consequently, net
servicing revenues decreased $9.1 million, partially offset by a $5.7 million
increase in the sale of servicing rights. Operating expenses increased in all
areas, reflecting increased hiring and expansion of capacity in order to support
continued growth; however, revenue growth marginally exceeded such
infrastructure enhancements.
Other Services
Revenues increased $330.2 million (57%), while Adjusted EBITDA decreased $13.6
million (12%). Revenues increased primarily from acquired NPC and Jackson Hewitt
operations, which contributed $409.8 million and $53.7 million to 1998 revenues,
respectively. The revenue increase attributable to 1998 acquisitions was
partially offset by a $140.0 million reduction in revenues associated with the
operations of certain of our ancillary businesses which were sold during 1997,
including Interval, which contributed $121.0 million to 1997 revenues. We sold
Interval in December 1997 coincident to the proposed Cendant Merger, in
consideration of Federal Trade Commission anti-trust concerns within the
timeshare industry.
The revenue increase did not translate into increases in Adjusted EBITDA
primarily due to asset write-offs, dispositions of certain ancillary business
operations and approximately $8.0 million of incremental operating costs
associated with establishing a consolidated worldwide data center. We wrote-off
$37.0 million of impaired goodwill associated with our National Library of
Poetry subsidiary, and $13.0 million of certain of our equity investments in
interactive membership businesses. Adjusted EBITDA in 1997 associated with
aforementioned disposed ancillary operations included $27.2 million from
Interval and $18.0 million related to services formerly provided to the casino
industry. Our NPC and Jackson Hewitt subsidiaries contributed $92.7 million and
$27.0 million to 1998 Adjusted EBITDA, respectively.
<PAGE>
Consolidated Results -- 1997 vs. 1996
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 % Change
------------- ------------- ----------
<S> <C> <C> <C>
(Dollars in millions)
Net revenues $ 4,051.9 $ 3,063.1 32%
Operating expenses(1) 2,839.0 2,282.4 24%
------------- -------------
Adjusted EBITDA 1,212.9 780.7 55%
Merger-related costs and other unusual charges 704.1 109.4 544%
Depreciation and amortization expense 229.0 138.5 65%
Interest expense, net 50.6 14.2 256%
------------- -------------
Pre-tax income from continuing operations
before extraordinary gain and cumulative
effect of accounting change 229.2 518.6 (56%)
Provision for income taxes 180.1 214.1 (16%)
------------- -------------
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change 49.1 304.5 (84%)
Income (loss) from discontinued
operations, net of tax (9.6) 25.5 *
Extraordinary gain, net of tax 26.4 - *
Cumulative effect of accounting
change, net of tax (283.1) - *
------------- -------------
Net income (loss) $ (217.2) $ 330.0 *
============= =============
</TABLE>
- ------------
(1) Exclusive of merger-related costs, unusual charges and depreciation and
amortization expense.
* Not meaningful.
<PAGE>
Revenues and Adjusted EBITDA
Revenues and Adjusted EBITDA increased $988.8 million (32%) and $432.2 million
(55%), respectively, in 1997 over 1996, and were supported by growth in
substantially all of our reportable operating segments. Revenues and Adjusted
EBITDA in 1997 included a full year of operations from companies acquired during
1996, including Coldwell Banker Corporation ("Coldwell Banker") in May 1996,
Avis, Inc. ("Avis") in October 1996 and Resort Condominiums International, Inc.
("RCI") in November 1996 (see "Liquidity and Capital Resources -- 1996 Purchase
Acquisitions and Investments"). A detailed discussion of fluctuations in
revenues and Adjusted EBITDA from 1996 to 1997 is included in the section
entitled "Results of Reportable Operating Segments -- 1997 vs. 1996."
Merger-Related Costs and Other Unusual Charges
1997. We incurred merger-related costs and other unusual charges ("Unusual
Charges ") in 1997 related to continuing operations of $704.1 million primarily
associated with the Cendant Merger and the PHH Merger. See "Results of
Operations -Consolidated Results 1998 vs. 1997 -- Merger-Related Costs and Other
Unusual Charges" for a detailed discussion of such charges.
1996. We incurred Unusual Charges in 1996 related to continuing operations of
$109.4 million substantially related to our merger with Ideon Group, Inc.
("Ideon"). Unusual Charges primarily included $80.4 million of
litigation-related liabilities associated with our determination to settle
acquired Ideon litigation, which existed at the August 1996 merger date. We have
since settled all outstanding litigation matters pursuant to which the primary
resulting obligation consisted of a settlement made in June 1997 with the
cofounder of SafeCard Services, Inc. which was acquired by Ideon in 1995. The
settlement required us to make $70.5 million of payments in annual installments
through 2003. We made cash payments of $27.8 million and $56.3 million in 1998
and 1997, respectively, associated with 1996 Unusual Charges.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $90.5 million (65%) in 1997 over
1996, primarily as a result of incremental amortization of goodwill and other
intangible assets from 1996 acquisitions and increased capital spending.
Interest Expense, net
Interest expense, net, increased $36.4 million in 1997 over 1996 primarily as a
result of the February 1997 issuance of $550.0 million 3% Convertible
Subordinated Notes and interest income earned in 1996 on approximately $420.0
million of excess proceeds generated from the $1.2 billion public offering of
46.6 million shares of our common stock in May 1996. The increase in interest,
net, was partially offset by a reduction in the weighted average interest rate
from 7.5% in 1996 to 6.0% in 1997 as a result of a greater proportion of fixed
rate debt, carrying lower interest rates, to total debt.
Provision for Income Taxes
Our effective tax rate increased from 41.3% in 1996 to 78.6% in 1997. The 1997
effective income tax rate included a 29.1% effective tax rate on the tax benefit
related to Unusual Charges due to the significant non-deductibility of such
costs. The effective income tax rate on 1997 income from continuing operations
excluding Unusual Charges was 40.7%.
Discontinued Operations
We recorded a $9.6 million net loss from discontinued operations in 1997
compared to net income of $25.5 million in 1996. The operating results of
discontinued operations included a $15.2 million extraordinary loss, net of tax,
in 1997 and $24.4 million and $24.9 million of Unusual Charges, net of tax, in
1997 and 1996, respectively. The extraordinary loss and Unusual Charges incurred
in 1997 have been previously discussed in the section entitled "Results of
Operations --Consolidated Results -- 1998 vs. 1997." Unusual Charges in 1996
consisted primarily of professional fees incurred in connection with our mergers
with certain software businesses acquired in 1996. Excluding Unusual Charges and
extraordinary items, income from discontinued operations decreased $20.4 million
(40%) from $50.4 million in 1996 to $30.0 million in 1997. Net income from our
Entertainment Publications segment increased $8.4 million (95%) from 1996 due to
revenue growth from volume increase and coupon book volume and the addition of
new sales channels while expenses decreased as a result of sales force
consolidations. Revenues within the Entertainment Publications segment increased
$13.5 million (8%) from $174.6 million in 1996 to $188.1 million in 1997. Net
income from the classified advertising business remained relatively unchanged
from 1996 while net income from the consumer software businesses decreased $28.5
million (72%) to $11.1 million in 1997. In 1997 revenues increased $49.2 million
(13%) which were offset by increased operating expenses of $93.2 million (29%).
The disproportionate increase in operating expenses resulted from accelerating
development and marketing costs incurred on titles without a corresponding
revenue increase because titles were not released to the marketplace as planned
in December 1997.
<PAGE>
RESULTS OF REPORTABLE OPERATING SEGMENTS - 1997 VS. 1996
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------------
Adjusted EBITDA
Revenues Adjusted EBITDA Margin
----------------------------------- -------------------------------------- ---------------------
1997 1996 % Change 1997 (1) 1996 (2) % Change 1997 1996
--------- --------- -------- -------- ------------ --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Travel $ 971.6 $ 429.2 126% $ 467.3 $ 189.5 147% 48% 44%
Individual
Membership 778.7 745.9 4% 5.3 43.2 (88%) 1% 6%
Insurance/
Wholesale 482.7 448.0 8% 111.0 99.0 12% 23% 22%
Real Estate
Franchise 334.6 236.3 42% 226.9 137.8 65% 68% 58%
Relocation 401.6 344.9 16% 92.6 65.5 41% 23% 19%
Fleet 324.1 293.5 10% 120.5 99.0 22% 37% 34%
Mortgage 179.2 127.7 40% 74.8 45.7 64% 42% 36%
Other 579.4 437.6 32% 114.5 101.0 13% 20% 23%
--------- --------- -------- --------
Total $ 4,051.9 $ 3,063.1 32% $1,212.9 $ 780.7 55% 30% 25%
========= ========= ======== ========
</TABLE>
- ------------------
(1) Excludes Unusual Charges of $704.1 million primarily associated with the
Cendant Merger and the PHH Merger.
(2) Excludes Unusual Charges of $109.4 million incurred in connection with the
Ideon merger.
Travel
Revenues and Adjusted EBITDA increased $542.4 million (126%) and $277.8 million
(147%), respectively, while the Adjusted EBITDA margin improved from 44% to 48%.
The acquisitions of Avis and RCI in October 1996 and November 1996,
respectively, contributed incremental revenues and Adjusted EBITDA of $503.9
million and $248.2 million, respectively. Excluding the 1996 acquisitions,
revenues and Adjusted EBITDA increased $38.5 million (9%) and $29.6 million
(16%), respectively, primarily as a result of an increase in lodging franchise
fees which was driven by a 4% increase in franchised rooms and a 2% increase in
revenue per available room. Expense increases were minimized due to the
significant operating leverage associated with mature franchise operations and a
leveraging of the corporate infrastructure among more businesses.
Individual Membership
Revenues increased $32.8 million (4%) while Adjusted EBITDA and Adjusted EBITDA
margin decreased $37.9 million (88%) and 5 percentage points, respectively. The
revenue increase in 1997 was primarily due to $25.4 million of increased product
sales and service fees, which are offered and provided to individual members.
The increase in revenues also included $7.1 million of incremental monthly
billings from new marketing arrangements made during 1996 with telephone and
mortgage companies. The reduction in Adjusted EBITDA and Adjusted EBITDA margin
from 1996 to 1997 was principally due to increased membership solicitation costs
incurred during 1997, higher call center and servicing expenses and start-up
costs incurred to introduce new membership clubs. The accounting policies for
membership revenue and expense recognition were changed effective January 1,
1997. Therefore, results of operations for 1997 and 1996 were accounted for
using different accounting policies. The pro forma effect of the accounting
change, as if such a change had been applied retroactively to 1996, would have
resulted in a reduction in 1996 revenues and Adjusted EBITDA of $16.6 million
and $11.3 million, respectively.
Insurance/Wholesale
Revenues and Adjusted EBITDA increased $34.7 million (8%) and $12.0 million
(12%), respectively, primarily due to an overall growth in customer base during
1997. Domestic operations, which comprised 82% and 84% of segment revenues in
1997 and 1996, respectively, generated higher Adjusted EBITDA margins than the
international businesses as a result of expansion costs incurred internationally
to penetrate new markets. Domestic revenues and Adjusted EBITDA increased $18.7
million (5%) and $10.2 million (11%), respectively, in 1997 over 1996 while
international revenues and Adjusted EBITDA increased $16.0 million (22%) and
$1.8 million (45%), respectively, for the comparable periods.
Real Estate Franchise
Revenues and Adjusted EBITDA increased $98.3 million (42%) and $89.1 million
(65%), respectively, in 1997 over 1996 while the Adjusted EBITDA margin improved
from 58% to 68%. The acquisitions of ERA and Coldwell Banker franchised brands
in February 1996 and May 1996, respectively, contributed incremental revenues
and Adjusted EBITDA of $73.8 million and $74.6 million, respectively, in 1997.
Excluding the 1996 acquisitions, revenues and Adjusted EBITDA increased $24.5
million (17%) and $14.5 million (17%) which was principally driven by increased
royalty fees generated from the Century 21 franchised brand. Royalty fees from
Century 21 franchisees increased as a result of a 5% increase in home sales by
franchisees and an 11% increase in the average price of homes sold. Existing
home sales in the United States increased 3% from 1996 to 1997 according to data
from the National Association of Realtors. Operating expenses, which did not
change proportionately with home sale volume, increased a minimal $9.3 million
(9%) to support the significant growth of the business. In addition, the
corporate infrastructure was leveraged among more businesses.
Relocation
Revenues and Adjusted EBITDA increased $56.7 million (16%) and $27.1 million
(41%), respectively, primarily as a result of the acquisition of Coldwell Banker
in May 1996. Coldwell Banker was a leading provider of corporate relocation
services and contributed incremental revenues and Adjusted EBITDA of $47.2
million and $18.6 million, respectively. The Adjusted EBITDA margin improved
from 19% to 23% as a result of economic efficiencies realized from the
consolidation of our relocation businesses.
Fleet
Revenues and Adjusted EBITDA increased $30.6 million (10%) and $21.5 million
(22%), respectively, in 1997 over 1996. The Adjusted EBITDA margin improved from
34% to 37%. Revenue and Adjusted EBITDA growth in 1997 was primarily
attributable to a 24% increase in service fee revenues, supported by a 20%
increase in number of cards and an 8% increase in fleet leasing revenues,
principally resulting from a 5% increase in pricing. The Adjusted EBITDA margin
improvement reflected a leveraging of the corporate infrastructure among more
businesses.
Mortgage
Revenues and Adjusted EBITDA increased $51.5 million (40%) and $29.1 million
(64%), respectively, which was primarily driven by mortgage origination growth
and gain on sale of servicing rights. The Adjusted EBITDA margin improved from
36% to 42%. Mortgage originations increased 40% to $11.7 billion contributing
$35.3 million additional revenue while servicing revenue was relatively flat.
The loan servicing portfolio grew 18% to $26.7 billion while gain on sale of
servicing rights increased $12.6 million to $14.1 million. Operating expenses
increased to support volume growth and to prepare for continued expansion as the
annual loan origination run rate approached $18.0 billion. However, revenue
growth marginally exceeded increases in operating expenses.
Other Services
Revenues and Adjusted EBITDA increased $141.8 million (32%) and $13.5 million
(13%), respectively, in 1997 over 1996. Such increases were primarily supported
by the operating results of an information technology business ("WizCom") which
was acquired in October 1996 as part of the Avis acquisition. Our WizCom
subsidiary operates the telecommunications and computer system that facilitates
reservations and agreement processing for lodging and car rental operations. The
acquisition of WizCom accounted for incremental revenues and Adjusted EBITDA in
1997 of $90.3 million and $30.6 million, respectively.
Our other ancillary businesses collectively contributed to the additional
revenue growth, although Adjusted EBITDA margins declined, primarily within
certain business units, which were sold during 1997.
Liquidity and Capital Resources
Divestitures
Discontinued Operations. During 1998, we implemented a program to divest
non-strategic businesses and assets in order to focus on our core businesses,
repay debt and repurchase our common stock (see "Overview"). Pursuant to such
program, on April 21, 1999, we announced that our Board of Directors approved
our plan to pursue the sale of our Entertainment Publications, Inc. ("EPub")
business segment. We have engaged Veronis, Suhler & Associates, Inc. to manage
the sale process. EPub sells discount programs to schools, community groups and
other organizations, which typically provide the discount programs to
individuals in the form of local discount coupon books, gift wrap and other
seasonal items. EPub solicits restaurants, hotels, theaters, sporting events,
retailers and other businesses which agree to offer services and/or merchandise
at discount prices.
On August 12, 1998, we announced that our Board of Directors committed to
discontinue our classified advertising and consumer software businesses by
disposing of Hebdo Mag and Cendant Software Corporation ("CDS"), respectively.
On December 15, 1998, we completed the sale of Hebdo Mag to its former 50%
owners for $449.7 million. We received $314.8 million in cash and 7.1 million
shares of our common stock valued at $134.9 million on the date of sale. We
recognized a $206.9 million gain on the sale of Hebdo Mag, which included a tax
benefit of $52.1 million. On November 20, 1998, we announced the execution of a
definitive agreement to sell CDS for $800.0 million in cash plus potential
future contingent payments pursuant to the contract. The sale was completed on
January 12, 1999. We realized a gain of approximately $390.5 million based upon
the finalization of the closing balance sheet at the sale date. We recognized
$197.8 million of such gain in 1998 substantially in the form of a tax benefit
and corresponding deferred tax asset.
Other. On April 21, 1999, we announced that we reached a definitive agreement to
sell our National Leisure Group (NLG) subsidiary. NLG is a leading retailer of
cruise and vacation packages.
On January 12, 1999, we completed the sale of our Essex Corporation ("Essex")
subsidiary for $8.0 million and realized a gain on sale of $1.3 million. Essex
is a third-party marketer of financial products for banks, primarily marketing
annuities, mutual funds and insurance products through financial institutions.
Termination of Proposed Acquisitions
RAC Motoring Services. On February 4, 1999, we announced our intention to not
proceed with the acquisition of RAC Motoring Services ("RACMS") due to certain
conditions imposed by the UK Secretary of State for Trade and Industry that we
determined to be not commercially feasible and, therefore, unacceptable. We
originally announced on May 21, 1998 a definitive agreement with the Board of
Directors of Royal Automobile Club Limited to acquire RACMS for approximately
$735.0 million in cash. We wrote-off $7.0 million of deferred acquisition costs
in the first quarter of 1999 in connection with the termination of the proposed
acquisition of RACMS.
American Bankers Insurance Group, Inc. On October 13, 1998, we and American
Bankers entered into a settlement agreement (the "ABI Settlement Agreement"),
pursuant to which we and American Bankers terminated a definitive agreement
dated March 23, 1998, which provided for our acquisition of American Bankers for
$3.1 billion. Accordingly, our pending tender offer for American Bankers shares
was also terminated. Pursuant to the ABI Settlement Agreement and in connection
with the termination of our proposed acquisition of American Bankers, we made a
$400.0 million cash payment to American Bankers and wrote off $32.3 million of
costs, primarily professional fees. In addition, we terminated a bank commitment
to provide a $650.0 million, 364-day revolving credit facility, which was made
available to partially fund the acquisition.
Providian Auto and Home Insurance Company. On October 5, 1998, we announced the
termination of an agreement to acquire Providian, for $219.0 million in cash.
Certain representations and covenants in such agreement had not been fulfilled
and the conditions to closing had not been met. We did not pursue an extension
of the termination date of the agreement because Providian no longer met our
acquisition criteria. In connection with the termination of our proposed
acquisition of Providian, we wrote off $1.2 million of costs.
1998 Purchase Acquisitions
National Parking Corporation. On April 27, 1998, we acquired NPC for $1.6
billion, substantially in cash, which included the repayment of approximately
$227.0 million of outstanding NPC debt. NPC was substantially comprised of two
operating subsidiaries: National Car Parks and Green Flag. National Car Parks is
the largest private (non-municipal) car park operator in the UK and Green Flag
operates the third largest roadside assistance group in the UK and offers a
wide-range of emergency support and rescue services. We funded the NPC
acquisition with borrowings under our revolving credit facilities.
Harpur Group. On January 20, 1998, we completed the acquisition of Harpur, a
leading fuel card and vehicle management company in the UK, for $206.1 million
in cash plus contingent payments of up to $20.0 million over two years.
Jackson Hewitt. On January 7, 1998, we completed the acquisition of Jackson
Hewitt for approximately $476.3 million in cash. Jackson Hewitt operates the
second largest tax preparation service franchise system in the United States.
The Jackson Hewitt franchise system specializes in computerized preparation of
federal and state individual income tax returns.
Other 1998 Acquisitions and Acquisition-Related Payments. We acquired certain
other entities for an aggregate purchase price of approximately $462.3 million
in cash during 1998. Additionally, we made a $100.0 million cash payment to the
seller of RCI in satisfaction of a contingent purchase liability.
1997 Purchase Acquisitions and Investments
Investment in NRT. In 1997, we executed agreements with NRT Incorporated
("NRT"), a corporation created to acquire residential real estate brokerage
firms. Under these agreements, we acquired $182.0 million of NRT preferred stock
(and may be required to acquire up to an additional $81.3 million of NRT
preferred stock). We received preferred dividend payments of $15.4 million and
$5.2 million during the years ended 1998 and 1997, respectively. On February 9,
1999, we executed new agreements with NRT, which among other things, increased
the term of each of the three franchise agreements under which NRT operates from
40 years to 50 years.
In connection with the aforementioned agreements, at our election, we will
participate in NRT's acquisitions by acquiring up to an aggregate $946.3 million
(plus an additional $500.0 million if certain conditions are met) of intangible
assets, and in some cases mortgage operations, of real estate brokerage firms
acquired by NRT. Through December 31, 1998, we acquired $445.7 million of such
mortgage operations and intangible assets, (primarily franchise agreements)
associated with real estate brokerage companies acquired by NRT, which brokerage
companies will become subject to the NRT 50-year franchise agreements. In
February 1999, NRT entered into an agreement with us whereby we made an upfront
payment of $30.0 million to NRT for services to be provided by NRT to us related
to the identification of potential acquisition candidates, the negotiation of
agreements and other services in connection with future brokerage acquisitions
by NRT. Such fee is refundable in the event the services are not provided.
Other. We acquired certain entities in 1997 for an aggregate purchase price of
$266.5 million, comprised of $244.9 million in cash and $21.6 million in our
common stock (0.9 million shares).
1996 Purchase Acquisitions and Investments
RCI. In November 1996, we completed the acquisition of all the outstanding
capital stock of RCI for $487.1 million comprised of $412.1 million in cash and
$75.0 million (approximately 2.4 million shares) in our common stock plus
contingent payments of up to $200.0 million over a five year period. (We made a
contingent payment of $100.0 million during the first quarter of 1998). RCI is
the world's largest provider of timeshare exchange.
Avis. In October 1996, we completed the acquisition of all of the outstanding
capital stock of Avis, including payments under certain employee stock plans of
Avis and the redemption of a certain series of preferred stock of Avis for
$806.5 million. The purchase price was comprised of approximately $367.2 million
in cash, $100.9 million in indebtedness and $338.4 million (approximately 11.1
million shares) in our common stock. Subsequently, we made contingent cash
payments of $26.0 million in 1996 and $60.8 million in 1997. The contingent
payments made in 1997 represented the incremental amount of value attributable
to our common stock as of the stock purchase agreement date in excess of the
proceeds realized upon subsequent sale of our common stock.
Upon entering into a definitive merger agreement to acquire Avis, we announced
our strategy to dilute our interest in the Avis car rental operations while
retaining assets associated with the franchise, including trademarks,
reservation system assets and franchise agreements with ARAC and other
licensees. In September 1997, ARAC (the company which operated the rental car
operations of Avis) completed an initial public offering ("IPO") which resulted
in a 72.5% dilution of our equity interest in ARAC. Net proceeds from the IPO of
$359.3 million were retained by ARAC. In March 1998, we sold one million shares
of Avis common stock and recognized a pre-tax gain of approximately $17.7
million. At December 31, 1998, our interest in ARAC was approximately 22.6%. In
January 1999, our equity interest was further diluted to 19.4% as a result of
our sale of an additional 1.3 million shares of Avis common stock.
Coldwell Banker. In May 1996, we acquired by merger Coldwell Banker, the largest
gross revenue producing residential real estate company in North America and a
leading provider of corporate relocation services. We paid $640.0 million in
cash for all of the outstanding capital stock of Coldwell Banker and repaid
$105.0 million of Coldwell Banker indebtedness. The aggregate purchase price for
the transaction was financed through the May 1996 sale of an aggregate 46.6
million shares of our common stock generating $1.2 billion of proceeds pursuant
to a public offering.
Other. During 1996, we acquired certain other entities for an aggregate purchase
price of $281.5 million comprised of $224.0 million in cash, $52.5 million of
our common stock (2.5 million shares) and $5.0 million of notes.
Financing (exclusive of Management and Mortgage Program Financing)
We believe that we have sufficient liquidity and access to liquidity through
various sources, including our ability to access public equity and debt markets
and financial institutions. We currently have a $1.25 billion term loan facility
in place as well as committed back-up facilities totaling $1.75 billion, of
which $1.705 billion is currently undrawn and available. Long-term debt
increased $2.1 billion to $3.4 billion at December 31, 1998 when compared to
amounts outstanding at December 31, 1997, primarily as a result of borrowings in
1998 to finance acquisitions and the repurchase of our common stock under a
share repurchase program. Our long-term debt, including current portion at
December 31, 1998 substantially consisted of $2.1 billion of publicly issued
fixed rate debt and $1.25 billion of borrowings under a term facility.
Term Loan Facilities
On May 29, 1998, we entered into a 364 day term loan agreement with a syndicate
of financial institutions which provided for borrowings of $3.25 billion (the
"Term Loan Facility"). The Term Loan Facility, as amended, incurred interest
based on the London Interbank Offered Rate ("LIBOR") plus a margin of
approximately 87.5 basis points. At December 31, 1998, borrowings under the Term
Loan Facility of $1.25 billion were classified as long-term based on our proven
intent and ability to refinance such borrowings on a long-term basis.
On February 9, 1999, we replaced the Term Loan Facility with a new two year term
loan facility (the "New Facility") which provides for borrowings of $1.25
billion. The New Facility bears interest at LIBOR plus a margin of approximately
100 basis points and is payable in five consecutive quarterly installments
beginning on the first anniversary of the closing date. The New Facility
contains certain restrictive covenants, which are substantially similar to and
consistent with the covenants in effect for our existing revolving credit
agreements. We used $1.25 billion of the proceeds from the New Facility to
refinance the majority of the outstanding borrowings under the Term Loan
Facility.
Credit Facilities
Our primary credit facility, as amended, consists of (i) a $750.0 million, five
year revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $1.0 billion, 364 day revolving credit facility (the "364 Day Revolving
Credit Facility") (collectively the "Revolving Credit Facilities"). The 364-Day
Revolving Credit Facility will mature on October 29, 1999 but may be renewed on
an annual basis for an additional 364 days upon receiving lender approval. The
Five Year Revolving Credit Facility will mature on October 1, 2001. Borrowings
under the Revolving Credit Facilities, at our option, bear interest based on
competitive bids of lenders participating in the facilities, at prime rates or
at LIBOR, plus a margin of approximately 75 basis points. We are required to pay
a per annum facility fee of .175% and .15% of the average daily unused
commitments under the Five Year Revolving Credit Facility and 364 Day Revolving
Credit Facility, respectively. The interest rates and facility fees are subject
to change based upon credit ratings on our senior unsecured long-term debt by
nationally recognized debt rating agencies. The Revolving Credit Facilities
contain certain restrictive covenants including restrictions on indebtedness,
mergers, liquidations and sale and leaseback transactions and requires the
maintenance of certain financial ratios, including a 3:1 minimum interest
coverage ratio and a maximum debt-to-capitalization ratio of 0.5:1. At December
31, 1998, we had no outstanding borrowings under the Revolving Credit
Facilities.
7 1/2% and 7 3/4% Senior Notes
On November 17, 1998, we filed an amended shelf registration statement with the
SEC for the aggregate issuance of up to $3.0 billion of debt and equity
securities. On November 24, 1998, we priced a total of $1.55 billion of Senior
Notes (the "Notes") in a two-part issue. The first issue, $400.0 million
principal amount of 7 1/2% Senior Notes due December 1, 2000, was priced to
yield 7.545%. The second issue, $1.15 billion principal amount of 7 3/4% Senior
Notes due December 1, 2003, was priced to yield 7.792%. Interest on the Notes
will be payable on June 1 and December 1 of each year, beginning on June 1,
1999. The Notes may be redeemed, in whole or in part, at any time, at our option
at a redemption price plus accrued interest to the date of redemption. The
redemption price is equal to the greater of (i) the face value of the Notes or
(ii) the sum of the present values of the remaining scheduled payments
discounted at the treasury rate plus a spread as defined in the indenture. The
offering was a component of a plan designed to refinance an aggregate of $3.25
billion of borrowings under our former Term Loan Facility. In addition to the
repayments of $1.3 billion of borrowings under the Term Loan Facility, proceeds
were used for general corporate purposes, which included the purchase of our
common stock.
FELINE PRIDES and Trust Preferred Securities
On March 2, 1998, Cendant Capital I (the "Trust"), a statutory business Trust
formed under the laws of the State of Delaware and our wholly-owned consolidated
subsidiary, issued 29.9 million FELINE PRIDES and 2.3 million trust preferred
securities and received approximately $1.5 billion in gross proceeds therefrom.
The Trust invested the proceeds in our 6.45% Senior Debentures due 2003 (the
"Debentures), which represents the sole asset of the Trust. The obligations of
the Trust related to the FELINE PRIDES and trust preferred securities are
unconditionally guaranteed by us to the extent we make payments pursuant to the
Debentures. The issuance of the FELINE PRIDES and trust preferred securities,
resulted in the utilization of approximately $3.0 billion of availability under
a $4.0 billion shelf registration statement. Upon issuance, the FELINE PRIDES
consisted of 27.6 million Income PRIDES and 2.3 million Growth PRIDES (Income
PRIDES and Growth PRIDES hereinafter referred to as "PRIDES"), each with a face
amount of $50 per PRIDE. The Income PRIDES consist of trust preferred securities
and forward purchase contracts under which the holders are required to purchase
our common stock in February 2001. The Growth PRIDES consist of zero coupon U.S.
Treasury securities and forward purchase contracts under which the holders are
required to purchase our common stock in February 2001. The stand-alone trust
preferred securities and the trust preferred securities forming a part of the
Income PRIDES, each with a face amount of $50, bear interest, in the form of
preferred stock dividends, at the annual rate of 6.45%, payable in cash.
Payments under the forward purchase contract forming a part of the Income PRIDES
will be made by us in the form of a contract adjustment payment at an annual
rate of 1.05%. Payments under the forward purchase contract forming a part of
the Growth PRIDES will be made by us in the form of a contract adjustment
payment at an annual rate of 1.30%. The forward purchase contracts require the
holder to purchase a minimum of 1.0395 shares and a maximum of 1.3514 shares of
our common stock per PRIDES security, depending upon the average of the closing
price per share of our common stock for a 20 consecutive day period ending in
mid-February of 2001. We have the right to defer the contract adjustment
payments and the payment of interest on its Debentures to the Trust. Such
election will subject us to certain restrictions, including restrictions on
making dividend payments on our common stock until all such payments in arrears
are settled.
On March 17, 1999, we reached a final agreement to settle a class action lawsuit
that was brought on behalf of the holders of PRIDES securities who purchased
their securities on or prior to April 15, 1998. We originally announced a
preliminary agreement in principle to settle such lawsuit on January 7, 1999.
The final agreement maintained the basic structure and accounting treatment as
the preliminary agreement. Under the terms of the final agreement, only holders
who owned PRIDES at the close of business on April 15, 1998 will be eligible to
receive a new additional "Right" for each PRIDES security held. At any time
during the life of the Rights (expires February 2001), holders may (i) sell them
or (ii) exercise them by delivering to us three Rights together with two PRIDES
in exchange for two new PRIDES (the "New PRIDES"). The terms of the New PRIDES
will be the same as the original PRIDES except that the conversion rate will be
revised so that, at the time the Rights are distributed, each New PRIDES will
have a value equal to $17.57 more than each original PRIDES, or, in the
aggregate, approximately $351.0 million. The settlement resulted in a net
increase to shareholders' equity of $121.8 million. The final agreement also
requires us to offer to sell four million additional PRIDES (having identical
terms to currently outstanding PRIDES) ("Additional PRIDES") to holders of
Rights for cash, at a value which will be based on the valuation model that was
utilized to set the conversion rate of the New PRIDES. Based on that valuation
model, the currently outstanding PRIDES have a theoretical value of $28.07,
based on the closing price of our common stock of $16.6875 per share on March
17, 1999. The offering of Additional PRIDES will be made only pursuant to a
prospectus filed with the SEC. We currently expect to use the proceeds of such
an offering to repurchase our common stock and for other general corporate
purposes. The arrangement to offer Additional PRIDES is designed to enhance the
trading value of the Rights by removing up to six million Rights from
circulation via exchanges associated with the offering and to enhance the open
market liquidity of New PRIDES by creating four million New PRIDES via exchanges
associated with the offering. If holders of Rights do not acquire all such
PRIDES, they will be offered to the public. Under the settlement agreement, we
also agreed to file a shelf registration statement for an additional 15 million
PRIDES, which could be issued by us at any time for cash. However, during the
last 30 days prior to the expiration of the Rights in February 2001, we will be
required to make these additional PRIDES available to holders of Rights at a
price in cash equal to 105% of the theoretical value of the Additional PRIDES as
of a specified date. The PRIDES, if issued, would have the same terms as the
currently outstanding PRIDES and could be used to exercise Rights. Based on a
market price of $16.6875 per share of our common stock on March 17, 1999, the
effect of the issuance of the New PRIDES will be to distribute approximately 19
million more shares of our common stock when the mandatory purchase of our
common stock associated with the PRIDES occurs in February 2001. This represents
approximately 2% more shares of our common stock than are currently outstanding.
The Rights will be distributed following final court approval of the settlement
and after the effectiveness of the registration statement filed with the SEC
covering the New PRIDES. It is presently expected that if the court approves the
settlement and such conditions are fulfilled, the Rights will be distributed in
August or September 1999. This summary of the settlement does not constitute an
offer to sell any securities, which will only be made by means of a prospectus
after a registration statement is filed with the SEC. There can be no assurance
that the court will approve the agreement or that the conditions contained in
the agreement will be fulfilled.
Debt Retirements
On December 15, 1998, we repaid the $150.0 million principal amount of our 5
7/8% Senior Notes outstanding in accordance with the provisions of the indenture
agreement.
On May 4, 1998, we redeemed all of our outstanding ($144.5 million principal
amount) 4 3/4% Convertible Senior Notes due 2003 at a price of 103.393% of the
principal amount, together with interest accrued to the redemption date. Prior
to the redemption date, during 1998, $95.5 million of such notes were exchanged
for 3.4 million shares of our common stock.
On April 8, 1998, we exercised our option to call our 6 1/2% Convertible
Subordinated Notes (the "61/2% Notes") for redemption on May 11, 1998, in
accordance with the provisions of the indenture relating to the 6-1/2% Notes.
Prior to the redemption date, during 1998, all of the outstanding 6-1/2% Notes
were converted into 2.1 million shares of our common stock.
Financing Related to Management and Mortgage Programs
Our PHH subsidiary operates our mortgage, fleet and relocation services
businesses as a separate public reporting entity and supports purchases of
leased vehicles, originated mortgages and advances under relocation contracts
primarily by issuing commercial paper and medium term notes and maintaining
securitized obligations. Such financing is not classified based on contractual
maturities, but rather is included in liabilities under management and mortgage
programs rather than long-term debt since such debt corresponds directly with
high quality related assets. PHH continues to pursue opportunities to reduce its
borrowing requirements by securitizing increasing amounts of its high quality
assets. Additionally, we entered into a three year agreement effective May 1998
and expanded in December 1998 under which an unaffiliated Buyer (the "Buyer")
committed to purchase, at our option, mortgage loans originated by us on a daily
basis, up to the Buyer's asset limit of $2.4 billion. Under the terms of this
sale agreement, we retain the servicing rights on the mortgage loans sold to the
Buyer and provide the Buyer with options to sell or securitize the mortgage
loans into the secondary market. At December 31, 1998, we were servicing
approximately $2.0 billion of mortgage loans owned by the Buyer.
PHH debt is issued without recourse to the parent company. PHH subsidiary
expects to continue to maximize its access to global capital markets by
maintaining the quality of its assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. Depending upon asset growth and financial market conditions, our PHH
subsidiary utilizes the United States, European and Canadian commercial paper
markets, as well as other cost-effective short-term instruments. In addition,
our PHH subsidiary will continue to utilize the public and private debt markets
as sources of financing. Augmenting these sources, our PHH subsidiary will
continue to manage outstanding debt with the potential sale or transfer of
managed assets to third parties while retaining fee-related servicing
responsibility.
<PAGE>
PHH's aggregate borrowings at December 31, 1998 and 1997 were as follows:
(In billions) 1998 1997
------------- ------------
Commercial paper $ 2.5 $ 2.6
Medium-term notes 2.3 2.7
Securitized obligations 1.9 -
Other 0.2 0.3
------------- ------------
$ 6.9 $ 5.6
============= ============
PHH filed a shelf registration statement with the SEC, effective March 2, 1998,
for the aggregate issuance of up to $3.0 billion of medium-term note debt
securities. These securities may be offered from time to time, together or
separately, based on terms to be determined at the time of sale. The proceeds
will be used to finance assets PHH manages for its clients and for general
corporate purposes. As of December 31, 1998, PHH had approximately $1.6 billion
of medium-term notes outstanding under this shelf registration statement.
Securitized Obligations
Our PHH subsidiary maintains four separate financing facilities, the outstanding
borrowings of which are securitized by corresponding assets under management and
mortgage programs. The collective weighted average interest rate on such
facilities was 5.8% at December 31, 1998. Such securitized obligations are
described below.
Mortgage Facility. In December 1998, our PHH subsidiary entered into a 364 day
financing agreement to sell mortgage loans under an agreement to repurchase (the
"Agreement") such mortgages. The Agreement is collateralized by the underlying
mortgage loans held in safekeeping by the custodian to the Agreement. The total
commitment under this Agreement is $500.0 million. Mortgage loans financed under
this Agreement at December 31, 1998 totaled $378.0 million.
Relocation Facilities. Our PHH subsidiary entered into a 364-day asset
securitization agreement effective December 1998 under which an unaffiliated
buyer has committed to purchase an interest in the rights to payment related to
certain relocation receivables of PHH. The revolving purchase commitment
provides for funding up to a limit of $325.0 million. Under the terms of this
agreement, our PHH subsidiary retains the servicing rights related to the
relocation receivables. At December 31, 1998, our PHH subsidiary was servicing
$248.0 million of assets which were funded under this agreement.
Our PHH subsidiary also maintains an asset securitization agreement, with a
separate unaffiliated buyer, which has a purchase commitment up to a limit of
$350.0 million. The terms of this agreement are similar to the aforementioned
facility, with PHH retaining the servicing rights on the right of payment. At
December 31, 1998, our PHH subsidiary was servicing $171.0 million of assets
eligible for purchase under this agreement.
Fleet Facilities. In December 1998, our PHH subsidiary entered into two secured
financing transactions each expiring five years from the effective agreement
date through its two wholly-owned subsidiaries, TRAC Funding and TRAC Funding
II. Secured leased assets (specified beneficial interests in a trust which owns
the leased vehicles and the leases) totaling $600.0 million and $725.3 million,
respectively, were contributed to the subsidiaries by PHH. Loans to TRAC Funding
and TRAC Funding II, were funded by commercial paper conduits in the amounts of
$500.0 million and $604.0 million, respectively, and were secured by the
specified beneficial interests. Monthly loan repayments conform to the
amortization of the leased vehicles with the repayment of the outstanding loan
balance required at time of disposition of the vehicles. Interest on the loans
is based upon the conduit commercial paper issuance cost and committed bank
lines priced on a LIBOR basis. Repayments of loans are limited to the cash flows
generated from the leases represented by the specified beneficial interests.
Other
To provide additional financial flexibility, PHH's current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average amount of
outstanding commercial paper. PHH maintains $2.65 billion of unsecured committed
credit facilities, which are backed by domestic and foreign banks. The
facilities are comprised of $1.25 billion of syndicated lines of credit maturing
in March 2000 and $1.25 billion of syndicated lines of credit maturing in the
year 2002. In addition, PHH has a $150.0 million revolving credit facility,
which matures in December 1999, and other uncommitted lines of credit with
various financial institutions, which were unused at December 31, 1998.
Management closely evaluates not only the credit of the banks but also the terms
of the various agreements to ensure ongoing availability. The full amount of
PHH's committed facilities at December 31, 1998 was undrawn and available. Our
management believes that our current policy provides adequate protection should
volatility in the financial markets limit PHH's access to commercial paper or
medium-term notes funding. PHH continuously seeks additional sources of
liquidity to accommodate PHH asset growth and to provide further protection from
volatility in the financial markets.
In the event that the public debt market is unable to meet PHH's funding needs,
we believe that PHH has appropriate alternative sources to provide adequate
liquidity, including current and potential future securitized obligations and
its $2.65 billion of revolving credit facilities.
PHH minimizes its exposure to interest rate and liquidity risk by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities.
On July 10, 1998, PHH entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with The First National Bank of Chicago, as trustee,
under the Senior Indenture dated as of June 5, 1997, which formalizes PHH's
policy of limiting the payment of dividends and the outstanding principal
balance of loans to us to 40% of consolidated net income (as defined in the
Supplemental Indenture) for each fiscal year. The Supplemental Indenture
prohibits PHH from paying dividends or making loans to us if upon giving effect
to such dividends and/or loan, PHH's debt to equity ratio exceeds 8 to 1, at the
time of the dividend or loan, as the case may be
Litigation
On April 15, 1998, we publicly announced that we discovered accounting
irregularities in the former business units of CUC. Such discovery prompted
investigations into such matters by us and the Audit Committee of our Board of
Directors. As a result of the findings from the investigations, we restated our
previously reported financial results for 1997, 1996 and 1995. Since such
announcement, more than 70 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on our behalf and several individual
lawsuits have been filed in various courts against us and other defendants. The
majority of these actions were all filed in or transferred to the United States
District Court for the District of New Jersey, where they are pending before
Judge William H. Walls and Magistrate Judge Joel A. Pisano. The Court has
ordered consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised us that its inquiry should not be construed as an indication by the SEC
or its staff that any violations of law have occurred. While we made all
adjustments considered necessary as a result of the findings from the
Investigations in restating our financial statements, we can provide no
assurances that additional adjustments will not be necessary as a result of
these government investigations.
On October 14, 1998, an action claiming to be a class action was filed against
us and four of our former officers and directors. The complaint claims that we
made false and misleading public announcements and filings with the SEC in
connection with our proposed acquisition of American Bankers allegedly in
violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and that the plaintiff and the alleged class members purchased American
Bankers' securities in reliance on these public announcements and filings at
inflated prices. On April 26, 1999, the United States District Court for New
Jersey found that the class action failed to state a claim upon which relief
could be granted and, accordingly, dismissed the class action.
As previously disclosed, we reached an agreement with plaintiffs' counsel
representing the class of holders of our PRIDES securities who purchased their
securities on or prior to April 15, 1998 to settle their class action lawsuit
against us through the issuance of a new "Right" for each PRIDES security held.
See "Liquidity and Capital Resources -- FELINE PRIDES and Trust Preferred
Securities" for a more detailed description of the settlement.
Other than with respect to the PRIDES class action litigation, we do not believe
that it is feasible to predict or determine the final outcome of these
proceedings or investigations or to estimate the amounts or potential range of
loss with respect to these proceedings or investigations. The possible outcomes
or resolutions of the proceedings could include a judgment against us or
settlements and could require substantial payments by us. In addition, the
timing of the final resolution of the proceedings or investigations is
uncertain. We believe that material adverse outcomes with respect to such
proceedings or investigations could have a material impact on our financial
condition, results of operations and cash flows.
Credit Ratings
In October 1998, Duff & Phelps Credit Rating Co. ("DCR"), Standard & Poor's
Corporation ("S&P"), and Moody's Investors Service Inc. ("Moody's") reduced our
long-term debt credit rating to A-from A, BBB from A, and Baa1 from A3,
respectively. In October 1998, Moody's and S&P reduced PHH's long-term and
short-term debt ratings to A3/P2 and A-/A2 from A2/P1 and A+/A1, respectively.
PHH's long-term and short-term credit ratings remain A+/F1 and A+/D1 with Fitch
IBCA and DCR, respectively. While the recent downgrading caused us to incur an
increase in cost of funds, we believe our sources of liquidity continue to be
adequate. (A security rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal at any time.)
Repricing of Stock Options
On September 23, 1998, the Compensation Committee of our Board of Directors
approved a program to effectively reprice certain Company stock options granted
to our middle management during December 1997 and the first quarter of 1998.
Such options were effectively repriced on October 14, 1998 at $9.8125 per share
(the "New Price"), which was the fair market value (as defined in the option
plans) on the date of such repricing. On September 23, 1998, the Compensation
Committee also modified the terms of certain options held by certain of our
executive officers and senior managers subject to certain conditions including
revocation of a portion of existing options. Additionally, a management equity
ownership program was adopted that requires these executive officers and senior
managers to acquire our common stock at various levels commensurate with their
respective compensation levels. The option modifications were accomplished by
canceling existing options and issuing a lesser amount of new options at the New
Price and, with respect to certain options of executive officers and senior
managers, at prices above the New Price.
Share Repurchase Program
We have completed the repurchase of our common stock pursuant to an initial $1.0
billion repurchase program, authorized by our Board of Directors in October
1998. During the first quarter of 1999, our Board of Directors authorized an
additional $600.0 million of our common stock to be repurchased under such
program. We executed this program through open-market purchases or privately
negotiated transactions. As of May 3, 1999, we repurchased a total of $1.6
billion (83.9 million shares) of our common stock under the program and,
including the 7.1 million shares acquired as part of the sale of Hebdo Mag, we
have reduced our outstanding shares by more than 10.5% from the inception of the
program. As of December 31, 1998, we had repurchased a total of 13.4 million
shares costing $257.7 million. Subject to bank credit facility covenants,
certain rating agency constraints and authorization from our Board of Directors,
we anticipate expanding the program, although we can give no assurance with
respect to the timing, likelihood or amount of future repurchases under the
program.
Cash Flows (1998 vs. 1997)
We generated $790.8 million of cash flows from operations in 1998 representing a
$405.5 million decrease from 1997. The decrease in cash flows from operations
was primarily due to a $391.7 million net increase in mortgage loans held for
sale due to increased mortgage loan origination volume.
We used $4.3 billion of cash flows for investing activities in 1998, principally
consisting of a $1.5 billion net investment in assets under management and
mortgage programs and $2.9 billion of acquisitions and acquisition related
payments, which included the acquisitions of NPC and Jackson Hewitt. In 1997, we
used $2.3 billion for investing activities including a $1.5 billion net
investment in assets under management and mortgage programs and $551.0 million
of acquisitions and acquisition related payments. In 1998, cash flows from
financing activities of approximately $4.7 billion included $1.55 billion of
proceeds from public offerings of senior debt, $3.25 billion of term loan
borrowings and $1.4 billion of proceeds from the issuance of FELINE PRIDES and
Trust Preferred Securities. Gross cash flows from financing activities were
partially offset by $2.0 billion of term loan repayments, $257.7 million of our
common stock purchases, and principal repayments of $150.0 million and $144.5
million pertaining to the outstanding 5 7/8% Senior Notes and the 4 3/4% Notes,
respectively. Additionally, in 1998 management and mortgage program financing
consisted of $1.1 billion of net borrowings which funded our investments in
assets under management and mortgage programs. In 1997, cash flows from
financing activities of $900.1 million primarily consisted of net borrowings
totaling $435.9 million including net proceeds of $543.2 million from the
issuance of the 3% Convertible Subordinated Notes in February 1997 and $509.9
million of net borrowings which funded purchases of assets under management and
mortgage programs.
Capital Expenditures
In 1998, $351.3 million was invested in property and equipment to support
operational growth and enhance marketing opportunities. In addition,
technological improvements were made to improve operating efficiencies. Capital
spending in 1998 included the development of integrated business systems within
the Relocation segment as well as investments in systems and office expansion to
support growth in the Mortgage segment. We expect to reduce our level of capital
spending by approximately 25% in 1999.
Year 2000 Compliance
The following disclosure also constitutes a Year 2000 readiness disclosure
statement pursuant to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after January
1, 2000. To minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we are continually identifying, evaluating,
implementing and testing changes to our computer systems, applications and
software necessary to achieve Year 2000 compliance. We implemented a Year 2000
initiative in March 1996 that has now been adopted by all of our business units.
As part of such initiative, we have selected a team of managers to identify,
evaluate and implement a plan to bring all of our critical business systems and
applications into Year 2000 compliance prior to December 31, 1999. The Year 2000
initiative consists of four phases: (i) identification of all critical business
systems subject to Year 2000 risk (the "Identification Phase"); (ii) assessment
of such business systems and applications to determine the method of correcting
any Year 2000 problems (the "Assessment Phase"); (iii) implementing the
corrective measures (the "Implementation Phase"); and (iv) testing and
maintaining system compliance (the "Testing Phase"). We have substantially
completed the Identification and Assessment Phases and have identified and
assessed five areas of risk: (i) internally developed business applications;
(ii) third party vendor software, such as business applications, operating
systems and special function software; (iii) computer hardware components; (iv)
electronic data transfer systems between us and our customers; and (v) embedded
systems, such as phone switches, check writers and alarm systems. Although no
assurances can be made, we believe that we have identified substantially all of
our systems, applications and related software that are subject to Year 2000
compliance risk and have either implemented or initiated the implementation of a
plan to correct such systems that are not Year 2000 compliant. In addition, as
part of our assessment process we are developing contingency plans as necessary.
Substantially all of our mission critical systems have been remediated during
1998. However, we cannot directly control the timing of certain Year 2000
compliant vendor products and in certain situations, exceptions to the December
1998 date have been authorized. We are closely monitoring those situations and
intend to complete testing efforts and any contingency implementation efforts
prior to December 31, 1999. Although we have begun the Testing Phase, we do not
anticipate completion of the Testing Phase until sometime prior to December
1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded and
other systems and other key services. Interruption of those services due to Year
2000 issues could have a material adverse impact on our operations. We have
initiated an evaluation of the status of such third party service providers'
efforts to determine alternative and contingency requirements. While approaches
to reducing risks of interruption of business operations vary by business unit,
options include identification of alternative service providers available to
provide such services if a service provider fails to become Year 2000 compliant
within an acceptable timeframe prior to December 31, 1999.
The total cost of our Year 2000 compliance plan is anticipated to be $55.0
million. Approximately $30.0 million of these costs had been incurred through
December 31, 1998, and we expect to incur the balance of such costs to complete
the compliance plan. We have been expensing and capitalizing the costs to
complete the compliance plan in accordance with appropriate accounting policies.
Variations from anticipated expenditures and the effect on our future results of
operations are not anticipated to be material in any given year. However, if
Year 2000 modifications and conversions are not made including modifications by
our third party service providers, or are not completed in time, the Year 2000
problem could have a material impact on our operations, cash flows and financial
condition. At this time we believe the most likely "worst case" scenario
involves potential disruptions in our operations as a result of the failure of
services provided by third parties.
The estimates and conclusions herein are forward-looking statements and are
based on our best estimates of future events. Risks of completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of our service providers to bring their
systems into Year 2000 compliance.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". We will adopt SFAS No. 133 effective
January 1, 2000. SFAS No. 133 requires us to record all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. If the derivative does not qualify as a hedging instrument, the change in
the derivative fair values will be immediately recognized as gain or loss in
earnings. If the derivative does qualify as a hedging instrument, the gain or
loss on the change in the derivative fair values will either be recognized (i)
in earnings as offsets to the changes in the fair value of the related item
being hedged or (ii) be deferred and recorded as a component of other
comprehensive income and reclassified to earnings in the same period during
which the hedged transactions occur. We have not yet determined what impact the
adoption of SFAS No. 133 will have on our financial statements.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", effective for the first fiscal quarter after
December 15, 1998. We will adopt SFAS No. 134 effective January 1, 1999. SFAS
No. 134 requires that after the securitization of mortgage loans, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other interests based on its ability and intent to sell or hold
those investments. On the date SFAS No. 134 is initially applied, we will
reclassify mortgage-backed securities and other interests retained after the
securitization of mortgage loans from the trading to the available for sale
category. Subsequent accounting that results from implementing SFAS No. 134
shall be accounted for in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities".
Forward Looking Statements
We make statements about our future results in this Annual Report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a number
of risks and uncertainties that are difficult to predict. Our actual results
could differ materially from those expressed our implied in the forward-looking
statements. Important assumptions and other important factors that could cause
our actual results to differ materially from those in the forward-looking
statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to
integrate and operate successfully acquired businesses and the
risks associated with such businesses, including the merger that
created Cendant and the National Parking Corporation acquisition;
o our ability to successfully divest non-core assets and implement our
new internet strategy;
o our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our
growth strategy and for us to operate within the limitations
imposed by financing arrangements; and
o our ability and our vendors; franchisees' and customers' ability
to complete the necessary actions to achieve a Year 2000
conversion for computer systems and applications.
We derived the forward-looking statements in this Annual Report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In recurring operations, we must deal with effects of changes in interest rates
and currency exchange rates. The following discussion presents an overview of
how such changes are managed and a view of their potential effects.
We use various financial instruments, particularly interest rate and currency
swaps and currency forwards, to manage our respective interest rate and currency
risks. We are exclusively an end user of these instruments, which are commonly
referred to as derivatives. We do not engage in trading, market-making or other
speculative activities in the derivatives markets. Established practices require
that derivative financial instruments relate to specific asset, liability or
equity transactions or to currency exposures. More detailed information about
these financial instruments, as well as the strategies and policies for their
use, is provided in Notes 15 and 16 to the financial statements.
The SEC requires that registrants include information about potential effects of
changes in interest rates and currency exchange in their financial statements.
Although the rules offer alternatives for presenting this information, none of
the alternatives is without limitations. The following discussion is based on
so-called "shock tests," which model effects of interest rate and currency
shifts on the reporting company. Shock tests, while probably the most meaningful
analysis permitted, are constrained by several factors, including the necessity
to conduct the analysis based on a single point in time and by their inability
to include the extraordinarily complex market reactions that normally would
arise from the market shifts modeled. While the following results of shock tests
for interest rate and currencies may have some limited use as benchmarks, they
should not be viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net
earnings resulting from a hypothetical 10% change (decrease) in
interest rates across all maturities (sometimes referred to as a
"parallel shift in the yield curve"). Under this model, it is
estimated that, all else constant, such a decrease would not
adversely impact our 1999 net earnings based on year-end 1998
positions.
o One means of assessing exposure to changes in currency exchange
rates is to model effects on future earnings using a sensitivity
analysis. Year-end 1998 consolidated currency exposures, including
financial instruments designated and effective as hedges, were
analyzed to identify our assets and liabilities denominated in
other than their relevant functional currency. Net unhedged
exposures in each currency were then remeasured assuming a 10%
change (decrease) in currency exchange rates compared with the
U.S. dollar. Under this model, it is estimated that, all else
constant, such a decrease would not adversely impact our 1999 net
earnings based on year-end 1998 positions.
The categories of primary market risk exposure to us are: (i) long-term U.S.
interest rates due to mortgage loan origination commitments and an investment in
mortgage loans held for resale; (ii) short-term interest rates as they impact
vehicle and relocation receivables; and (iii) LIBOR and commercial paper
interest rates due to their impact on variable rate borrowings.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement Schedule Index commencing
on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required herein has been previously reported on our Form
10-K/A for the year ended December 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Proxy Statement under the
sections titled "Proposal 1: Election of Directors" and "Executive Officers" is
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's Proxy Statement under the
section titled "Executive Compensation and Other Information" is incorporated
herein by reference in response to this item, except that the information
contained in the Proxy Statement under the sub-headings "Pre-Merger Compensation
Committee Report on Executive Compensation" and "Performance Graph" is not
incorporated herein by reference and is not to be deemed "filed" as part of this
filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained in the Company's Proxy Statement under the
section titled "Security Ownership of Certain Beneficial Owners and Management"
is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's Proxy Statement under the
section titled "Certain Relationships and Related Transactions" is incorporated
herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 14(a)(1) Financial Statements
See Financial Statements and Financial Statements Index commencing on page
F-1 hereof.
Item 14(a)(3) Exhibits
See Exhibit Index commencing on page E-1 hereof.
Item 14(b) Reports on Form 8K
On October 5, 1998, we filed a current report on Form 8-K to report under
Item 5 the termination of our agreement to purchase Providian Auto and Home
Insurance Company.
On October 14, 1998, we filed a current report on Form 8-K to report
under Item 5 its intention to file financial statements of NPC.
On October 14, 1998, we filed a current report on Form 8-K to report under
Item 5 the termination of its agreement to purchase American Bankers Insurance
Group, Inc. and its intention to repurchase up to $1 billion of common stock.
<PAGE>
On October 21, 1998, we filed a current report on Form 8-K to report under
Item 5 the filing of financial schedules summarizing restated revenue and EDITDA
by business segment for all four quarters of 1997 and the first and second
quarters of 1998.
On November 4, 1998, we filed a current report on Form 8-K to report the
unaudited pro forma financial statements of the Company giving effect to the
acquisition of NPC for the year ended December 31, 1997 and for the six months
ended June 30, 1998. We also filed the consolidated financial statements of NPC
for the 52-week period ended March 27, 1998.
On November 6, 1998, we filed a current report on Form 8-K to report its
third quarter results for the quarter ending September 30, 1998. The Company
also reported the execution of certain amendments to its credit facilities.
On November 16, 1998, we filed a current report on Form 8-K to file the
unaudited pro forma financial statements of the Company giving effect to the
acquisition of NPC for the year ended December 31, 1997 and the nine months
ended September 30, 1998.
On November 24, 1998, we filed a current report on Form 8-K announcing the
execution of a definitive agreement to sell the Company's consumer software
division for $800 million in cash plus potential future cash payments of up to
approximately $200 million.
On December 4, 1998, we filed a current report on Form 8-K to file certain
required opinions and consents in connection with the sale of the Company's 7
1/2% Notes due 2000 and its 7 3/4% Notes due 2003.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENDANT CORPORATION
By: /s/ James E. Buckman
James E. Buckman
Vice Chairman and General Counsel
Date: May 12, 1999
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------- --------------------------------------------- -------------------
<S> <C> <C>
/s/ Henry R. Silverman Chairman of the Board, President, Chief May 12, 1999
(Henry R. Silverman) Executive Officer and Director
/s/ James E. Buckman Vice Chairman, General Counsel and Director May 12, 1999
(James E. Buckman)
/s/ Stephen P. Holmes Vice Chairman and Director May 12, 1999
(Stephen P. Holmes)
/s/ Robert D. Kunisch Vice Chairman and Director May 12, 1999
(Robert D. Kunisch)
/s/ Michael P. Monaco Vice Chairman and Director May 12, 1999
(Michael P. Monaco)
/s/ David M. Johnson Senior Executive Vice President and Chief May 12, 1999
(David M. Johnson) Financial Officer (Principal Financial Officer)
/s/ Tobia Ippolito Senior Vice President and Corporate Controller May 12, 1999
(Tobia Ippolito) (Principal Accounting Officer)
/s/ John D. Snodgrass Director May 12, 1999
(John D. Snodgrass)
/s/ Leonard S. Coleman Director May 12, 1999
(Leonard S. Coleman)
/s/ Martin L. Edelman Director May 12, 1999
(Martin L. Edelman)
/s/ Carole G. Hankin Director May 12, 1999
Dr. Carole G. Hankin)
/s/ Brian Mulroney Director May 12, 1999
(The Rt. Hon. Brian Mulroney,
P.C., LL.D)
/s/ Robert W. Pittman Director May 12, 1999
(Robert W. Pittman)
/s/ E. John Rosenwald, Jr. Director May 12, 1999
(E. John Rosenwald, Jr.)
/s/ Robert P. Rittereiser Director May 12, 1999
(Robert P. Rittereiser)
/s/ Leonard Schutzman Director May 12, 1999
(Leonard Schutzman)
/s/ Robert F. Smith Director May 12, 1999
(Robert F. Smith)
/s/ Craig R. Stapleton Director May 12, 1999
(Craig R. Stapleton)
/s/ Robert E. Nederlander Director May 12, 1999
(Robert E. Nederlander)
</TABLE>
<PAGE>
Exhibits:
Exhibit No. Description
- ----------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated March 23, 1998 among the
Company, Season Acquisition Corp. and American Bankers
Insurance Group, Inc. (incorporated by reference to Exhibit
C2 to the Schedule 14D-1 (Amendment 31), dated March 23,
1998, filed by the Company and Season Acquisition Corp.)*
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 4.1 to the
Company's PostEffective Amendment No. 2 on Form S-8 to the
Registration Statement on Form S-4, No.
333-34517, dated December 17, 1997)*
3.2 Amended and Restated ByLaws of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K dated August 4, 1998)*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement, No. 33-44453, on Form
S-4 dated December 19, 1991)*
4.2 Indenture dated as of February 11, 1997, between CUC
International Inc. and Marine Midland Bank, as trustee
(filed as Exhibit 4(a) to the Company's Report on Form 8-K
filed February 13, 1997)*
4.3 Indenture between HFS Incorporated and Continental Bank,
National Association, as trustee (Incorporated by
reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-71736), Exhibit No. 4.1)*
4.4 Indenture dated as of February 28, 1996 between HFS
Incorporated and First Trust of Illinois, National
Association, as trustee (Incorporated by reference to HFS
Incorporated's Current Report on Form 8-K dated March 8,
1996, Exhibit 4.01)*
4.5 Supplemental Indenture No. 1 dated as of February 28, 1996
between HFS Incorporated and First Trust of Illinois,
National Association, as trustee (Incorporated by reference
to HFS Incorporated's Current Report on Form 8-K dated March
8, 1996, Exhibit 4.02)*
4.6 Indenture, dated as of February 24, 1998, between the
Company and The Bank of Novia Scotia Trust Company of New
York, as Trustee (incorporated by reference to Exhibit 4.4
to the Company's Current Report on Form 8-K dated March 6,
1998)*
4.7 First Supplemental Indenture dated February 24, 1998,
between the Company and The Bank of Novia Scotia Trust
Company of New York, as Trustee (incorporated by reference
to Exhibit 4.5 to the Company's Current Report on Form 8-K,
dated March 6, 1998)*
4.8 Amended and Restated Declaration of Trust of Cendant Capital
I. (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated March 6, 1998)*
4.9 Preferred Securities Guarantee Agreement dated March 2,
1998, between by Cendant Corporation and Wilmington Trust
Company. (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated March 6, 1998)*
4.10 Purchase Contract Agreement (including as Exhibit A the form
of the Income PRIDES and as Exhibit B the form of the Growth
PRIDES), dated March 2, 1998, between Cendant Corporation
and The First National Bank of Chicago (incorporated by
reference to Exhibit 4.3 to the Company's Current Report on
Form 8-K dated March 6, 1998)*
<PAGE>
Exhibit No. Description
- -------------- ------------------------------------------------------------
10.1-10.38 Material Contracts, Management Contracts, Compensatory Plans
and Arrangements **
10.1(a) Agreement with Henry R. Silverman, dated June 30, 1996 and
as amended through December 17, 1997 (filed as
Exhibit 10.6 to the Company's Registration Statement on Form
S-4, Registration No. 333-34571)*
10.1(b) Amendment to Agreement with Henry R. Silverman, dated
December 31, 1998. **
10.2(a) Agreement with Stephen P. Holmes, dated September 12, 1997
(filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-4, Registration No. 333-34571)*
10.2(b) Amendment to Agreement with Stephen P. Holmes, dated January
11, 1999. **
10.3(a) Agreement with Michael P. Monaco, dated September 12, 1997
(filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-4, Registration No. 333-34571)*
10.3(b) Amendment to Agreement with Michael Monaco, dated December
23, 1998. **
10.4(a) Agreement with James E. Buckman, dated September 12, 1997
(filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-4, Registration No. 333-34571)*
10.4(b) Amendment to Agreement with James E. Buckman, dated January
11, 1999. **
10.5 1987 Stock Option Plan, as amended (filed as Exhibit
10.16 to the Company's Form 10-Q for the period ended
October 31, 1996)*
10.6 1990 Directors Stock Option Plan, as amended (filed as
Exhibit 10.17 to the Company's Form 10-Q for the period
ended October 31, 1996)*
10.7 1992 Directors Stock Option Plan, as amended (filed as
Exhibit 10.18 to the Company's Form 10-Q for the period
ended October 31, 1996)*
10.8 1994 Directors Stock Option Plan, as amended (filed as
Exhibit 10.19 to the Company's Form 10-Q for the period
ended October 31, 1996)*
10.9 1997 Stock Option Plan (filed as Exhibit 10.23 to the
Company's Form 10-Q for the period ended April 30, 1997)*
10.10 1997 Stock Incentive Plan (filed as Appendix E to the Joint
Proxy Statement/ Prospectus included as part of the
Company's Registration Statement, No. 333-34517, on Form S-4
dated August 28, 1997)*
10.11 HFS Incorporated's Amended and Restated 1993 Stock Option
Plan (Incorporated by reference to HFS Incorporated's
Registration Statement on Form S-8 (Registration
No.33-83956), Exhibit 4.1)*
<PAGE>
Exhibit No. Description
- ----------- ------------------------------------------------------------
10.12(a) First Amendment to the Amended and Restated 1993 Stock
Option Plan dated May 5, 1995. (Incorporated by reference to
HFS Incorporated's Registration Statement on Form S-8
(Registration No. 33-094756), Exhibit 4.1)*
10.12(b) Second Amendment to the Amended and Restated 1993 Stock
Option Plan dated January 22, 1996. (Incorporated by
reference to the HFS Incorporated's Annual Report on Form
10-K for fiscal year ended December 31, 1995, Exhibit
10.21(b))*
10.12(c) Third Amendment to the Amended and Restated 1993 Stock
Option Plan dated January 22, 1996. (Incorporated by
reference to the HFS Incorporated's Annual Report on Form
10-K for fiscal year ended December 31, 1995, Exhibit
10.21(c))*
10.12(d) Fourth Amendment to the Amended and Restated 1993 Stock
Option Plan dated May 20, 1996. (Incorporated by reference
to HFS Incorporated's Registration Statement on Form S-8
(Registration No. 333-06733), Exhibit 4.5)*
10.12(e) Fifth Amendment to the Amended and Restated 1993 Stock
Option Plan dated July 24, 1996 (Incorporated by reference
to the HFS Incorporated's Annual Report on Form 10-K for
fiscal year ended December 31, 1995, Exhibit 10.21(e))*
10.12(f) Sixth Amendment to the Amended and Restated 1993 Stock
Option Plan dated September 24, 1996 (Incorporated by
reference to the HFS Incorporated's Annual Report on Form
10-K for fiscal year ended December 31, 1995, Exhibit
10.21(e))*
10.12(g) Seventh Amendment to the Amended and Restated 1993 Stock
Option Plan dated as of April 30, 1997 (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, Exhibit 10.17(g))*
10.12(h) Eighth Amendment to the Amended and Restated 1993 Stock
Option Plan dated as of May 27, 1997 (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, Exhibit 10.17(h))*
10.13 HFS Incorporated's 1992 Incentive Stock Option Plan and
Form of Stock Option Agreement. (Incorporated by
reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.6)*
10.14 Cendant Corporation 1992 Employee Stock Plan (Incorporated
by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-8 dated January 29, 1998
(Registration No. 333-45183))*
10.15 Cendant Corporation Deferred Compensation Plan **
10.16 Agreement and Plan of Merger, by and among HFS Incorporated,
HJ Acquisition Corp. and Jackson Hewitt, Inc., dated as of
November 19, 1997. (Incorporated by reference to Exhibit
10.1 to HFS Incorporated's Current Report on Form 8-K dated
August 14, 1997, File No. 111402)*
10.17 Form of Underwriting Agreement for Debt Securities
(Incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement on Form S-3, Registration No.
333-45227)*
<PAGE>
Exhibit No. Description
- ----------- ------------------------------------------------------------
10.18 Underwriting Agreement dated February 24, 1998 among the
Company, Cendant Capital I, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Chase
Securities Inc. (Incorporated by reference to the Company's
Form 8-K dated March 6, 1998, Exhibit 1.1)*
10.19 Registration Rights Agreement dated as of February 11, 1997,
between CUC International Inc. and Goldman, Sachs & Co. (for
itself and on behalf of the other purchasers party
thereto)(filed as Exhibit 4(b) to the Company's Report on
Form 8-K filed February 13, 1997)*
10.20 Agreement and Plan of Merger between CUC International Inc.
and HFS Incorporated, dated as of May 27, 1997 (filed as
Exhibit 2.1 to the Company's Report on Form 8-K filed on
May 29, 1997)*
10.21(a) $750,000,000 Five Year Revolving Credit and Competitive
Advance Facility Agreement, dated as of October 2, 1996,
among the Company, the several banks and other financial
institutions from time to time parties thereto and The Chase
Manhattan Bank, as Administrative Agent and CAF Agent
(Incorporated by reference to Exhibit (b)(1) to the Schedule
14-D1 filed by the Company on January 27, 1998, File No.
531838)*
10.21(b) Amendment, dated as of October 30, 1998, to the Five Year
Competitive Advance and Revolving Credit Agreement, dated as
of October 2, 1998, by and among the Company, the general
institutions, parties thereto and The Chase Manhattan Bank,
as Administrative Agent (incorporated by reference to
Exhibit 10.2 to the Company's Form 8-K dated February 10,
1999)*
10.22(a) $1,250,000 364-Day Revolving Credit and Competitive Advance
Facility Agreement, dated October 2, 1996, as amended and
restated through October 30, 1998, among the Company, the
several banks and other financial institutions from time to
time parties thereto, and The Chase Manhattan Bank, as
Administrative Agent and as Lead Manager (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K dated
November 5, 1998).*
10.22(b) Amendment, dated as of February 4, 1999, to the Five-Year
Competitive Advance and Revolving Credit Agreement and the
364-Day Competitive Advance and Revolving Credit Agreement
among the Company, the lenders therein and The Chase
Manhattan Bank, as Administrative Agent (incorporated by
reference to Exhibit 99.2 to the Company's Form 8-K dated
February 16, 1999)*.
10.23 Distribution Agreement, dated March 5, 1998, among the
Company, Bear, Stearns & Co., Inc., Chase Securities Inc.,
Lehman Brothers and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (incorporated by
reference to the Company's Current Report on Form 8-K, dated
March 10, 1998)*
10.24(a) 364-Day Credit Agreement Among PHH Corporation, PHH Vehicle
Management Services, Inc., the Lenders, the Chase Manhattan
Bank, as Administrative Agent and the Chase Manhattan Bank
of Canada, as Canadian Agent, Dated March 5, 1999. **
10.24(b) Five-year Credit Agreement ("PHH Five-year Credit
Agreement") among PHH Corporation, the Lenders, and Chase
Manhattan Bank, as Administrative Agent, dated March 4, 1997
(Incorporated by reference from Exhibit 10.2 to Registration
Statement 333-27715)*
<PAGE>
Exhibit No. Description
- ----------- ------------------------------------------------------------
10.24(c) Second Amendment to PHH Credit Agreements (Incorporated by
reference to PHH Incorporated's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997,
Exhibit 10.1)*
10.24(d) Third Amendment to PHH Credit Agreements (Incorporated by
reference to PHH Incorporated's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997,
Exhibit 10.1)*
10.24(e) Fourth Amendment dated as of November 2, 1998, to PHH Five-
Year Credit Agreement. **
10.25 Indenture between the Company and Bank of New York, Trustee,
dated as of May 1, 1992 (Incorporated by reference
from Exhibit 4(a)(iii) to Registration Statement 33-48125)*
10.26 Indenture between the Company and First National Bank
of Chicago, Trustee, dated as of March 1, 1993
(Incorporated by reference from Exhibit 4(a)(i) to
Registration Statement 33-59376)*
10.27 Indenture between the Company and First National Bank
of Chicago, Trustee, dated as of June 5, 1997
(Incorporated by reference from Exhibit 4(a) to Registration
Statement 333-27715)*
10.28 Indenture between the Company and Bank of New York, Trustee
dated as of June 5, 1997 (Incorporated by reference
from Exhibit 4(a)(11) to Registration Statement 333-27715)*
10.29 Distribution Agreement between the Company and CS First
Boston Corporation; Goldman, Sachs & Co.; Merrill Lynch &
Co.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated;
and J.P. Morgan Securities, Inc. dated November 9, 1995
(Incorporated by reference from Exhibit 1 to Registration
Statement 33-63627)*
10.30 Distribution Agreement between the Company and Credit
Suisse; First Boston Corporation; Goldman Sachs & Co. and
Merrill Lynch & Co., dated June 5, 1997 filed as Exhibit 1
to Registration Statement 333-27715*
10.31 Distribution Agreement, dated March 2, 1998, among PHH
Corporation, Credit Suisse First Boston Corporation, Goldman
Sachs & Co., Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated and J.P. Morgan Securities,
Inc., filed as Exhibit 1 to Form 8-K dated March 3, 1998,
File No. 107797*
10.32 Registration Rights Agreement, dated as of November 12,
1996, by and between HFS Incorporated and Ms. Christel
DeHaan (Incorporated by reference to HFS Incorporated's
Registration Statement on Form S-3 (Registration No.
333-17371), Exhibit 2.2)*
10.33 License Agreement dated as of September 18, 1989 amended
and restated as of July 15, 1991 between Franchise
System Holdings, Inc. and Ramada Franchise Systems, Inc.
(Incorporated by reference to HFS Incorporated's
Registration Statement on Form S-1 (Registration No.
33-51422), Exhibit No. 10.2)*
10.34 Restructuring Agreement dated as of July 15, 1991 by and
among New World Development Co., Ltd., Ramada
International Hotels & Resorts, Inc. Ramada Inc., Franchise
System Holdings, Inc., HFS Incorporated and Ramada
Franchise Systems, Inc. (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No. 10.3)*
10.35 License Agreement dated as of November 1, 1991 between
Franchise Systems Holdings, Inc. and Ramada Franchise
Systems, Inc. (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No. 10.4)*
10.36 Amendment to License Agreement, Restructuring Agreement and
Certain Other Restructuring Documents dated as of November
1, 1991 by and among New World Development Co., Ltd., Ramada
International Hotels & Resorts, Inc., Ramada Inc., Franchise
System Holdings, Inc., HFS Incorporated and Ramada Franchise
Systems, Inc. (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No.
10.5)*
<PAGE>
Exhibit No. Description
- ----------- ------------------------------------------------------------
10.37 Master License Agreement dated July 30, 1997, among HFS
Car Rental, Inc., Avis Rent A Car System, Inc. and
Wizard Co. (incorporated by reference to HFS Incorporated
Form 10-Q for the quarter ended June 30, 1997, Exhibit
10.1)*
10.38 Term Loan Agreement, dated as of February 9, 1999, among
Cendant Corporation, as Borrower , the Lenders referred
therein, Bank of America NT & SA, as Syndication Agent,
Barclays Bank, PLC, The Bank of Nova Scotia, Credit Lyonnais
New York Branch, as CoDocumentation Agents, First Union
National Bank, and The Industrial Bank of Japan, Limited,
New York Branch, as Managing Agents, Credit Suisse First
Boston, The Sumitomo Bank, Limited, New York Branch, Banque
Paribas, as CoAgents and The Chase Manhattan Bank, as
Administrative Agent (incorporated by reference to Cendant
Corporation's Form 8-K dated February 16, 1999 (File No.
110308)). *
12 Statement Re: Computation of Consolidated Ratio to Earnings
to Combined Fixed Charges and Preferred Stock Dividends
16.1 Letter re: change in certifying accountant (Incorporated
by reference to the Company's Form 8-K dated January
27, 1998)*
16.2 Letter re: change in certifying accountant of a
significant subsidiary (Incorporated by reference to the
Company's Form 8-K dated May 18, 1998)*
21 Subsidiaries of Registrant **
23.1 Consent of Deloitte & Touche LLP related to the financial
statements of Cendant Corporation
23.2 Consent of KPMG LLP relating to the financial statements of
PHH Corporation
27 Financial data schedule
- ---------------
* Incorporated by reference
** Previously included in the Annual Report on Form 10-K of Cendant
Corporation for the year ended December 31, 1998, filed with the Securities
and Exchange Commission March 29, 1999.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-10
Notes to Consolidated Financial Statements F-12
F-1
<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, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. We did not audit the statements of
income, shareholders' equity, and cash flows of PHH Corporation (a consolidated
subsidiary of Cendant Corporation) for the year ended December 31, 1996 which
statements reflect net income of $87.7 million. Those statements were audited by
other auditors whose reports has been furnished to us, and our opinion, insofar
as it relates to the amounts included for PHH Corporation, is based solely on
the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cendant Corporation and
subsidiaries at December 31, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 18 to the consolidated financial statements, the Company is
involved in certain litigation related to the discovery of accounting
irregularities in certain former CUC International Inc. business units.
Additionally, as discussed in Note 2, effective January 1, 1997 the Company
changed its method of recognizing revenue and membership solicitation costs for
its individual membership business.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
May 10, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHH Corporation
We have audited the consolidated statement of income, shareholder's equity and
cash flows of PHH Corporation and subsidiaries (the "Company") for the year
ended December 31, 1996, before the restatement related to the merger of Cendant
Corporation's relocation business with the Company and reclassifications to
conform to the presentation used by Cendant Corporation, not presented
separately herein. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements (before restatement and
reclassifications) referred to above present fairly, in all material respects,
the results of operations of PHH Corporation and subsidiaries and their cash
flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Baltimore, Maryland
April 30, 1997
F-3
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Revenues
Membership and service fees - net $ 4,883.5 $ 3,895.3 $ 2,972.4
Fleet leasing (net of depreciation and interest costs of
$1,279.4, $1,205.2 and $1,132.4) 88.7 59.5 56.7
Other 114.4 97.1 34.0
--------- --------- ---------
Net revenues 5,086.6 4,051.9 3,063.1
--------- --------- ---------
Expenses
Operating 1,721.5 1,179.4 1,042.6
Marketing and reservation 1,158.5 1,031.8 909.1
General and administrative 648.7 627.8 330.7
Depreciation and amortization 314.0 229.0 138.5
Other charges
Litigation settlement 351.0 - -
Termination of proposed acquisitions 433.5 - -
Executive terminations 52.5 - -
Investigation-related costs 33.4 - -
Merger-related costs and other unusual charges (credits) (67.2) 704.1 109.4
Financing costs 35.1 - -
Interest - net 113.9 50.6 14.2
--------- --------- ---------
Total expenses 4,794.9 3,822.7 2,544.5
--------- --------- ---------
Income from continuing operations before income taxes,
minority interest, extraordinary gain and cumulative effect
of accounting change 291.7 229.2 518.6
Provision for income taxes 95.4 180.1 214.1
Minority interest, net of tax 50.6 - -
--------- --------- ---------
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change 145.7 49.1 304.5
Income (loss) from discontinued operations, net of tax (10.8) (9.6) 25.5
Gain on sale of discontinued operations, net of tax 404.7 - -
--------- --------- ---------
Income before extraordinary gain and cumulative effect
of accounting change 539.6 39.5 330.0
Extraordinary gain, net of tax - 26.4 -
--------- --------- ---------
Income before cumulative effect of accounting change 539.6 65.9 330.0
Cumulative effect of accounting change, net of tax - (283.1) -
--------- --------- ---------
Net income (loss) $ 539.6 $ (217.2) $ 330.0
========= ========= =========
Income (loss) per share
Basic
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 0.17 $ 0.06 $ 0.40
Income (loss) from discontinued operations (0.01) (0.01) 0.04
Gain on sale of discontinued operations 0.48 - -
Extraordinary gain - 0.03 -
Cumulative effect of accounting change - (0.35) -
--------- --------- ---------
Net income (loss) $ 0.64 $ (0.27) $ 0.44
========= ========== =========
Diluted
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 0.16 $ 0.06 $ 0.38
Income (loss) from discontinued operations (0.01) (0.01) 0.03
Gain on sale of discontinued operations 0.46 - -
Extraordinary gain - 0.03 -
Cumulative effect of accounting change - (0.35) -
--------- --------- ---------
Net income (loss) $ 0.61 $ (0.27) $ 0.41
========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,007.1 $ 65.3
Receivables (net of allowance for doubtful accounts
of $110.9 and $60.9) 1,490.5 1,122.1
Deferred membership commission costs 253.0 169.5
Deferred income taxes 460.6 306.9
Other current assets 898.7 632.4
Net assets of discontinued operations 462.5 360.5
------------ -------------
Total current assets 4,572.4 2,656.7
------------ -------------
Property and equipment, net 1,420.3 530.9
Franchise agreements, net 1,363.2 1,079.6
Goodwill, net 3,911.0 2,124.6
Other intangibles, net 743.5 608.6
Other assets 679.8 597.4
------------ -------------
Total assets exclusive of assets under programs 12,690.2 7,597.8
------------ -------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,801.1 3,659.1
Relocation receivables 659.1 775.3
Mortgage loans held for sale 2,416.0 1,636.3
Mortgage servicing rights 635.7 373.0
------------ -------------
7,511.9 6,443.7
------------ -------------
Total assets $ 20,202.1 $ 14,041.5
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities
Accounts payable and other current liabilities $ 1,502.6 $ 1,478.3
Deferred income 1,354.2 1,042.0
------------ -------------
Total current liabilities 2,856.8 2,520.3
------------ -------------
Deferred income 233.9 292.1
Long-term debt 3,362.9 1,246.0
Deferred income taxes 77.4 66.2
Other non-current liabilities 125.6 97.2
------------ -------------
Total liabilities exclusive of liabilities under programs 6,656.6 4,221.8
------------ -------------
Liabilities under management and mortgage programs
Debt 6,896.8 5,602.6
------------ -------------
Deferred income taxes 341.0 295.7
------------ -------------
Mandatorily redeemable preferred securities issued by subsidiary 1,472.1 -
Commitments and contingencies (Note 18)
Shareholders' equity
Preferred stock, $.01 par value - authorized 10 million shares;
none issued and outstanding - -
Common stock, $.01 par value - authorized 2 billion shares;
issued 860,551,783 and 838,333,800 shares 8.6 8.4
Additional paid-in capital 3,863.4 3,085.0
Retained earnings 1,480.2 940.6
Accumulated other comprehensive loss (49.4) (38.2)
Treasury stock, at cost, 27,270,708 and 6,545,362 shares (467.2) (74.4)
------------ -------------
Total shareholders' equity 4,835.6 3,921.4
------------ -------------
Total liabilities and shareholders' equity $ 20,202.1 $ 14,041.5
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ -------- ---------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 725.2 $ 7.3 $1,041.9 $ 905.1 $ (25.1) $ (31.0) $ 1,898.2
Comprehensive income:
Net income - - - 330.0 - -
Currency translation
adjustment - - - - 12.2 -
Net unrealized gain
on marketable
securities - - - - 6.5 -
Total comprehensive
income - - - - - - 348.7
Issuance of common
stock 63.3 .6 1,627.9 - - - 1,628.5
Exercise of stock
options by payment
of cash and
common stock 14.0 .1 74.6 - - (25.5) 49.2
Restricted stock
issuance 1.4 - - - - - -
Amortization of
restricted stock - - 2.3 - - - 2.3
Tax benefit from
exercise of stock
options - - 78.9 - - - 78.9
Cash dividends
declared and other
equity distributions - - - (41.3) - - (41.3)
Adjustment to reflect
change in fiscal
years of pooled
entities - - (.6) (7.1) - - (7.7)
Conversion of convertible
notes 3.8 .1 18.0 - - - 18.1
Purchase of common
stock - - - - - (19.2) (19.2)
------ -------- -------- --------- -------------- ------------ ---------
Balance at
December 31, 1996 807.7 $ 8.1 $2,843.0 $ 1,186.7 $ (6.4) $ (75.7) $3,955.7
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(In millions)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ -------- ---------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 807.7 $ 8.1 $2,843.0 $ 1,186.7 $ (6.4) $ (75.7) $ 3,955.7
Comprehensive loss:
Net loss - - - (217.2) - -
Currency translation
adjustment - - - - (27.6) -
Net unrealized loss
on marketable
securities - - - - (4.2) -
Total comprehensive
loss - - - - - - (249.0)
Issuance of
common stock 6.2 - 46.3 - - - 46.3
Exercise of stock options
by payment of cash
and common stock 11.4 .1 132.8 - - (17.8) 115.1
Restricted stock
issuance .2 - - - - - -
Amortization of
restricted stock - - 28.5 - - - 28.5
Tax benefit from exercise
of stock options - - 93.5 - - - 93.5
Cash dividends declared - - - (6.6) - - (6.6)
Adjustment to reflect
change in fiscal year
from Cendant Merger - - - (22.3) - - (22.3)
Conversion of
convertible notes 20.2 .2 150.9 - - - 151.1
Purchase of
common stock - - - - - (171.3) (171.3)
Retirement of treasury
stock (7.4) - (190.4) - - 190.4 -
Other - (19.6) - - - (19.6)
------ -------- -------- -------- ------------- ---------- -----------
Balance at
December 31, 1997 838.3 $ 8.4 $3,085.0 $ 940.6 $ (38.2) $ (74.4) $ 3,921.4
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(In millions)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ -------- ---------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 838.3 $ 8.4 $3,085.0 $ 940.6 $ (38.2) $ (74.4) $ 3,921.4
Comprehensive income:
Net income - - - 539.6 - -
Currency translation
adjustment - - - - (11.2) -
Total comprehensive
income - - - - - - 528.4
Exercise of stock options
by payment of cash and
common stock 16.4 .1 168.4 - - ( .2) 168.3
Amortization of
restricted stock - - .7 - - - .7
Tax benefit from exercise
of stock options - - 147.3 - - - 147.3
Conversion of convertible
notes 5.9 .1 113.7 - - - 113.8
Purchase of common
stock - - - - - (257.7) (257.7)
Mandatorily redeemable
preferred securities
issued by subsidiary - - (65.7) - - - (65.7)
Common stock received as
consideration in sale
of discontinued
operations - - - - - (134.9) (134.9)
Rights issuable - - 350.0 - - - 350.0
Other - - 64.0 - - - 64.0
------ -------- -------- --------- -------------- ----------- ----------
Balance at
December 31, 1998 860.6 $ 8.6 $3,863.4 $ 1,480.2 $ (49.4) $ (467.2) $ 4,835.6
====== ======== ======== ========= ============= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 539.6 $ (217.2) $ 330.0
Adjustments to reconcile net income (loss) to net cash
provided by operating activities from continuing operations:
(Income) loss from discontinued operations, net of tax 10.8 9.6 (25.5)
Gain on sale of discontinued operations, net of tax (404.7) - -
Non cash charges:
Litigation settlement 351.0 - -
Extraordinary gain on sale of subsidiary, net of tax - (26.4) -
Cumulative effect of accounting change, net of tax - 283.1 -
Asset impairments and termination benefits 62.5 - -
Merger-related costs and other unusual charges (credits) (67.2) 704.1 109.4
Payments of merger-related costs and other unusual
charge liabilities (158.2) (317.7) (61.3)
Depreciation and amortization 314.0 229.0 138.5
Membership acquisition costs - - (512.1)
Amortization of membership costs - - 492.3
Proceeds from sales of trading securities 136.1 - -
Purchases of trading securities (181.6) - -
Deferred income taxes (105.0) (21.3) 66.6
Net change in assets and liabilities from continuing operations:
Receivables (128.7) (71.8) (133.2)
Deferred membership commission costs (86.8) - -
Income taxes receivable (97.9) (84.0) (18.3)
Accounts payable and other current liabilities 94.3 (103.1) 25.2
Deferred income 82.3 134.0 43.9
Other, net (49.9) (55.9) 53.9
------------- ------------ ----------
Net cash provided by continuing operations exclusive of
management and mortgage programs 310.6 462.4 509.4
------------- ------------ ----------
Management and mortgage programs:
Depreciation and amortization 1,259.9 1,121.9 1,021.8
Origination of mortgage loans (26,571.6) (12,216.5) (8,292.6)
Proceeds on sale and payments from mortgage loans
held for sale 25,791.9 11,828.5 8,219.3
------------- ------------ ----------
480.2 733.9 948.5
------------- ------------ ----------
Net cash provided by operating activities of
continuing operations 790.8 1,196.3 1,457.9
------------- ------------ ----------
Investing Activities
Property and equipment additions (351.1) (151.7) (97.6)
Proceeds from sales of marketable securities - 506.1 72.4
Purchases of marketable securities - (458.1) (125.6)
Investments (24.4) (272.5) (12.7)
Net assets acquired (net of cash acquired) and
acquisition-related payments (2,850.5) (551.0) (1,608.6)
Net proceeds from sale of subsidiary 314.8 224.0 -
Other, net 106.5 (108.7) (56.2)
------------- ------------ ----------
Net cash used in investing activities of continuing operations
exclusive of management and mortgage programs (2,804.7) (811.9) (1,828.3)
------------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Management and mortgage programs:
Investment in leases and leased vehicles $ (2,446.6) $ (2,068.8) $ (1,901.2)
Payments received on investment in leases
and leased vehicles 987.0 589.0 595.9
Proceeds from sales and transfers of leases
and leased vehicles to third parties 182.7 186.4 162.8
Equity advances on homes under management (6,484.1) (6,844.5) (4,308.0)
Repayment on advances on homes under management 6,624.9 6,862.6 4,348.9
Additions to mortgage servicing rights (524.4) (270.4) (164.4)
Proceeds from sales of mortgage servicing rights 119.0 49.0 7.1
------------- ------------ ----------
(1,541.5) (1,496.7) (1,258.9)
------------- ------------ ----------
Net cash used in investing activities of continuing operations (4,346.2) (2,308.6) (3,087.2)
------------- ------------ ----------
Financing Activities
Proceeds from borrowings 4,808.3 66.7 459.3
Principal payments on borrowings (2,595.9) (174.0) (3.5)
Issuance of convertible debt - 543.2 -
Issuance of common stock 171.0 132.2 1,223.8
Purchases of common stock (257.7) (171.3) (19.2)
Proceeds from mandatorily redeemable preferred securities
issued by subsidiary, net 1,446.7 - -
Other, net - (6.6) (121.3)
------------- ------------ ----------
Net cash provided by financing activities of continuing
operations exclusive of management and mortgage programs 3,572.4 390.2 1,539.1
------------- ------------ ----------
Management and mortgage programs:
Proceeds from debt issuance or borrowings 4,300.0 2,816.3 1,656.0
Principal payments on borrowings (3,089.7) (1,692.9) (1,645.9)
Net change in short-term borrowings (93.1) (613.5) 231.8
------------- ------------ ----------
1,117.2 509.9 241.9
------------- ------------ ----------
Net cash provided by financing activities of continuing
operations 4,689.6 900.1 1,781.0
------------- ------------ ----------
Effect of changes in exchange rates on cash and cash
equivalents (16.4) 15.4 (46.2)
Cash provided by (used in) discontinued operations (176.0) (181.0) 113.4
------------- ------------ ----------
Net increase (decrease) in cash and cash equivalents 941.8 (377.8) 218.9
Cash and cash equivalents, beginning of period 65.3 443.1 224.2
------------- ------------ ----------
Cash and cash equivalents, end of period $ 1,007.1 $ 65.3 $ 443.1
============= ============ ==========
Supplemental Disclosure of Cash Flow Information
Interest payments $ 623.6 $ 374.8 $ 291.7
============= ============ ==========
Income tax payments, net $ (23.0) $ 264.5 $ 89.4
============= ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
Cendant Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
Cendant Corporation, together with its subsidiaries (the "Company"), is
one of the foremost consumer and business services companies in the
world. The Company was created through the merger (the "Cendant Merger")
of HFS Incorporated ("HFS") and CUC International Inc. ("CUC") in
December 1997, which was accounted for as a pooling of interests. Prior
to the Cendant Merger, both HFS and CUC had grown significantly through
mergers and acquisitions accounted for under both the pooling of
interests method (the most significant being the merger of HFS with PHH
Corporation ("PHH") in April 1997 (the "PHH Merger")) and purchase method
of accounting (See Note 4). The accompanying consolidated financial
statements and notes hereto are presented as if all mergers and
acquisitions accounted for as poolings of interests have operated as one
entity since inception. The accompanying consolidated financial
statements and footnotes for the years ended December 31, 1998, 1997 and
1996 set forth herein have been amended to reflect the reclassification
of Entertainment Publications, Inc., a Company subsidiary, as a
discontinued operation (see Note 5). Accordingly, the restated
consolidated financial statements presented herein are the Company's
primary historical financial statements for the periods presented.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
and transactions of the Company together with its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such determination as
of each balance sheet date. Marketable securities classified as available
for sale are carried at fair value with unrealized gains and losses
included in the determination of comprehensive income and reported as a
component of shareholders' equity. Marketable securities classified as
trading securities are reported at fair value with unrealized gains and
losses recognized in earnings. Securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities. During 1998, unrealized holding gains
on trading securities of approximately $16.0 million were included in
other revenue in the consolidated statements of operations. Marketable
securities consist principally of mutual funds, corporate bonds and other
debt securities. The cost of marketable securities sold is determined on
the specific identification method.
F-12
<PAGE>
Property and Equipment
Property and equipment is stated at cost less accumulate depreciation
and amortization. Depreciation is computed by the straight-line method
over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed by the straight-line method over the
estimated useful lives of the related assets or the lease term, if
shorter.
Franchise Agreements
Franchise agreements are recorded at their acquired fair values and are
amortized on a straight-line basis over the estimated periods to be
benefited, ranging from 12 to 40 years. At December 31, 1998 and 1997,
accumulated amortization amounted to $169.1 million and $126.4 million,
respectively.
Goodwill
Goodwill, which represents the excess of cost over fair value of net
assets acquired, is amortized on a straight-line basis over the estimated
useful lives, substantially ranging from 25 to 40 years. At December 31,
1998 and 1997, accumulated amortization amounted to $244.0 million and
$173.6 million, respectively.
Asset Impairments
The Company periodically evaluates the recoverability of its investments,
intangible assets and long-lived assets, comparing the respective
carrying values to the current and expected future cash flows, on an
undiscounted basis, to be generated from such assets. Property and
equipment is evaluated separately within each business. The
recoverability of goodwill and franchise agreements is evaluated on a
separate basis for each acquisition and franchise brand, respectively.
Based on an evaluation of its intangible assets and in connection with
the Company's regular forecasting processes, the Company determined that
$37.0 million of goodwill associated with a Company subsidiary, National
Library of Poetry, was permanently impaired. In addition, the Company had
equity investments in interactive businesses, which were generating
negative cash flows and were unable to access sufficient liquidity
through equity or debt offerings. As a result, the Company wrote off
$13.0 million of such investments. The aforementioned impairments
impacted the Company's Other services segment and are classified as
operating expenses in the consolidated statements of operations.
Revenue Recognition and Business Operations
Franchising. Franchise revenue principally consists of royalties as well
as marketing and reservation fees, which are based on a percentage of
franchisee revenue. Royalty, marketing and reservation fees are accrued
as the underlying franchisee revenue is earned. Franchise revenue also
includes initial franchise fees, which are recognized as revenue when all
material services or conditions relating to the sale have been
substantially performed which is generally when a franchised unit is
opened.
Timeshare. Timeshare revenue principally consists of exchange fees and
subscription revenue. Exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscriber. Subscription
revenue, net of related procurement costs, is deferred upon receipt and
recognized as revenue over the subscription period during which delivery
of publications and other services are provided to subscribers.
Individual Membership. Membership revenue is generally recognized upon
the expiration of the membership period. Memberships are generally
cancelable for a full refund of the membership fee during the entire
membership period, generally one year.
In August 1998, the Securities and Exchange Commission ("SEC") requested
that the Company change its accounting policies with respect to revenue
and expense recognition for its membership businesses, effective January
1, 1997. Although the Company believed that its accounting for
memberships had been appropriate and consistent with industry practice,
the Company complied with the SEC's request and adopted new accounting
policies for its membership businesses.
F-13
<PAGE>
Prior to such adoption, the Company recorded deferred membership income,
net of estimated cancellations, at the time members were billed (upon
expiration of the free trial period), which was recognized as revenue
ratably over the membership term and modified periodically based on
actual cancellation experience. In addition, membership acquisition
and renewal costs, which related primarily to membership solicitations
were capitalized as direct response advertising costs due to the
Company's ability to demonstrate that the direct response advertising
resulted in future economic benefits. Such costs were amortized on a
straight-line basis as revenues were recognized (over the average
membership period).
The SEC's conclusion was that when membership fees are fully refundable
during the entire membership period, membership revenue should be
recognized at the end of the membership period upon the expiration of the
refund offer. The SEC further concluded that non-refundable solicitation
costs should be expensed as incurred since such costs are not recoverable
if membership fees are refunded. The Company agreed to adopt such
accounting policies effective January 1, 1997 and accordingly, recorded a
non-cash after-tax charge on such date of $283.1 million to account for
the cumulative effect of the accounting change.
Insurance/Wholesale. Commissions received from the sale of third party
accidental death and dismemberment insurance are recognized over the
underlying policy period. The Company also receives a profit commission
based on premiums less claims and certain other expenses (including the
above commissions). Such profit commissions are accrued based on claims
experience to date, including an estimate of claims incurred but not
reported.
Relocation. Relocation services provided by the Company include
facilitating the purchase and resale of the transferee's residence,
providing equity advances on the transferee's residence and home
management services. The home is purchased under a contract of sale and
the Company obtains a deed to the property; however, it does not
generally record the deed or transfer title. Transferring employees are
provided equity advances on their home based on an appraised value
generally determined by independent appraisers, after deducting any
outstanding mortgages. The mortgage is generally retired concurrently
with the advance of the equity and the purchase of the home. Based on its
client agreements, the Company is given parameters under which it
negotiates for the ultimate sale of the home. The gain or loss on resale
is generally borne by the client corporation. In certain transactions,
the Company will assume the risk of loss on the sale of homes; however,
in such transactions, the Company will control all facets of the resale
process, thereby, limiting its exposure.
While homes are held for resale, the amount funded for such homes carry
an interest charge computed at a floating rate based on various indices.
Direct costs of managing the home during the period the home is held for
resale, including property taxes and repairs and maintenance, are
generally borne by the client corporation. The client corporation
normally advances funds to cover a portion of such carrying costs. When
the home is sold, a settlement is made with the client corporation
netting actual costs with any advanced funding.
Revenues and related costs associated with the purchase and resale of a
residence are recognized over the period in which services are provided.
Relocation services revenue is recorded net of costs reimbursed by client
corporations and interest expenses incurred to fund the purchase of a
transferee's residence. Under the terms of contracts with client
corporations, the Company is generally protected against losses from
changes in real estate market conditions. The Company also offers
fee-based programs such as home marketing assistance, household goods
moves and destination services. Revenues from these fee-based services
are taken into income over the periods in which the services are provided
and the related expenses are incurred.
F-14
<PAGE>
Fleet. The Company primarily leases its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). See Note 10 -- Net
Investment in Leases and Leased Vehicles. Each lease is either classified
as an operating lease or direct financing lease, as defined. Lease
revenues are recognized based on rentals. Revenues from fleet management
services other than leasing are recognized over the period in which
services are provided and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection with
the sale of loans, and direct loan origination costs associated with
loans is deferred until such loans are sold. Mortgage loans are recorded
at the lower of cost or market value on an aggregate basis. Sales of
mortgage loans are generally recorded on the date a loan is delivered to
an investor. Gains or losses on sales of mortgage loans are recognized
based upon the difference between the selling price and the carrying
value of the related mortgage loans sold. See Note 11 -- Mortgage Loans
Held For Sale.
Fees received for servicing loans owned by investors are based on the
difference between the weighted average yield received on the mortgages
and the amount paid to the investor, or on a stipulated percentage of the
outstanding monthly principal balance on such loans. Servicing fees are
credited to income when received. Costs associated with loan servicing
are charged to expense as incurred.
The Company recognizes as separate assets the rights to service mortgage
loans for others by allocating total costs incurred between the loan and
the servicing rights retained based on their relative fair values. The
carrying value of mortgage servicing rights ("MSRs") is amortized over
the estimated life of the related loan portfolio in proportion to
projected net servicing revenues. Such amortization is recorded as a
reduction of loan servicing fees in the consolidated statements of
operations. Projected net servicing income is in turn determined on the
basis of the estimated future balance of the underlying mortgage loan
portfolio, which declines over time from prepayments and scheduled loan
amortization. The Company estimates future prepayment rates based on
current interest rate levels, other economic conditions and market
forecasts, as well as relevant characteristics of the servicing
portfolio, such as loan types, interest rate stratification and recent
prepayment experience. MSRs are periodically assessed for impairment,
which is recognized in the consolidated statements of operations during
the period in which impairment occurs as an adjustment to the
corresponding valuation allowance. Gains or losses on the sale of MSRs
are recognized when title and all risks and rewards have irrevocably
passed to the buyer and there are no significant unresolved
contingencies. See Note 12 -- Mortgage Servicing Rights.
Advertising Expenses
Advertising costs, including direct response advertising (subsequent to
January 1, 1997), are generally expensed in the period incurred.
Advertising expenses for the years ended December 31, 1998, 1997 and 1996
were $684.7 million, $574.4 million and $503.8 million, respectively.
Income Taxes
The provision for income taxes includes deferred income taxes resulting
from items reported in different periods for income tax and financial
statement purposes. Deferred tax assets and liabilities represent the
expected future tax consequences of the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The effects of changes in tax rates on deferred tax
assets and liabilities are recognized in the period that includes the
enactment date. No provision has been made for U.S. income taxes on
approximately $312.3 million of cumulative undistributed earnings of
foreign subsidiaries at December 31, 1998 since it is the present
intention of management to reinvest the undistributed earnings
indefinitely in foreign operations. The determination of unrecognized
deferred U.S. tax liability for unremitted earnings is not practicable.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates in effect as of the balance sheet dates. Equity accounts
are translated at historical exchange rates and revenues, expenses and
cash flows are translated at the average exchange rates for the periods
presented. Translation gains and losses are included as a component of
comprehensive income (loss) in the consolidated statements of
shareholders' equity.
F-15
<PAGE>
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities". The
Company will adopt SFAS No. 133 effective January 1, 2000. SFAS No. 133
requires the Company to record all derivatives in the consolidated
balance sheet as either assets or liabilities measured at fair
value. If the derivative does not qualify as a hedging instrument, the
change in the derivative fair values will be immediately recognized as a
gain or loss in earnings. If the derivative does qualify as a hedging
instrument, the gain or loss on the change in the derivative fair values
will either be recognized (i) in earnings as offsets to the changes in
the fair value of the related item being hedged or (ii) be deferred and
recorded as a component of other comprehensive income and reclassified to
earnings in the same period during which the hedged transactions occur.
The Company has not yet determined what impact the adoption of SFAS No.
133 will have on its financial statements.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to the presentation used in 1998.
3. Earnings Per Share
Basic earnings per share ("EPS") are computed based solely on the
weighted average number of common shares outstanding during the period.
Diluted EPS reflects all potential dilution of common stock, including
the assumed exercise of stock options using the treasury method and
convertible debt. At December 31, 1998, 38.0 million stock options
outstanding with a weighted average exercise price of $29.58 per option
were excluded from the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the
Company's common stock. In addition, at December 31, 1998, the Company's
3% Convertible Subordinated Notes, convertible into 18.0 million shares
of Company common stock were antidilutive and, therefore, excluded from
the computation of diluted EPS. Basic and diluted EPS from continuing
operations is calculated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(In millions, except per share amounts) 1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 145.7 $ 49.1 $ 304.5
Convertible debt interest - net of tax - - 5.8
----------- --------- ----------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change, as
adjusted $ 145.7 $ 49.1 $ 310.3
=========== ========= ==========
Weighted average shares
Basic 848.4 811.2 757.4
Potential dilution of common stock:
Stock options 32.0 40.5 40.1
Convertible debt - - 24.1
----------- --------- ----------
Diluted 880.4 851.7 821.6
=========== ========= ==========
EPS - continuing operations before extraordinary gain
and cumulative effect of accounting change
Basic $ 0.17 $ 0.06 $ 0.40
=========== ========= ==========
Diluted $ 0.17 $ 0.06 $ 0.38
=========== ========= ==========
</TABLE>
F-16
<PAGE>
4. Purchase Method Business Combinations
The acquisitions discussed below were accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities
assumed were recorded at their estimated fair values. The excess of
purchase price over the fair value of the underlying net assets acquired
is allocated to goodwill. The operating results of such acquired
companies are included in the Company's consolidated statements of
operations since the respective dates of acquisition.
The following tables present information about the Company's acquisitions
consummated and other acquisition-related payments made during each of
the years in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
Jackson
(In millions) NPC Harpur Hewitt Other
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Cash paid $ 1,637.7 $ 206.1 $ 476.3 $ 562.3
Fair value of identifiable net
assets acquired (1) 590.2 51.3 99.2 216.8
------------- ------------- ------------ -------------
Goodwill $ 1,047.5 $ 154.8 $ 377.1 $ 345.5
============= ============= ============ =============
Goodwill benefit period (years) 40 40 40 25 to 40
============= ============= ============ =============
1996
----------------------------------------------------
(In millions) Coldwell
1997 RCI Avis Banker Other
----------- -------- -------- ----------- -----------
Cash paid $ 244.9 $ 412.1 $ 367.2 $ 745.0 $ 224.0
Common stock issued 21.6 75.0 338.4 - 52.5
Notes issued - - 100.9 - 5.0
----------- -------- -------- ----------- -----------
Total consideration 266.5 487.1 806.5 745.0 281.5
Fair value of identifiable net
assets acquired (1) 111.1 9.4 472.5 393.2 42.8
----------- -------- -------- ----------- -----------
Goodwill $ 155.4 $ 477.7 $ 334.0 $ 351.8 $ 238.7
=========== ======== ======== =========== ===========
Goodwill benefit period (years) 25 to 40 40 40 40 25 to 40
=========== ======== ======== =========== ===========
Number of shares issued as
consideration 0.9 2.4 11.1 - 2.5
=========== ======== ======== =========== ===========
</TABLE>
---------------
(1) Cash acquired in connection with acquisitions during 1998, 1997 and
1996 was $57.5 million, $1.7 million, and $135.0 million,
respectively.
1998 Acquisitions
National Parking Corporation. On April 27, 1998, the Company completed
the acquisition of National Parking Corporation Limited ("NPC") for $1.6
billion, substantially in cash, which included the repayment of
approximately $227.0 million of outstanding NPC debt. NPC was
substantially comprised of two operating subsidiaries: National Car Parks
and Green Flag. National Car Parks is the largest private (non-municipal)
car park operator in the United Kingdom ("UK") and Green Flag operates
the third largest roadside assistance group in the UK and offers a
wide-range of emergency support and rescue services.
Harpur Group. On January 20, 1998, the Company completed the acquisition
of The Harpur Group Ltd. ("Harpur"), a leading fuel card and vehicle
management company in the UK, for approximately $206.1 million in cash
plus contingent payments of up to $20.0 million over two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $476.3
million in cash. Jackson Hewitt operates the second largest tax
preparation service franchise system in the United States. The Jackson
Hewitt franchise system specializes in computerized preparation of
federal and state individual income tax returns.
F-17
<PAGE>
Other 1998 Acquisitions and Acquisition-Related Payments. The Company
acquired certain other entities for an aggregate purchase price of
approximately $462.3 million in cash during the year ended December 31,
1998. Additionally, the Company made a $100.0 million cash payment to the
seller of Resort Condominiums
International, Inc. ("RCI") in satisfaction of a contingent purchase
liability, which was accounted for as additional goodwill.
Pro forma Information (unaudited)
The following table reflects the operating results of the Company for the
years ended December 31, 1998 and 1997 on a pro forma basis, which gives
effect to the acquisition of NPC. The remaining acquisitions completed
during 1998 and 1997 are not significant on a pro forma basis and are
therefore not included. The pro forma results are not necessarily
indicative of the operating results that would have occurred had the NPC
acquisition been consummated on January 1, 1997, nor are they intended to
be indicative of results that may occur in the future. The underlying pro
forma information includes the amortization expense associated with the
assets acquired, the Company's financing arrangements, certain purchase
accounting adjustments and related income tax effects.
The following table reflects the operating results of the Company for the
years ended December 31, 1998 and 1997 on a pro forma basis, which gives
effect to the acquisition of NPC. The remaining acquisitions completed
during 1998 and 1997 are not significant on a pro forma basis and are
therefore not included. The pro forma results are not necessarily
indicative of the operating results that would have occurred had the NPC
acquisition been consummated on January 1, 1997, nor are they intended to
be indicative of results that may occur in the future. The underlying pro
forma information includes the amortization expense associated with the
assets acquired, the Company's financing arrangements, certain purchase
accounting adjustments and related income tax effects.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(In millions, except per share amounts) 1998 1997
------------ -----------
<S> <C> <C>
Net revenues $ 5,288.1 $ 4,649.3
Income from continuing operations
before extraordinary gain and
cumulative effect of accounting change 143.1 40.5
Net income (loss) (1) 537.0 (225.8)(2)
Per share information:
Basic
Income from continuing operations
before extraordinary gain and
cumulative effect of accounting change $ 0.17 $ 0.05
Net income (loss) (1) $ 0.63 $ (0.28)
Weighted average shares 848.4 811.2
Diluted
Income from continuing operations
before extraordinary gain and
cumulative effect of accounting change $ 0.16 $ 0.05
Net income (loss) (1) $ 0.61 $ (0.28)
Weighted average shares 880.4 851.7
</TABLE>
--------------
(1) Includes gain on sale of discontinued operations, net of tax, of $404.7
million ($0.46 per diluted share) in 1998 and loss from discontinued
operations, net of tax, of $10.8 million ($0.01 per diluted share) and
$9.6 million ($0.01 per diluted share), in 1998 and 1997, respectively.
(2) Includes an extraordinary gain, net of tax, of $26.4 million ($0.03
per diluted share) and the cumulative effect of a change in accounting,
net of tax, of $283.1 million ($0.35 per diluted share).
1996 Acquisitions
Resort Condominiums International, Inc. In November 1996, the Company
completed the acquisition of all the outstanding capital stock of RCI for
$487.1 million. The purchase agreement provides for contingent payments
of up to $200.0 million over a five year period which are based on
components which measure RCI's future performance, including EBITDA, net
revenues and number of members, as defined.
F-18
<PAGE>
Avis, Inc. In October 1996, the Company completed the acquisition of
all of the outstanding capital stock of Avis, Inc. ("Avis"), including
payments under certain employee stock plans of Avis and the redemption
of certain series of preferred stock of Avis for an aggregate $806.5
million. Subsequently, the Company made contingent cash payments of
$26.0 million in 1996 and $60.8 million in 1997. The contingent
payments made in 1997 represented the incremental amount of value
attributable to Company common stock as of the stock purchase agreement
date in excess of the proceeds realized upon the subsequent sale of such
Company common stock. See Note 23-Related Party Transactions-Avis-for a
discussion of the Company's executed business plan regarding Avis.
Coldwell Banker Corporation. In May 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), the largest gross
revenue producing residential real estate company in North America and a
leading provider of corporate relocation services. The Company paid
$640.0 million in cash for all of the outstanding capital stock of
Coldwell Banker and repaid $105.0 million of Coldwell Banker
indebtedness. The aggregate purchase price for the transaction was
financed through the May 1996 sale of an aggregate 46.6 million shares of
Company common stock pursuant to a public offering.
5. Discontinued Operations
On April 21, 1999, the Company announced that its Board of Directors
approved management's plan to pursue the sale of the Company's
Entertainment Publications, Inc. ("EPub") business segment, a wholly
owned subsidiary of the Company, and has engaged Veronis, Suhler &
Associates, Inc. to manage the sale process. EPub sells discount programs
to schools, community groups and other organizations, which typically
offer the discount programs to individuals in the form of local discount
coupon books, gift wrap and other seasonal items. EPub solicits
restaurants, hotels, theaters, sporting events, retailers and other
businesses which agree to offer services and/or merchandise at discount
prices.
On August 12, 1998, the Company announced that the Executive Committee of
its Board of Directors committed to discontinue the Company's classified
advertising and consumer software businesses by disposing of Hebdo Mag
International, Inc. ("Hebdo Mag") and Cendant Software Corporation
("CDS"), two wholly owned subsidiaries of the Company. Hebdo Mag is a
publisher and distributor of classified advertising information and CDS
is a developer, publisher and distributor of educational and
entertainment software.
On December 15, 1998, the Company completed the sale of Hebdo Mag to its
former 50% owners for $449.7 million. The Company received $314.8 million
in cash and 7.1 million shares of Company common stock valued at $134.9
million on the date of sale. The Company recognized a gain on the sale of
Hebdo Mag of $206.9 million, including a tax benefit of $52.1 million,
which is included in the gain on sale of discontinued operations in the
consolidated statements of operations.
On January 12, 1999, the Company completed the sale of CDS for $800.0
million in cash plus potential future contingent cash payments pursuant
to the contract. The Company realized a gain of approximately $390.5
million based upon the finalization of the closing balance sheet at the
sale date. The Company recognized $197.8 million of such gain in 1998
substantially in the form of a tax benefit and corresponding deferred tax
asset. The Company recognized this deferred tax asset upon executing the
definitive agreement to sell CDS, which was when it became apparent to
the Company that the deferred tax asset would be realized. The recognized
gain is included in the gain on sale of discontinued operations in the
consolidated statements of operations.
F-19
<PAGE>
Summarized financial data of discontinued operations are as follows:
Statement of Operations Data:
<TABLE>
<CAPTION>
EPub
------------------------------------------
(In millions) Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net revenues $ 197.2 $ 188.1 $ 174.6
----------- ---------- -----------
Income before income taxes 23.3 28.1 14.9
Provision for income taxes 9.1 10.9 6.1
----------- ---------- -----------
Net income $ 14.2 $ 17.2 $ 8.8
=========== ========== ===========
CDS
------------------------------------------
Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ---------- -----------
Net revenues $ 345.8 $ 433.7 $ 384.5
----------- ---------- -----------
Income (loss) before income taxes (57.3) (5.9) 42.0
Provision for (benefit from) income taxes (22.9) 2.4 27.3
----------- ---------- -----------
Net income (loss) $ (34.4) $ (8.3) $ 14.7
=========== ========== ===========
Classified Advertising
------------------------------------------
Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ---------- -----------
Net revenues $ 202.4 $ 208.5 $ 126.4
----------- ---------- -----------
Income (loss) before income taxes
and extraordinary loss 16.9 (4.5) 3.7
Provision for (benefit from) income taxes 7.5 (1.2) 1.7
Extraordinary loss from early extinguishment of
debt, net of a $4.9 million tax benefit - (15.2) -
----------- ---------- -----------
Net income (loss) $ 9.4 $ (18.5) $ 2.0
=========== ========== ===========
</TABLE>
The Company allocated $19.9 million and $5.0 million of interest expense
to discontinued operations for the years ended December 31, 1998 and
1997, respectively. Such interest expense represents the cost of funds
associated with businesses acquired by the discontinued business segments
at an interest rate consistent with the Company's consolidated effective
borrowing rate.
Balance Sheet Data:
<TABLE>
<CAPTION>
Classified
EPub CDS Advertising
-------------------------- ---------------------- ------------
December 31, December 31, December 31,
(In millions) 1998 1997 1998 1997 1997
---------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Current assets $ 63.3 $ 64.3 $ 284.9 $ 209.1 $ 58.6
Goodwill 12.1 23.6 105.7 42.2 181.5
Other assets 27.9 31.2 88.2 49.2 33.2
Total liabilities (14.4) (31.9) (105.2) (127.0) (173.5)
---------- ----------- ---------- ---------- ----------
Net assets of discontinued operations $ 88.9 $ 87.2 $ 373.6 $ 173.5 $ 99.8
========== =========== ========== ========== ==========
</TABLE>
F-20
<PAGE>
6. Other Charges
Litigation Settlement
On March 17, 1999, the Company reached a final agreement to settle the
class action lawsuit that was brought on behalf of the holders of Income or
Growth FELINE PRIDES ("PRIDES") securities who purchased their
securities on or prior to April 15, 1998, the date on which the Company
announced the discovery of accounting irregularities in the former business
units of CUC (see Note 17 -- Mandatorily Redeemable Trust Preferred
Securities Issued by Subsidiary). We originally announced a preliminary
agreement in principle to settle such lawsuit on January 7, 1999. The final
agreement maintained the basic structure and accounting treatment as the
preliminary agreement. Under the terms of the agreement only holders who
owned PRIDES at the close of business on April 15, 1998 will be eligible to
receive a new additional "Right" for each PRIDES security held. Right
holders may (i) sell them or (ii) exercise them by delivering to the
Company, three Rights together with two PRIDES in exchange for two New
PRIDES (the "New PRIDES"), for a period beginning upon distribution of the
Rights and concluding upon expiration of the Rights (February 2001).
The terms of the New PRIDES will be the same as the original PRIDES except
that the conversion rate will be revised so that, at the time the Rights
are distributed, each New PRIDES will have a value equal to $17.57 more
than each original PRIDES, or, in the aggregate, approximately $351.0
million. Accordingly, the Company recorded a non-cash charge of $351.0
million in the fourth quarter of 1998 with an increase in additional
paid-in capital and accrued liabilities of $350.0 million and $1.0 million,
respectively, based on the prospective issuance of the Rights. The
agreement also requires the Company to offer to sell four million
additional PRIDES (having identical terms to currently outstanding PRIDES)
to holders of Rights for cash, at a value which will be based on the
valuation model that was utilized to set the conversion rate of the New
PRIDES. Based on that valuation model, the currently outstanding PRIDES
have a theoretical value of $28.07 based on the closing price of the
Company's common stock of $16.6875 on March 17, 1999. The offering of
additional PRIDES will be made only pursuant to a prospectus filed with the
SEC. The Company currently expects to use the proceeds of such an offering
to repurchase our common stock and for other general corporate purposes.
The arrangement to offer additional PRIDES is designed to enhance the
trading value of the Rights by removing up to six million Rights from
circulation via exchanges associated with the offering and to enhance the
open market liquidity of New PRIDES by creating four million New PRIDES via
exchanges associated with the offering. If holders of Rights do not acquire
all such PRIDES, they will be offered to the public. Under the settlement
agreement, the Company also agreed to file a shelf registration statement
for an additional 15 million PRIDES, which could be issued by the Company
at any time for cash. However, during the last 30 days prior to the
expiration of the Rights in February 2001, the Company will be required to
make these additional PRIDES available to holders of Rights at a price in
cash equal to 105% of the theoretical value of the additional PRIDES as of
a specified date. The PRIDES, if issued, would have the same terms as the
currently outstanding PRIDES and could be used to exercise Rights. Based on
a market price of $16.6875, the closing price per share of the Company's
common stock on March 17, 1999, the effect of the issuance of the New
PRIDES will be to distribute approximately 19 million more shares of
Company common stock when the mandatory purchase of Company common stock
associated with the PRIDES occurs in February 2001. This represents
approximately 2% more shares of Company common stock than are currently
outstanding. The Rights will be distributed following final court approval
of the settlement and after the effectiveness of the registration statement
filed with the SEC covering the New PRIDES. It is presently expected that
if the court approves the settlement and such conditions are fulfilled, the
Rights will be distributed in August or September 1999. This summary of the
settlement does not constitute an offer to sell any securities, which will
only be made by means of a prospectus after a registration statement is
filed with the SEC. There can be no assurance that the court will approve
the agreement or that the conditions contained in the agreement will be
fulfilled.
F-21
<PAGE>
Termination of Proposed Acquisitions
On October 13, 1998, the Company and American Bankers Insurance Group, Inc.
("American Bankers") entered into a settlement agreement (the "Settlement
Agreement"), pursuant to which the Company and American Bankers terminated
a definitive agreement dated March 23, 1998 which provided for the
Company's acquisition of American Bankers for $3.1 billion. Accordingly,
the Company's pending tender offer for American Bankers shares was also
terminated. Pursuant to the Settlement Agreement and in connection with
termination of the Company's proposed acquisition of American Bankers, the
Company made a $400.0 million cash payment to American Bankers and wrote
off $32.3 million of costs, primarily professional fees.
On October 5, 1998, the Company announced the termination of an agreement
to acquire, for $219.0 million in cash, Providian Auto and Home Insurance
Company ("Providian"). Certain representations and covenants in such
agreement had not been fulfilled and the conditions to closing had not been
met. The Company did not pursue an extension of the termination date of the
agreement because Providian no longer met the Company's acquisition
criteria. In connection with the termination of the Company's proposed
acquisition of Providian, the Company wrote off $1.2 million of costs.
Executive Terminations
The Company incurred $52.5 million of costs in 1998 related to the
termination of certain former executives of the Company, principally Walter
A. Forbes, who resigned as Chairman of the Company and as a member of the
Board of Directors. The severance agreement reached with Mr. Forbes
entitled him to the benefits required by his employment contract relating
to a termination of Mr. Forbes' employment with the Company for reasons
other than for cause. Aggregate benefits given to Mr. Forbes resulted in a
charge of $50.9 million comprised of $38.4 million in cash payments and 1.3
million Company stock options, with a Black-Scholes value of $12.5 million.
Such options were immediately vested and expire on July 28, 2008.
Investigation-Related Costs
The Company incurred $33.4 million of professional fees, public relations
costs and other miscellaneous expenses in connection with accounting
irregularities and resulting investigations into such matters.
Financing Costs
In connection with the Company's discovery and announcement of accounting
irregularities on April 15, 1998 and the corresponding lack of audited
financial statements, the Company was temporarily prohibited from accessing
public debt markets. As a result, the Company paid $27.9 million in fees
associated with waivers and various financing arrangements. Additionally,
during 1998, the Company exercised its option to redeem its 4-3/4%
Convertible Senior Notes (the "4 3/4% Notes") (see Note 13 -- Long-Term
Debt -- 43/4% Convertible Senior Notes). At such time, the Company
anticipated that all holders of the 4-3/4% Notes would elect to convert the
4 3/4% Notes to Company common stock. However, at the time of redemption,
holders of the 4 3/4% Notes elected not to convert the 4-3/4% Notes to
Company common stock and as a result, the Company redeemed such notes at a
premium. Accordingly, the Company recorded a $7.2 million loss on early
extinguishment of debt.
1997 Merger-Related Costs and Other Unusual Charges (Credits)
The Company incurred merger-related costs and other unusual charges
("Unusual Charges") in 1997 related to continuing operations of $704.1
million primarily associated with the Cendant Merger (the "Fourth Quarter
1997 Charge") and the PHH Merger (the "Second Quarter 1997 Charge").
Liabilities associated with Unusual Charges are classified as a component
of accounts payable and other current liabilities. The reduction of such
liabilities from inception is summarized by category of expenditure and by
charge as follows:
F-22
<PAGE>
<TABLE>
<CAPTION>
Net 1997 Balance at 1998 Activity Balance at
Unusual 1997 December 31, Cash Non December 31,
(In millions) Charges Reductions 1997 Payments Cash Adjustments 1998
--------- ----------- ------------ --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Professional fees $ 123.3 $ (72.6) $ 50.7 $ (38.2) $ - $ (10.9) $ 1.6
Personnel related 324.8 (156.3) 168.5 (75.3) - (23.0) 70.2
Business terminations 133.9 (130.0) 3.9 (1.2) 6.1 (7.1) 1.7
Facility related and
other 156.0 (105.6) 50.4 (15.7) 2.1 (26.7) 10.1
-------- ---------- ---------- --------- ------ ----------- -----------
Total Unusual Charges $ 738.0 $ (464.5) $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
Reclassification for
discontinued operations (33.9) 33.9 - - - - -
-------- ---------- ---------- --------- ------ ----------- -----------
Total Unusual Charges
related to continuing
operations $ 704.1 $ 430.6 $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
======== ========= ========== ========= ====== =========== ===========
Net 1997 Balance at 1998 Activity Balance at
Unusual 1997 December 31, Cash Non December 31,
(In millions) Charges Reductions 1997 Payments Cash Adjustments 1998
--------- ----------- ------------ --------- ------ ----------- -----------
Fourth Quarter 1997
Charge $ 454.9 $ (257.5) $ 197.4 $ (102.6) $ 0.5 $ (28.1) $ 67.2
Second Quarter 1997
Charge 283.1 (207.0) 76.1 (27.8) 7.7 (39.6) 16.4
-------- ---------- ---------- --------- ------ ----------- -----------
Total Unusual Charges $ 738.0 $ (464.5) $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
Reclassification for
discontinued operations (33.9) 33.9 - - - - -
-------- ---------- ---------- --------- ------ ----------- -----------
Total Unusual Charges
related to continuing
operations $ 704.1 $ (430.6) $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
======== ========= ========== ========= ====== =========== ===========
</TABLE>
Fourth Quarter 1997 Charge. The Company incurred Unusual Charges in the fourth
quarter of 1997 totaling $454.9 million substantially associated with the
Cendant Merger and the merger in October 1997 with Hebdo Mag. Reorganization
plans were formulated prior to and implemented as a result of the mergers. The
Company determined to streamline its corporate organization functions and
eliminate several office locations in overlapping markets. Management's plan
included the consolidation of European call centers in Cork, Ireland and
terminations of franchised hotel properties.
Unusual Charges included $93.0 million of professional fees primarily consisting
of investment banking, legal and accounting fees incurred in connection with the
mergers. The Company also incurred $170.7 million of personnel-related costs
including $73.3 million of retirement and employee benefit plan costs, $23.7
million of restricted stock compensation, $61.4 million of severance resulting
from consolidations of European call centers and certain corporate functions and
$12.3 million of other personnel-related costs. The Company provided for 474
employees to be terminated, the majority of which have been severed as of
December 31, 1998. Unusual Charges included $78.3 million of business
termination costs which consisted of a $48.3 million impairment write down of
hotel franchise agreement assets associated with a quality upgrade program and
$30.0 million of costs incurred to terminate a contract which may have
F-23
<PAGE>
restricted the Company from maximizing opportunities afforded by the Cendant
Merger. Facility-related and other unusual charges of $112.9 million included
$70.0 million of irrevocable contributions to independent technology trusts for
the direct benefit of lodging and real estate franchisees, $16.4 million of
building lease termination costs and a $22.0 million reduction in intangible
assets associated with the Company's wholesale annuity business for which
impairment was determined in 1997. During the year ended December 31, 1998, the
Company recorded a net credit of $28.1 million to Unusual Charges with a
corresponding reduction to liabilities primarily as a result of a change in the
original estimate of costs to be incurred.
Second Quarter 1997 Charge. The Company incurred $295.4 million of Unusual
Charges in the second quarter of 1997 primarily associated with the PHH Merger.
During the fourth quarter of 1997, as a result of changes in estimates, the
Company adjusted certain merger-related liabilities, which resulted in a $12.3
million credit to Unusual Charges. Reorganization plans were formulated in
connection with the PHH Merger and were implemented upon consummation. The PHH
Merger afforded the combined company, at such time, an opportunity to
rationalize its combined corporate, real estate and travel related businesses,
and enabled the corresponding support and service functions to gain
organizational efficiencies and maximize profits. Management initiated a plan
just prior to the PHH Merger to close hotel reservation call centers, combine
travel agency operations and continue the downsizing of fleet operations by
reducing headcount and eliminating unprofitable products. In addition,
management initiated plans to integrate its relocation, real estate franchise
and mortgage origination businesses to capture additional revenue through the
referral of one business unit's customers to another. Management also formalized
a plan to centralize the management and headquarters functions of the world's
largest, second largest and other company-owned corporate relocation business
unit subsidiaries. Such initiatives resulted in write-offs of abandoned systems
and leasehold assets commencing in the second quarter 1997. The aforementioned
reorganization plans provided for 560 job reductions, which included the
elimination of PHH Corporate functions and facilities in Hunt Valley, Maryland.
Unusual Charges included $154.1 million of personnel-related costs associated
with employee reductions necessitated by the planned and announced consolidation
of the Company's corporate relocation service businesses worldwide as well as
the consolidation of corporate activities. Personnel-related charges also
included termination benefits such as severance, medical and other benefits and
provided for retirement benefits pursuant to pre-existing contracts resulting
from a change in control. Unusual Charges also included professional fees of
$30.3 million, primarily comprised of investment banking, accounting and legal
fees incurred in connection with the PHH Merger. The Company incurred business
termination charges of $55.6 million, which were comprised of $38.8 million of
costs to exit certain activities primarily within the Company's fleet management
business (including $35.7 million of asset write-offs associated with exiting
certain activities), a $7.3 million termination fee associated with a joint
venture that competed with the PHH Mortgage Services business (now Cendant
Mortgage Corporation) and $9.6 million of costs to terminate a marketing
agreement with a third party in order to replace the function with internal
resources. Facility-related and other charges totaling $43.1 million included
costs associated with contract and lease terminations, asset disposals and other
charges incurred in connection with the consolidation and closure of excess
office space.
The Company had substantially completed the aforementioned restructuring
activities at December 31, 1998. During the year ended December 31, 1998, the
Company recorded a net credit of $39.6 million to Unusual Charges with a
corresponding reduction to liabilities primarily as a result of a change in the
original estimate of costs to be incurred.
1996 Merger-Related Costs and Other Unusual Charges
In connection with and coincident to Company mergers accounted for as poolings
of interests during 1996, the Company incurred Unusual Charges of approximately
$134.3 million in 1996, of which $109.4 million was related to continuing
operations (substantially related to the Company's merger with Ideon Group, Inc.
("Ideon")) and $24.9 million was associated with consumer software businesses
that are discontinued. The collective Unusual Charges recorded during 1996
related to Company mergers and the utilization of such liabilities is summarized
below:
F-24
<PAGE>
<TABLE>
<CAPTION>
1996 Balance at Balance at
Unusual 1997 December 31, 1998 December 31,
(In millions) Charges Reductions 1997 Reductions 1998
----------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Professional fees $ 27.5 $ (27.5) $ - $ - $ -
Personnel related 7.5 (7.5) - - -
Facility related 12.4 (10.4) 2.0 (2.0) -
Litigation related 80.4 (14.4) 66.0 (25.0) 41.0
Other 6.5 (6.2) .3 (0.3) -
----------- ---------- ----------- ---------- ------------
Total Unusual Charges 134.3 (66.0) 68.3 (27.3) 41.0
Reclassification for
discontinued operations (24.9) 24.9 - - -
----------- ---------- ----------- ---------- ------------
Total Unusual Charges
related to continuing
operations $ 109.4 $ (41.1) $ 68.3 $ (27.3) $ 41.0
=========== ========== =========== ========== ============
</TABLE>
Costs associated with the discontinued operations were comprised primarily of
professional fees incurred in connection with the Company's mergers with
consumer software businesses. Costs associated with the Company's merger with
Ideon were non-recurring and included transaction and exit costs as well as a
provision relating to certain litigation matters giving consideration to the
Company's intended approach to these matters. The Company has since settled all
outstanding litigation matters. The remaining $41.0 million of
litigation-related liabilities at December 31, 1998 consists of the present
value of settlement payments to be made in annual installments to the co-founder
of SafeCard Services, Inc. 1998 reductions include $27.8 million of cash
payments and a $0.5 million charge to Unusual Charges as a result of a change in
the original estimate of costs to be incurred.
The 1996 Unusual Charges also provided for costs to be incurred in connection
with the Company's consolidation efforts, including severance costs to be
accrued resulting from the Ideon merger and costs relating to the expected
obligations for certain third-party contracts (existing leases and vendor
agreements) to which Ideon is a party and which are neither terminable at will
nor automatically terminate upon a change-in-control of Ideon. In addition, the
Company incurred certain exit costs in transferring and consolidating Ideon's
credit card registration and enhancement services into the Company's credit card
registration and enhancement services business. As a result of the Ideon merger,
120 employees were terminated.
7. Property and Equipment - net
Property and equipment - net consisted of:
<TABLE>
<CAPTION>
Estimated
Useful Lives December 31,
(In millions) in Years 1998 1997
----------- ------------ -------------
<S> <C> <C> <C>
Land - $ 153.3 $ 8.4
Building and leasehold improvements 5 - 50 749.2 214.8
Furniture, fixtures and equipment 3 - 10 984.1 609.2
------------ -------------
1,886.6 832.4
Less accumulated depreciation and amortization 466.3 301.5
------------ -------------
$ 1,420.3 $ 530.9
============ =============
</TABLE>
F-25
<PAGE>
8. Other Intangibles - net
Other intangibles - net consisted of:
<TABLE>
<CAPTION>
Estimated
Benefit Periods December 31,
(In millions) in Years 1998 1997
--------------- ------------ -------------
<S> <C> <C> <C>
Avis trademark 40 $ 402.0 $ 402.0
Other trademarks 40 170.9 72.5
Customer lists 3-10 162.7 116.8
Other 2-16 102.4 88.5
------------ -------------
838.0 679.8
Less accumulated amortization 94.5 71.2
------------ -------------
$ 743.5 $ 608.6
============ =============
</TABLE>
Other intangibles are recorded at their estimated fair values at the
dates acquired and are amortized on a straight-line basis over the
periods to be benefited.
9. Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consisted of:
<TABLE>
<CAPTION>
December 31,
------------------------------
(In millions) 1998 1997
------------ -------------
<S> <C> <C>
Accounts payable $ 453.9 $ 479.5
Merger and acquisition obligations 152.7 359.0
Accrued payroll and related 199.7 187.3
Advances from relocation clients 59.5 57.2
Other 636.8 395.3
------------ -------------
$ 1,502.6 $ 1,478.3
============ =============
10. Net Investment in Leases and Leased Vehicles
Net investment in leases and leased vehicles consisted of:
December 31,
------------------------------
(In millions) 1998 1997
------------ -------------
Vehicles under open-end operating leases $ 2,725.6 $ 2,640.1
Vehicles under closed-end operating leases 822.1 577.2
Direct financing leases 252.4 440.8
Accrued interest on leases 1.0 1.0
------------ -------------
$ 3,801.1 $ 3,659.1
============ =============
</TABLE>
The Company records the cost of leased vehicles as "net investment in
leases and leased vehicles." The vehicles are leased primarily to
corporate fleet users for initial periods of twelve months or more under
either operating or direct financing lease agreements. Vehicles under
operating leases are amortized using the straight-line method over the
expected lease term. The Company's experience indicates that the full
term of the leases may vary considerably due to extensions beyond the
minimum lease term. Lessee repayments of investment in leases and leased
vehicles were $1.9 billion and $1.6 billion in 1998 and 1997,
respectively, and the ratio of such repayments to the average net
investment in leases and leased vehicles was 50.7% and 46.8% in 1998 and
1997, respectively.
F-26
<PAGE>
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 generally been sold
for amounts exceeding the residual value guarantees. Maintenance and
repairs of vehicles under these agreements are the responsibility of the
lessee. The original cost and accumulated depreciation of vehicles under
this type of operating lease was $5.3 billion and $2.6 billion,
respectively, at December 31, 1998 and $5.0 billion and $2.4 billion,
respectively, at December 31, 1997.
Under the second type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease is for the account of
the Company. The lessee generally pays for or provides maintenance,
vehicle licenses and servicing. The original cost and accumulated
depreciation of vehicles under these agreements were $1.0 billion and
$190.5 million, respectively, at December 31, 1998 and $754.4 million and
$177.2 million, respectively, at December 31, 1997. The Company, based on
historical experience and a current assessment of the used vehicle
market, established an allowance in the amount of $14.2 million and $11.7
million for potential losses on residual values on vehicles under these
leases at December 31, 1998 and 1997, respectively.
Under the direct financing lease agreements, the minimum lease term is 12
months with a month to month renewal thereafter. In addition, resale of
the vehicles upon termination of the lease is for the account for the
lessee. Maintenance and repairs of these vehicles are the responsibility
of the lessee.
Open-end operating leases and direct financing leases generally have a
minimum lease term of 12 months with monthly renewal options thereafter.
Closed-end operating leases typically have a longer term, usually 24
months or more, but are cancelable under certain conditions.
Gross leasing revenues, which are included in fleet leasing in the
consolidated statements of operations, consist of:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
(In millions) 1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Operating leases $ 1,330.3 $ 1,222.9 $ 1,145.8
Direct financing leases, primarily interest 37.8 41.8 43.3
----------- ---------- -----------
$ 1,368.1 $ 1,264.7 $ 1,189.1
=========== ========== ===========
</TABLE>
In June 1998, the Company entered into an agreement with an independent
third party to sell and leaseback vehicles subject to operating leases.
The net carrying value of the vehicles sold was $100.6 million. Since the
net carrying value of these vehicles was equal to their sales price,
there was no gain or loss recognized on the sale. The lease agreement
entered into between the Company and the counterparty was for a minimum
lease term of 12 months with three one-year renewal options. For the year
ended December 31, 1998, the total rental expense incurred by the Company
under this lease was $17.7 million.
F-27
<PAGE>
The Company has transferred existing managed vehicles and related leases
to unrelated investors and has retained servicing responsibility. Credit
risk for such agreements is retained by the Company to a maximum extent
in one of two forms: excess assets transferred, which were $9.4 million
and $7.6 million at December 31, 1998 and 1997, respectively; or
guarantees to a maximum extent. There were no guarantees to a maximum
extent at December 31, 1998 or 1997. All such credit risk has been
included in the Company's consideration of related allowances. The
outstanding balances under such agreements aggregated $259.1 million and
$224.6 million at December 31, 1998 and 1997, respectively.
Other managed vehicles with balances aggregating $221.8 million and
$157.9 million at December 31, 1998 and 1997, respectively, are included
in special purpose entities which are not owned by the Company. These
entities do not require consolidation as they are not controlled by the
Company and all risks and rewards rest with the owners. Additionally,
managed vehicles totaling approximately $81.9 million and $69.6 million
at December 31, 1998 and 1997, respectively, are owned by special purpose
entities which are owned by the Company. However, such assets and related
liabilities have been netted in the consolidated balance sheet since
there is a two-party agreement with determinable accounts, a legal right
of offset exists and the Company exercises its right of offset in
settlement with client corporations.
11. Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. The Company sells
loans insured or guaranteed by various government sponsored entities and
private insurance agencies. The insurance or guaranty is provided
primarily on a non-recourse basis to the Company, except where limited by
the Federal Housing Administration and Veterans Administration and their
respective loan programs. As of December 31, 1998 and 1997, mortgage
loans sold with recourse amounted to approximately $58.3 million and
$58.5 million, respectively. The Company believes adequate allowances are
maintained to cover any potential losses.
The Company entered into a three year agreement effective May 1998 and
expanded in December 1998 under which an unaffiliated Buyer (the "Buyer")
committed to purchase, at the Company's option, mortgage loans originated
by the Company on a daily basis, up to the Buyer's asset limit of $2.4
billion. Under the terms of this sale agreement, the Company retains the
servicing rights on the mortgage loans sold to the Buyer and provides the
Buyer with opportunities to sell or securitize the mortgage loans into
the secondary market. At December 31, 1998, the Company was servicing
approximately $2.0 billion of mortgage loans owned by the Buyer.
F-28
<PAGE>
12. Mortgage Servicing Rights
Capitalized mortgage servicing rights ("MSRs") activity was as follows:
<TABLE>
<CAPTION>
(In millions) MSRs Allowance Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 192.8 $ (1.4) $ 191.4
Less: PHH activity for January 1996
to reflect change in PHH fiscal year (14.0) .2 (13.8)
Additions to MSRs 164.4 - 164.4
Amortization (51.8) - (51.8)
Write-down/provision - .6 .6
Sales (1.9) - (1.9)
----------- ---------- -----------
Balance, December 31, 1996 289.5 (.6) 288.9
Additions to MSRs 251.8 - 251.8
Amortization (95.6) - (95.6)
Write-down/provision - (4.1) (4.1)
Sales (33.1) - (33.1)
Deferred hedge, net 18.6 - 18.6
Reclassification of mortgage-related securities (53.5) - (53.5)
----------- ---------- -----------
Balance, December 31, 1997 377.7 (4.7) 373.0
Additions to MSRs 475.2 - 475.2
Additions to hedge 49.2 - 49.2
Amortization (82.5) - (82.5)
Write-down/provision - 4.7 4.7
Sales (99.1) - (99.1)
Deferred hedge, net (84.8) - (84.8)
----------- ---------- -----------
Balance, December 31, 1998 $ 635.7 $ - $ 635.7
=========== ========== ===========
</TABLE>
The value of the Company's MSRs is sensitive to changes in interest
rates. The Company uses a hedge program to manage the associated
financial risks of loan prepayments. Commencing in 1997, the Company used
certain derivative financial instruments, primarily interest rate floors,
interest rate swaps, principal only swaps, futures and options on futures
to administer its hedge program. Premiums paid/received on the acquired
derivatives instruments are capitalized and amortized over the life of
the contracts. Gains and losses associated with the hedge instruments are
deferred and recorded as adjustments to the basis of the MSRs. In the
event the performance of the hedge instruments do not meet the
requirements of the hedge program, changes in the fair value of the hedge
instruments will be reflected in the income statement in the current
period. Deferrals under the hedge programs are allocated to each
applicable stratum of MSRs based upon its original designation and
included in the impairment measurement.
F-29
<PAGE>
For purposes of performing its impairment evaluation, the Company
stratifies its portfolio on the basis of interest rates of the underlying
mortgage loans. The Company measures impairment for each stratum by
comparing estimated fair value to the recorded book value. The
Company records amortization expense in proportion to and over the
period of the projected net servicing income. Temporary impairment is
recorded through a valuation allowance in the period of occurrence.
13. Long-Term Debt
Long-term debt consisted of:
December 31,
-----------------------------
(In millions) 1998 1997
------------ ------------
Term Loan Facility $ 1,250.0 $ -
Revolving Credit Facilities - 276.0
7 1/2% Senior Notes 399.7 -
7 3/4% Senior Notes 1,148.0 -
3% Convertible Subordinated Notes 545.4 543.2
5 7/8% Senior Notes - 149.9
4 3/4% Convertible Senior Notes - 240.0
Other 24.9 39.2
------------ ------------
3,368.0 1,248.3
Less current portion 5.1 2.3
------------ ------------
$ 3,362.9 $ 1,246.0
============ ============
Term Loan Facilities
On May 29, 1998, the Company entered into a 364 day term loan agreement
with a syndicate of financial institutions which provided for borrowings
of $3.25 billion (the "Term Loan Facility"). The Term Loan Facility, as
amended, incurred interest based on the London Interbank Offered Rate
("LIBOR") a margin of approximately 87.5 basis points. The weighted
average interest rate on the Term Loan Facility was 6.2% at December 31,
1998.
At December 31, 1998, borrowings under the Term Loan Facility of $1.25
billion were classified as long-term based on the Company's intent and
ability to refinance such borrowings on a long-term basis. On February 9,
1999, the Company replaced the Term Loan Facility with a new two year
term loan facility (the "New Facility") which provides for borrowings of
$1.25 billion. The Company used $1.25 billion of the proceeds from the
New Facility to refinance the majority of the outstanding borrowings
under the Term Loan Facility. The New Facility bears interest at a rate
of LIBOR plus a margin of approximately 100 basis points and is payable
in five consecutive quarterly installments beginning on the first
anniversary of the closing date. The New Facility contains certain
restrictive covenants, which are substantially similar to and consistent
with the covenants in effect for the Company's existing revolving credit
agreements.
F-30
<PAGE>
Credit Facilities
The Company's primary credit facility, as amended, consists of (i) a
$750.0 million, five year revolving credit facility (the "Five Year
Revolving Credit Facility") and (ii) a $1.0 billion, 364 day revolving
credit facility (the "364 Day Revolving Credit Facility") (collectively
the "Revolving Credit Facilities"). The 364-Day Revolving Credit Facility
will mature on October 29, 1999 but may be renewed on an annual basis for
an additional 364 days upon receiving lender approval. The Five Year
Revolving Credit Facility will mature on October 1, 2001. Borrowings
under the Revolving Credit Facilities, at the option of the Company, bear
interest based on competitive bids of lenders participating in the
facilities, at prime rates or at LIBOR, plus a margin of approximately 75
basis points. The Company is required to pay a per annum facility fee of
.175% and .15% of the average daily unused commitments under the Five
Year Revolving Credit Facility and 364 Day Revolving Credit Facility,
respectively. The interest rates and facility fees are subject to change
based upon credit ratings on the Company's senior unsecured long-term
debt by nationally recognized debt rating agencies. Letters of credit of
$45.0 million were outstanding under the Five-Year Revolving Credit
Facility at December 31, 1998. The Revolving Credit Facilities contain
certain restrictive covenants including restrictions on indebtedness,
mergers, liquidations and sale and leaseback transactions and requires
the maintenance of certain financial ratios, including a 3:1 minimum
interest coverage ratio and a 0.5:1 maximum debt-to-capitalization ratio.
7 1/2% and 7 3/4% Senior Notes
On November 17, 1998, the Company filed an amended shelf registration
statement with the SEC for the aggregate issuance of up to $3.0 billion
of debt and equity securities. On November 24, 1998, the Company priced a
total of $1.55 billion of Senior Notes (the "Notes") in a two-part issue.
The first issue, $400.0 million principal amount of 7 1/2% Senior Notes
due December 1, 2000, was priced to yield 7.545%. The second issue, $1.15
billion principal amount of 7 3/4% Senior Notes due December 1, 2003, was
priced to yield 7.792%. Interest on the Notes will be payable on June 1
and December 1 each year, beginning on June 1, 1999. The Notes may be
redeemed, in whole or in part, at any time at the option of the Company
at a redemption price plus accrued interest to the date of redemption.
The redemption price is equal to the greater of (i) the face value of the
notes or (ii) the sum of the present values of the remaining scheduled
payments discounted at the treasury rate plus a spread defined in the
indenture. Net proceeds from the offering were used to repay a portion
of the Company's Term Loan Facility and for general corporate purposes,
which included the repurchase of Company common stock.
3% Convertible Subordinated Notes
In February 1997, the Company completed a public offering of $550.0
million 3% Convertible Subordinated Notes (the "3% Notes") due 2002. Each
$1,000 principal amount of 3% Notes is convertible into 32.6531 shares of
Company common stock subject to adjustment in certain events. The 3%
Notes may be redeemed at the option of the Company at any time on or
after February 15, 2000, in whole or in part, at the appropriate
redemption prices (as defined in the indenture governing the 3% Notes)
plus accrued interest to the redemption date. The 3% Notes will be
subordinated in right of payment to all existing and future Senior Debt
(as defined in the indenture governing the 3% Notes) of the Company.
5 7/8% Senior Notes
On December 15, 1998, the Company repaid the $150.0 million principal
amount of 5 7/8% Senior Notes outstanding in accordance with the
provisions of the indenture agreement.
4 3/4% Convertible Senior Notes
In February 1996, the Company completed a public offering of $240.0
million unsecured 4 3/4% Convertible Senior Notes due 2003, which were
convertible at the option of the holder at any time prior to maturity
into 36.030 shares of Company common stock per $1,000 principal amount of
the 4 3/4% Notes, representing a conversion price of $27.76 per share. On
May 4, 1998, the Company redeemed all of the outstanding ($144.5 million
principal amount) 4 3/4% Notes at a price of 103.393% of the principal
amount, together with interest accrued to the redemption date (see Note 6
-Other Charges -- Financing Costs). Prior to the redemption date, during
1998, holders of such notes exchanged $95.5 million of the 4 3/4% Notes
for 3.4 million shares of Company common stock.
F-31
<PAGE>
Debt Maturities
Aggregate maturities of debt for each of the next five years commencing
in 1999 are as follows:
(In millions)
Year Amount
---------- ------------
1999 $ 5.1
2000 403.3
2001 1,250.3
2002 545.4
2003 1,148.0
Thereafter 15.9
-----------
$ 3,368.0
===========
14. Liabilities under Management and Mortgage Programs
Borrowings to fund assets under management and mortgage programs
consisted of:
<TABLE>
<CAPTION>
December 31,
-------------------------------
(In millions) 1998 1997
------------ --------------
<S> <C> <C>
Commercial paper $ 2,484.4 $ 2,577.5
Medium-term notes 2,337.9 2,747.8
Securitized obligations 1,901.5 -
Other 173.0 277.3
------------ --------------
$ 6,896.8 $ 5,602.6
============ ==============
</TABLE>
Commercial Paper
Commercial paper, which matures within 180 days, is supported by
committed revolving credit agreements described below and short-term
lines of credit. The weighted average interest rates on the Company's
outstanding commercial paper were 6.1% and 5.9% at December 31, 1998
and 1997, respectively.
Medium-Term Notes
Medium-term notes of $2.3 billion primarily represent unsecured loans,
which mature through 2002. The weighted average interest rates on such
medium-term notes were 5.6% and 5.9% at December 31, 1998 and 1997,
respectively.
Securitized Obligations
The Company maintains four separate financing facilities, the outstanding
borrowings under which are securitized by corresponding assets under
management and mortgage programs. The collective weighted average
interest rate on such facilities was 5.8% at December 31, 1998. Such
securitized obligations are described below.
F-32
<PAGE>
Mortgage Facility. In December 1998, the Company entered into a 364 day
financing agreement to sell mortgage loans under an agreement to
repurchase such mortgages (the "Agreement"). The Agreement is
collateralized by the underlying mortgage loans held in safekeeping by
the custodian to the Agreement. The total commitment under this Agreement
is $500.0 million and is renewable on an annual basis at the discretion
of the lender in accordance with the securitization agreement. Mortgage
loans financed under this Agreement at December 31, 1998 totaled $378.0
million and are included in mortgage loans held for sale on the
consolidated balance sheet.
Relocation Facilities. The Company entered into a 364-day asset
securitization agreement effective December 1998 under which an
unaffiliated buyer has committed to purchase an interest in the right to
payments related to certain Company relocation receivables. The revolving
purchase commitment provides for funding up to a limit of $325.0 million
and is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Under the terms of this
agreement, the Company retains the servicing rights related to the
relocation receivables. At December 31, 1998, the Company was servicing
$248.0 million of assets, which were funded under this agreement.
The Company also maintains an asset securitization agreement with a
separate unaffiliated buyer, which has a purchase commitment up to a
limit of $350.0 million. The terms of this agreement are similar to the
aforementioned facility with the Company retaining the servicing rights
on the right of payment. At December 31, 1998, the Company was servicing
$171.0 million of assets eligible for purchase under this agreement.
Fleet Facilities. In December 1998, the Company entered into two secured
financing transactions each expiring five years from the effective
agreement date through its two wholly-owned subsidiaries, TRAC Funding
and TRAC Funding II. Secured leased assets (specified beneficial
interests in a trust which owns the leased vehicles and the leases)
totaling $600.0 million and $725.3 million, respectively, were
contributed to the subsidiaries by the Company. Loans to TRAC Funding and
TRAC Funding II were funded by commercial paper conduits in the amounts
of $500.0 million and $604.0 million, respectively, and were secured by
the specified beneficial interests. Monthly loan repayments conform to
the amortization of the leased vehicles with the repayment of the
outstanding loan balance required at time of disposition of the vehicles.
Interest on the loans is based upon the conduit commercial paper issuance
cost and committed bank lines priced on a LIBOR basis. Repayments of
loans are limited to the cash flows generated from the leases represented
by the specified beneficial interests.
Other. Other liabilities under management and mortgage programs are
principally comprised of unsecured borrowings under uncommitted
short-term lines of credit and other bank facilities, all of which
matures in 1999. The weighted average interest rate on such debt was 5.5%
and 6.7% at December 31, 1998 and 1997, respectively.
F-33
<PAGE>
Interest expense is incurred on indebtedness, which is used to finance
fleet leasing, relocation and mortgage servicing activities. Interest
incurred on borrowings used to finance fleet leasing activities was
$177.3 million, $177.0 million and $161.8 million for the years ended
December 31, 1998, 1997, and 1996, respectively, and is included net
within fleet leasing revenues in the consolidated statements of
operations. Interest related to equity advances on homes was $26.9
million, $32.0 million and $35.0 million for the years ended December 31,
1998, 1997 and 1996, respectively. Interest related to origination and
mortgage servicing activities was $138.9 million, $77.6 million and $63.4
million for the years ended December 31, 1998, 1997 and 1996,
respectively. Interest expense incurred on borrowings used to finance
both equity advances on homes and mortgage servicing activities are
recorded net within membership and service fee revenues in the
consolidated statements of operations.
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 100 percent of
the average amount of outstanding commercial paper. As of December 31,
1998, the Company maintained $2.75 billion in committed and unsecured
credit facilities, which were backed by a consortium of domestic and
foreign banks. The facilities were comprised of $1.25 billion in 364 day
credit lines maturing in March 1999, a $250.0 million (changed to $150.0
million in March 1999) revolving credit facility maturing December 1999
and a five year $1.25 billion credit line maturing in the year 2002.
Under such credit facilities, the Company paid annual commitment fees of
$1.9 million, $1.7 million and $2.4 million for the years ended December
31, 1998, 1997 and 1996, respectively. In March 1999, the Company
extended the $1.25 billion in 364 day credit lines to March 2000. In
addition, the Company has other uncommitted lines of credit with various
banks of which $5.1 million was unused at December 31, 1998. The full
amount of the Company's committed facility was undrawn and available at
December 31, 1998 and 1997.
Although the period of service for a vehicle is at the lessee's option,
and the period a home is held for resale varies, management estimates, by
using historical information, the rate at which vehicles will be disposed
and the rate at which homes will be resold. Projections of estimated
liquidations of assets under management and mortgage programs and the
related estimated repayments of liabilities under management and mortgage
programs as of December 31, 1998, are set forth as follows:
<TABLE>
<CAPTION>
(In millions) Assets under Management Liabilities under Management
Years and Mortgage Programs and Mortgage Programs (1)
-------------- ----------------------- ----------------------------
<S> <C> <C>
1999 $ 4,882.0 $ 4,451.7
2000 1,355.9 1,342.2
2001 668.6 659.0
2002 289.0 263.1
2003 168.3 142.0
2004-2008 148.1 38.8
------------- -------------
$ 7,511.9 $ 6,896.8
============= =============
</TABLE>
----------
(1) The projected repayments of liabilities under management and mortgage
programs are different than required by contractual maturities.
F-34
<PAGE>
15. Derivative Financial Instruments
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with
fluctuations in interest rates, foreign currency exchange rates, prices
of mortgage loans held for sale and anticipated mortgage loan closings
arising from commitments issued. The Company performs analyses on an
on-going basis to determine that a high correlation exists between the
characteristics of derivative instruments and the assets or transactions
being hedged. As a matter of policy, the Company does not engage in
derivative activities for trading or speculative purposes. The Company is
exposed to credit-related losses in the event of non-performance by
counterparties to certain derivative financial instruments. The Company
manages such risk by periodically evaluating the financial position of
counterparties and spreading its positions among multiple counterparties.
The Company presently does not expect non-performance by any of the
counterparties.
Interest Rate Swaps
The Company enters into interest rate swap agreements to match the
interest characteristics of the assets being funded and to modify the
contractual costs of debt financing. The swap agreements correlate the
terms of the assets to the maturity and rollover of the debt by
effectively matching a fixed or floating interest rate with the
stipulated revenue stream generated from the portfolio of assets being
funded. Amounts to be paid or received under interest rate swap
agreements are accrued as interest rates change and are recognized over
the life of the swap agreements as an adjustment to interest expense. For
the years ended December 31, 1998, 1997 and 1996, the Company's hedging
activities increased interest expense $2.1 million, $4.0 million and $4.1
million, respectively, and had no effect on its weighted average
borrowing rate. The fair value of the swap agreements is not recognized
in the consolidated financial statements since they are accounted for as
matched swaps.
F-35
<PAGE>
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps.
<TABLE>
<CAPTION>
1998
Notional Weighted Average Weighted Average Swap
(Dollars in millions) Amount Receive Rate Pay Rate Maturities
------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Commercial paper $ 355.2 4.92% 5.84% 1999-2006
Medium-term notes 931.0 5.27% 5.04% 1999-2000
Canada commercial paper 89.8 5.52% 5.27% 1999-2002
Sterling liabilities 662.3 6.26% 6.62% 1999-2002
Deutsche mark liabilities 31.9 3.24% 4.28% 1999-2001
-------------
$ 2,070.2
=============
1997
Notional Weighted Average Weighted Average Swap
(Dollars in millions) Amount Receive Rate Pay Rate Maturities
------------- ---------------- ---------------- -------------
Commercial paper $ 355.7 5.68% 6.26% 1999-2004
Medium-term notes 1,551.0 5.93% 5.73% 1999-2000
Canada commercial paper 142.8 4.93% 4.95% 1999-2002
Sterling liabilities 491.5 7.21% 7.69% 1999-2002
Deutsche mark liabilities 9.1 3.76% 5.34% 1999-2001
-------------
$ 2,550.1
=============
</TABLE>
---------------
(1) The projected repayments of liabilities under management and mortgage
programs are different than required by contractual maturities.
Foreign Exchange Contracts
In order to manage its exposure to fluctuations in foreign currency
exchange rates, on a selective basis, the Company enters into foreign
exchange contracts. Such contracts are primarily utilized to hedge
intercompany loans to foreign subsidiaries and certain monetary assets
and liabilities denominated in currencies other than the U.S. dollar. The
Company may also hedge currency exposures that are directly related to
anticipated, but not yet committed transactions expected to be
denominated in foreign currencies. The principal currencies hedged are
the British pound and the German mark. Market value gains and losses on
foreign currency hedges related to intercompany loans are deferred and
recognized upon maturity of the underlying loan. Market value gains and
losses on foreign currency hedges of anticipated transactions are
recognized in the statement of operations as exchange rates change.
However, fluctuations in exchange rates are generally offset by the
anticipated exposures being hedged. Historically, foreign exchange
contracts have been short-term in nature.
Other Financial Instruments
With respect to both mortgage loans held for sale and anticipated
mortgage loan closings arising from commitments issued, the Company is
exposed to the risk of adverse price fluctuations primarily due to
changes in interest rates. The Company uses forward delivery contracts,
F-37
<PAGE>
financial futures and option contracts to reduce such risk. Market value
gains and losses on such positions used as hedges are deferred and
considered in the valuation of cost or market value of mortgage loans
held for sale.
With respect to the mortgage servicing portfolio, the Company acquired
certain derivative financial instruments, primarily interest rate floors,
interest rate swaps, principal only swaps, futures and options on futures
to manage the associated financial impact of interest rate movements.
16. Fair Value of Financial Instruments and Servicing Rights
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments.
The fair values of the financial instruments presented may not be
indicative of their future values.
Marketable Securities
Fair value is based upon quoted market prices or investment advisor
estimates.
Mortgage Loans Held for Sale
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to
purchase loans net of mortgage-related positions. The value of embedded
MSRs has been considered in determining fair value.
Mortgage Servicing Rights
Fair value is estimated by discounting future net servicing cash flows
associated with the underlying securities using discount rates that
approximate current market rates and externally published prepayment
rates, adjusted, if appropriate, for individual portfolio
characteristics.
Debt
The fair values of the Company's Senior Notes, Convertible Notes and
Medium-term Notes are estimated based on quoted market prices or market
comparables.
Mandatorily Redeemable Preferred Securities Issued by Subsidiary
Fair value is estimated based on quoted market prices and incorporates
the settlement of litigation and the resulting modification of terms (see
Note 6 -- Other Charges -- Litigation Settlement).
Interest Rate Swaps, Foreign Exchange Contracts, Other Mortgage-Related
Positions
The fair values of these instruments are estimated, using dealer quotes,
as the amount that the Company would receive or pay to execute a new
agreement with terms identical to those remaining on the current
agreement, considering interest rates at the reporting date.
F-38
<PAGE>
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- ------------------------------------
Notional/ Estimated Notional/ Estimated
Contract Carrying Fair Contract Carrying Fair
(In millions) Amount Amount Value Amount Amount Value
--------- -------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Marketable securities $ - $ 220.8 $ 220.8 $ - $ 65.2 $ 65.2
Investment in mortgage
securities - 46.2 46.2 - 48.0 48.0
---------------------------------------------------------------------------------------------------------
Assets under management and
mortgage programs
Relocation receivables - 659.1 659.1 - 775.3 775.3
Mortgage loans held for sale - 2,416.0 2,462.7 - 1,636.3 1,668.1
Mortgage servicing rights - 635.7 787.7 - 373.0 394.6
---------------------------------------------------------------------------------------------------------
Long-term debt - 3,362.9 3,351.1 - 1,246.0 1,468.3
---------------------------------------------------------------------------------------------------------
Off balance sheet derivatives
relating to long-term debt
Foreign exchange forwards 1.1 - - 5.5 - -
Other off balance sheet derivatives
Foreign exchange forwards 47.6 - - 102.7 - -
---------------------------------------------------------------------------------------------------------
Liabilities under management
and mortgage programs
Debt - 6,896.8 6,895.0 - 5,602.6 5,604.2
---------------------------------------------------------------------------------------------------------
Mandatorily redeemable preferred
securities issued by subsidiary - 1,472.1 1,333.2 - - -
---------------------------------------------------------------------------------------------------------
Off balance sheet derivatives
relating to liabilities under
management and mortgage
programs
Interest rate swaps 2,070.2 - - 2,550.1 - -
in a gain position - - 7.8 - - 5.6
in a loss position - - (11.5) - - (3.9)
Foreign exchange forwards 349.3 - 0.1 409.8 - 2.5
---------------------------------------------------------------------------------------------------------
Mortgage-related positions
Forward delivery
commitments (a) 5,057.0 2.9 (3.5) 2,582.5 19.4 (16.2)
Option contracts to sell (a) 700.8 8.5 3.7 290.0 .5 -
Option contracts to buy (a) 948.0 5.0 1.0 705.0 1.1 4.4
Commitments to fund
mortgages 3,154.6 - 35.0 1,861.7 - 19.7
Constant maturity treasury
floors (b) 3,670.0 43.8 84.0 825.0 12.5 17.1
Interest rate swaps (b) 775.0 175.0
in a gain position - - 34.6 - - 1.3
in a loss position - - (1.2) - - -
Treasury futures (b) 151.0 - (0.7) 331.5 - 4.8
Principal only swaps (b) 66.3 - 3.1 - - -
</TABLE>
----------------
(a)Carrying amounts and gains (losses) on these mortgage-related positions
are already included in the determination of respective carrying
amounts and fair values of mortgage loans held for sale. Forward
delivery commitments are used to manage price risk on sale of all
mortgage loans to end investors including loans held by an
unaffiliated buyer as described in Note 11.
F-39
<PAGE>
(b) Carrying amounts on these mortgage-related positions are capitalized
and recorded as a component of MSRs. Gains (losses) on such positions
are included in the determination of the respective carrying amounts
and fair value of MSRs.
17. Mandatorily Redeemable Trust Preferred Securities Issued by Subsidiary
On March 2, 1998, Cendant Capital I (the "Trust"), a statutory business
Trust formed under the laws of the State of Delaware and a wholly-owned
consolidated subsidiary of the Company, issued 29.9 million FELINE PRIDES
and 2.3 million trust preferred securities and received approximately
$1.5 billion in gross proceeds therefrom. The Trust invested the proceeds
in 6.45% Senior Debentures due 2003 (the "Debentures") issued by the
Company, which represents the sole asset of the Trust. The obligations of
the Trust related to the FELINE PRIDES and trust preferred securities are
unconditionally guaranteed by the Company to the extent the Company makes
payments pursuant to the Debentures. Upon the issuance of the FELINE
PRIDES and trust preferred securities, the Company recorded a liability
of $43.3 million with a corresponding reduction to shareholders' equity
equal to the present value of the total future contract adjustment
payments to be made under the FELINE PRIDES. The FELINE PRIDES, upon
issuance, consisted of 27.6 million Income PRIDES and 2.3 million Growth
PRIDES (Income PRIDES and Growth PRIDES hereinafter referred to as
"PRIDES"), each with a face amount of $50 per PRIDE. The Income PRIDES
consist of trust preferred securities and forward purchase contracts
under which the holders are required to purchase common stock from the
Company in February 2001. The Growth PRIDES consist of zero coupon U.S.
Treasury securities and forward purchase contracts under which the
holders are required to purchase common stock from the Company in
February 2001. The stand alone trust preferred securities and the trust
preferred securities forming a part of the Income PRIDES, each with a
face amount of $50, bear interest, in the form of preferred stock
dividends, at the annual rate of 6.45% payable in cash. Such preferred
stock dividends are presented as minority interest, net of tax in the
consolidated statements of operations. Payments under the forward
purchase contract forming a part of the Income PRIDES will be made by the
Company in the form of a contract adjustment payment at an annual rate of
1.05%. Payments under the forward purchase contract forming a part of the
Growth PRIDES will be made by the Company in the form of a contract
adjustment payment at an annual rate of 1.30%. The forward purchase
contracts require the holder to purchase a minimum of 1.0395 shares and a
maximum of 1.3514 shares of Company common stock per PRIDES security
depending upon the average of the closing price per share of the
Company's common stock for a 20 consecutive day period ending in
mid-February of 2001. The Company has the right to defer the contract
adjustment payments and the payment of interest on the Debentures to the
Trust. Such election will subject the Company to certain restrictions,
including restrictions on making dividend payments on its common stock
until all such payments in arrears are settled.
The Company has reached an agreement to settle a class action lawsuit
that was brought on behalf of holders of PRIDES securities who purchased
their securities on or prior to April 15, 1998 (see Note 6 -- Other
Charges -- Litigation Settlement).
F-40
<PAGE>
18. Commitments and Contingencies
Leases
The Company has noncancelable operating leases covering various
facilities and equipment, which primarily expire through the year 2004.
Rental expense for the years ended December 31, 1998, 1997 and 1996 was
$171.5 million, $84.9 million and $69.2 million, respectively. The
Company incurred contingent rental expenses in 1998 of $44.1 million,
which is included in total rental expense, principally based on rental
volume or profitability at certain NPC parking facilities. The Company
has been granted rent abatements for varying periods on certain of its
facilities. Deferred rent relating to those abatements is being amortized
on a straight-line basis over the applicable lease terms.
Commitments under capital leases are not significant.
Future minimum lease payments required under noncancelable operating
leases as of December 31, 1998 are as follows:
(In millions)
Year Amount
------------- -------------
1999 $ 116.4
2000 104.3
2001 89.2
2002 65.7
2003 52.4
Thereafter 138.2
-------------
$ 566.2
=============
Litigation
Accounting Irregularities. On April 15, 1998, the Company publicly
announced that it discovered accounting irregularities in the former
business units of CUC. Such discovery prompted investigations into such
matters by the Company and the Audit Committee of the Company's Board of
Directors. As a result of the findings from the investigations, the
Company restated its previously reported financial results for 1997, 1996
and 1995. Since the April 15, 1998 announcement more than 70 lawsuits
claiming to be class actions, two lawsuits claiming to be brought
derivatively on the Company's behalf and several individual lawsuits have
been filed in various courts against the Company and other defendants.
The majority of these actions were all filed in or transferred to the
United States District Court for the District of New Jersey, where they
are pending before Judge William H. Walls and Magistrate Judge Joel A.
Pisano. The Court has ordered consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The
SEC advised the Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have
occurred. While the Company made all adjustments considered necessary as
a result of the findings from the Investigations, in restating its
financial statements, the Company can provide no assurances that
additional adjustments will not be necessary as a result of these
government investigations.
F-41
<PAGE>
On October 14, 1998, an action claiming to be a class action was filed
against the Company and four of the Company's former officers and
directors. The complaint claims that the Company made false and
misleading public announcements and filings with the SEC in connection
with the Company's proposed acquisition of American Bankers allegedly in
violation of Sections 10(b) and 20(a) on the Securities Exchange Act of
1934, as amended and that the plaintiff and the alleged class members
purchased American Bankers' securities in reliance on these public
announcements and filings at inflated prices. On April 26, 1999, the
United States District Court for the District of New Jersey found that
the class action failed to state a claim upon which relief could be
granted and, accordingly, dismissed the class action.
As previously disclosed, the Company reached a final agreement with
plaintiff's counsel representing the class of holders of its PRIDES
securities who purchased their securities on or prior to April 15, 1998
to settle their class action lawsuit against the Company through the
issuance of a new "Right" for each PRIDES security held. (See Note 6 --
Other Charges for a more detailed description of the settlement).
Other than with respect to the PRIDES class action litigation, the
Company does not believe it is feasible to predict or determine the final
outcome or resolution of these proceedings or to estimate the amounts or
potential range of loss with respect to these proceedings and
investigations. In addition, the timing of the final resolution of these
proceedings and investigations is uncertain. The possible outcomes or
resolutions of these proceedings and investigations could include
judgements against the Company or settlements and could require
substantial
F-42
<PAGE>
payments by the Company. Management believes that material adverse
outcomes with respect to such proceedings and investigations could have a
material adverse impact on the Company's financial condition, results of
operations and cash flows.
Other pending litigation. The Company and its subsidiaries are involved
in pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect
on the Company's consolidated financial position, results of operations
or cash flows.
19. Income Taxes
The income tax provision consists of:
Year Ended December 31,
-------------------------------------------
(In millions) 1998 1997 1996
------------ ---------- ------------
Current
Federal $ (173.1) $ 142.8 $ 97.5
State (0.6) 23.3 13.0
Foreign 56.5 28.5 18.1
----------- ---------- ------------
(117.2) 194.6 128.6
----------- ---------- ------------
Deferred
Federal 181.5 (14.5) 68.4
State 30.0 (3.2) 16.3
Foreign 1.1 3.2 0.8
----------- ---------- ------------
212.6 (14.5) 85.5
----------- ---------- ------------
Provision for income taxes $ 95.4 $ 180.1 $ 214.1
=========== ========== ============
Net deferred income tax assets and liabilities are comprised of the
following:
December 31,
----------------------------
(In millions) 1998 1997
---------- -------------
Current net deferred income taxes
Merger and acquisition-related liabilities $ 52.8 $ 101.2
Accrued liabilities and deferred income 319.8 223.9
Excess tax basis on assets held for sale 190.0 -
Insurance retention refund (21.2) (19.3)
Provision for doubtful accounts 13.8 4.0
Franchise acquisition costs (6.9) (2.6)
Deferred membership acquisition costs 2.6 8.6
Other (90.3) (8.9)
----------- ------------
Current net deferred tax asset $ 460.6 $ 306.9
=========== ============
December 31,
----------------------------
(In millions) 1998 1997
---------- -------------
Non-current net deferred income taxes
Depreciation and amortization $ (296.5) $ (277.9)
Deductible goodwill - taxable poolings 49.3 44.2
Merger and acquisition-related liabilities 25.8 35.0
Accrued liabilities and deferred income 63.9 66.9
Acquired net operating loss carryforward 83.5 59.9
Other (3.4) 5.7
---------- -----------
Non-current net deferred tax liability $ (77.4) $ (66.2)
========== ===========
F-43
<PAGE>
December 31,
----------------------------
(In millions) 1998 1997
---------- -------------
Management and mortgage program
deferred income taxes
Depreciation $ (121.3) $ (233.1)
Unamortized mortgage servicing rights (248.0) (74.6)
Accrued liabilities 25.8 9.5
Alternative minimum tax carryforwards 2.5 2.5
---------- -----------
Net deferred tax liabilities under
management and mortgage programs $ (341.0) $ (295.7)
========== ============
Net operating loss carryforwards at December 31, 1998 acquired in
connection with the acquisition of Avis expire as follows: 2001, $8.2
million; 2002, $89.6 million; 2005, $7.2 million; 2009, $17.7 million;
and 2010, $116.0 million. Certain state net operating loss carryforwards
of $43.9 million are not expected to be realized; therefore, a valuation
allowance of $43.9 million was established in 1998.
The Company's effective income tax rate for continuing operations differs
from the federal statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 6.5% 5.6% 3.6%
Non-deductible merger-related costs - 32.6% -
Amortization of non-deductible goodwill 6.4% 1.4% 1.5%
Foreign taxes differential (8.6%) 3.7% .8%
Recognition of excess tax basis on assets held for sale (2.9%) - -
Other (3.7%) .3% .4%
------ ----- -----
32.7% 78.6% 41.3%
===== ===== =====
</TABLE>
F-44
<PAGE>
20. Stock Option Plans
On December 12, 1998, the Company adopted the 1999 Broad-Based Employee
Stock Option Plan (the "Broad-Based Plan"). The Broad-Based Plan
authorizes the granting of up to 16 million shares of Company common
stock through awards of nonqualified stock options (stock options which
do not qualify as incentive stock options as defined under the Internal
Revenue Service Code). Certain officers and all employees and independent
contractors of the Company are eligible to receive awards under the
Broad-Based Plan. Options granted under the plan generally have a ten
year term and are exercisable at 20% per year commencing one year from
the date of grant.
In connection with the Cendant Merger, the Company adopted the 1997 Stock
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the
granting of up to 25 million shares of Company common stock through
awards of stock options (which may include incentive stock options and/or
nonqualified stock options), stock appreciation rights and shares of
restricted Company common stock. All directors, officers and employees of
the Company and its affiliates are eligible to receive awards under the
Incentive Plan. Options granted under the Incentive Plan generally have a
ten year term and are exercisable at 20% per year commencing one year
from the date of grant. During 1997, the Company also adopted two other
stock plans: the 1997 Employee Stock Plan (the "1997 Employee Plan") and
the 1997 Stock Option Plan (the "1997 SOP"). The 1997 Employee Plan
authorizes the granting of up to 25 million shares of Company common
stock through awards of nonqualified stock options, stock appreciation
rights and shares of restricted Company common stock to employees of the
Company and its affiliates. The 1997 SOP provides for the granting of up
to 10 million shares of Company common stock to key employees (including
employees who are directors and officers) of the Company and its
subsidiaries through awards of incentive and/or nonqualified stock
options. Options granted under the 1997 Employee Plan and the 1997 SOP
generally have ten-year terms and are exercisable at 20% per year
commencing one year from the date of grant.
The Company also grants options to employees pursuant to three additional
stock option plans under which the Company may grant options to purchase
in the aggregate up to 70.8 million shares of Company common stock.
Annual vesting periods under these plans range from 20% to 33%, all
commencing one-year from the respective grant dates. At December 31, 1998
and 1997, there were 38.6 million and 49.3 million shares available for
grant under the Company's stock option plans. On September 23, 1998, the
Compensation Committee of the Board of Directors approved a program to
effectively reprice certain Company stock options granted to middle
management employees during December 1997 and the first quarter of 1998.
Such options were effectively repriced on October 14, 1998 at $9.8125 per
share (the "New Price"), which was the fair market value (as defined in
the option plans) on the date of such repricing. On September 23, 1998,
the Compensation Committee also modified the terms of certain options
held by certain executive officers and senior managers of the Company
subject to certain conditions including revocation of a portion of
existing options. Additionally, a management equity ownership program was
adopted that requires these executive officers and senior managers to
acquire Company common stock at various levels commensurate with their
respective compensation levels. The option modifications were
accomplished by canceling existing options and issuing a lesser amount of
new options at the New Price and, with respect to certain options of
executive officers and senior managers, at prices above the New Price.
F-45
<PAGE>
The table below summarizes the annual activity of the Company's stock
option plans:
Weighted
Options Avg. Exercise
(Shares in millions) Outstanding Price
----------- ---------------
Balance at December 31, 1995 98.7 $ 7.21
Granted 36.1 22.14
Canceled (2.8) 18.48
Exercised (14.0) 5.77
--------
Balance at December 31, 1996 118.0 11.68
Granted 78.8 27.94
Canceled (6.4) 27.29
Exercised (14.0) 7.20
PHH conversion (1) (4.4) -
--------
Balance at December 31, 1997 172.0 18.66
Granted
Equal to fair market value 83.8 19.16
Greater than fair market value 20.8 17.13
Canceled (81.8) 29.36
Exercised (17.0) 10.01
--------
Balance at December 31, 1998 177.8 14.64
========
------------
(1) In connection with the PHH Merger, all unexercised PHH stock options
were canceled and converted into 1.8 million shares of Company common
stock.
The Company utilizes the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for its stock option plans. Under APB No. 25, because the
exercise prices of the Company's employee stock options are equal to or
greater than the market prices of the underlying Company stock on the
date of grant, no compensation expense is recognized.
Had the Company elected to recognize compensation cost for its stock
option plans based on the calculated fair value at the grant dates for
awards under such plans, consistent with the method prescribed by SFAS
No.123, net income (loss) per share would have reflected the pro forma
amounts indicated below:
F-46
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(In millions, except per share data) 1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss)
as reported $ 539.6 $ (217.2) $ 330.0
pro forma 392.9 (663.9)(2) 245.1
Net income (loss) per share:
Basic
as reported $ .64 $ (.27) $ .44
pro forma (1) .46 (.82)(2) .32
Diluted
as reported .61 (.27) .41
pro forma (1) .46 (.82)(2) .31
</TABLE>
-----------
(1) The effect of applying SFAS No. 123 on the pro forma net income per
share disclosures is not indicative of future amounts because it does
not take into consideration option grants made prior to 1995 or in
future years.
(2) Includes incremental compensation expense of $335.4 million ($204.9
million, after tax) or $.25 per basic and diluted share as a result
of the immediate vesting of HFS options upon consummation of the
Cendant Merger.
The fair values of the stock options are estimated on the dates of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
CUC HFS PHH
Plans Plans Plans
--------- --------- ---------
1998 1997 1996
--------- --------- -----------------------------------
<S> <C> <C> <C> <C> <C>
Dividend yield - - - - 2.8%
Expected volatility 55.0% 32.5% 28.0% 37.5% 21.5%
Risk-free interest rate 4.9% 5.6% 6.3% 6.4% 6.5%
Expected holding period 6.3 years 7.8 years 5.0 years 9.1 years 7.5 years
</TABLE>
The weighted average fair values of Company stock options granted during
the year ended December 31, 1998, which were repriced with exercise
prices equal to and higher than the underlying stock price at the date of
grant, were 19.69 and 18.10, respectively. The weighted average fair
value of the stock options granted during the year ended December 31,
1998, which were not repriced was $10.16. The weighted average fair value
of stock options granted during the year ended December 31, 1997 was
$13.71. The weighted average fair value of stock options granted under
the former CUC plans (inclusive of plans acquired) during the year ended
December 31, 1996 was $7.51. The weighted average fair value of stock
options granted under the former HFS plans (inclusive of the PHH plans)
during the year ended December 31, 1996 was $10.96.
F-47
<PAGE>
The tables below summarize information regarding Company stock options
outstanding and exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -------------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$.01 to $10.00 89.6 6.8 $ 7.40 50.5 $ 5.56
$10.01 to $20.00 38.6 7.5 15.44 17.3 14.52
$20.01 to $30.00 27.3 7.9 23.02 20.8 23.09
$30.01 to $40.00 22.3 8.8 32.03 14.8 31.83
----- -----
177.8 7.4 14.64 103.4 14.34
===== =====
</TABLE>
21. Shareholders' Equity
On December 1, 1998, the Company's Board of Directors amended and
restated the 1998 Employee Stock Purchase Plan (the "Plan"). The Company
reserved 2.5 million shares of Company common stock in connection with
the Plan, which enables eligible employees to purchase shares of common
stock from the Company at 85% of the fair market value on the first
business day of each calendar quarter (the "Offering Date"). Eligible
employees may authorize the Company to withhold up to 10% of their
compensation from each paycheck during any calendar quarter, in an amount
not to exceed a total of $25,000 of Company common stock (at fair market
value as of the Offering Date) during any calendar year.
In November 1998, the Board of Directors authorized a $1.0 billion common
share repurchase program. As of December 31, 1998, the Company had
repurchased 13.4 million shares costing $257.7 million. During the first
quarter of 1999, the Company's Board of Directors authorized an
additional $600.0 million of Company common stock to be repurchased under
such program. The Company has executed this program through open market
purchases or privately negotiated transactions, subject to bank credit
facility covenants and certain rating agency constraints. As of May 3,
1999, the Company repurchased $1.6 billion of Company common stock,
reducing its outstanding shares by 83.9 million shares under this share
repurchase program.
22. Employee Benefit Plans
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate
funds for their retirement. The Company matches the contributions of
participating employees on the basis of the percentages specified in the
plans. The Company's cost for contributions to these plans was $22.8
million, $15.0 million and $9.4 million for the years ended December 31,
1998, 1997 and 1996, respectively.
The Company's PHH subsidiary has a domestic non-contributory defined
benefit pension plan covering substantially all domestic employees of PHH
and its subsidiaries employed prior to July 1, 1997. Additionally, the
Company has contributory defined benefit pension plans in certain United
Kingdom subsidiaries with participation in the plans at the employees'
option. Under both the domestic and foreign plans, benefits are based on
an employee's years of credited service and a percentage of final average
compensation.
The Company's policy for all plans is to contribute amounts sufficient to
meet the minimum requirements plus other amounts as deemed appropriate.
The projected benefit obligations of the funded plans were $196.3 million
and $108.1 million and funded assets, at fair value, were $162.2 million
and $102.7 million at December 31, 1998 and 1997, respectively. The net
pension cost and the recorded liability were not material to the
accompanying consolidated financial statements.
F-48
<PAGE>
23. Related Party Transactions
NRT
During 1997, the Company executed agreements with NRT Incorporated
("NRT"), a corporation created to acquire residential real estate
brokerage firms. In 1997, NRT acquired the real estate brokerage business
and operations of National Realty Trust ("the Trust"). The Trust was an
independent trust to which the Company contributed the brokerage offices,
which were owned by Coldwell Banker at the time of the Company's
acquisition of Coldwell Banker in 1996. Since inception, NRT acquired
other local and regional real estate brokerage businesses. NRT is the
largest residential brokerage firm in the United States. Certain officers
of the Company serve on the Board of Directors of NRT. NRT is party to
various agreements and arrangements with the Company and its
subsidiaries. Under these agreements, the Company acquired $182.0 million
of NRT preferred stock (and may be required to acquire up to an
additional $81.3 million of NRT preferred stock). The Company received
preferred dividend payments of $15.4 million and $5.2 million during the
years ended 1998 and 1997, respectively which are included in other
revenue in the consolidated statements of operations. NRT is the largest
franchisee, based on gross commission income, of the Company's three real
estate franchise systems. During 1998, 1997 and 1996, NRT and its
predecessors paid an aggregate $121.5 million, $60.5 million and $24.0
million, respectively, in franchise royalties to the Company. On February
9, 1999, the Company executed new agreements with NRT, which among other
things, increased the term of each of the three franchise agreements
under which NRT operates from 40 years to 50 years.
In connection with the aforementioned agreements, the Company at its
election, will participate in NRT's acquisitions by acquiring up to an
aggregate $946.3 million (plus an additional $500.0 million if certain
conditions are met) of intangible assets, and in some cases mortgage
operations, of real estate brokerage firms acquired by NRT. Through
December 31, 1998, the Company acquired $445.7 million of such mortgage
operations and intangible assets, primarily franchise agreements
associated with real estate brokerage companies acquired by NRT, which
brokerage companies will become subject to the NRT 50-year franchise
agreements. In February 1999, NRT and the Company entered into an
agreement whereby the Company made an upfront payment of $30.0 million to
NRT for services to be provided by NRT to the Company related to the
identification of potential acquisition candidates, the negotiation of
agreements and other services in connection with future brokerage
acquisitions by NRT. Such fee is refundable in the event the services are
not provided.
Avis, Inc.
Upon entering into the definitive merger agreement to acquire Avis, the
Company announced its strategy to dilute its interest in the subsidiary
of Avis which controlled the car rental operations of Avis ("ARAC") while
retaining assets associated with the franchise business, including
trademarks, reservation system assets and franchise agreements with ARAC
and other licensees. Since the Company's control was planned to be
temporary, the Company accounted for its 100% investment in ARAC under
the equity method. The Company's equity interest was diluted to 27.5%
pursuant to an Initial Public Offering ("IPO") by ARAC in September 1997.
Net proceeds from the IPO of $359.3 million were retained by ARAC. In
March 1998, the Company sold one million shares of Avis common stock and
recognized a pre-tax gain of approximately $17.7 million, which is
included in other revenue in the consolidated statements of operations.
At December 31, 1998, the Company's interest in ARAC was approximately
22.6%. The Company recorded its equity in the earnings of ARAC, which
amounted to $13.5 million, $51.3 million and $1.2 million for the years
ended December 31, 1998, 1997 and 1996, respectively, as a component of
other revenue in the consolidated statements of operations. In January
1999, the Company's equity interest was further diluted to 19.4% as a
result of the Company's sale of 1.3 million shares of Avis common stock.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. During
1998 and 1997, total franchise royalties paid to the Company from ARAC
were $91.9 million and $81.7 million, respectively. In addition, the
Company operates the telecommunications and computer processing system,
which services ARAC for reservations, rental agreement processing,
accounting and fleet control for which the Company charges ARAC at cost.
Certain officers of the Company serve on the Board of Directors of ARAC.
24. Divestiture
On December 17, 1997, as directed by the Federal Trade Commission in
connection with the Cendant Merger, CUC sold immediately preceding the
Cendant Merger all of the outstanding shares of its timeshare exchange
businesses, Interval International Inc. ("Interval"), for net proceeds of
$240.0 million less transaction related costs amortized as services are
provided. The Company recognized a gain on the sale of Interval of $76.6
million ($26.4 million, after tax), which has been reflected as an
extraordinary gain in the consolidated statements of operations.
F-49
<PAGE>
25. Franchising and Marketing/Reservation Activities
Revenue from franchising activities includes initial franchise fees
charged to lodging properties, car rental locations, tax preparation
offices and real estate brokerage offices upon execution of a franchise
contract. Initial franchise fees amounted to $44.7 million, $26.0 million
and $24.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Franchising information at December 31 is as follows:
<TABLE>
<CAPTION>
1998 (1) 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Franchised Units in Operation 22,471 18,876 18,535
Backlog (Franchised units sold
but not yet opened) 2,063 1,547 1,061
</TABLE>
----------
(1) 1998 franchised units were acquired in connection with the
acquisition of Jackson Hewitt.
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees
related to the Company's lodging brands' franchisees are calculated based
on a specified percentage of gross room revenues. Marketing fees received
from the Company's real estate brands' franchisees are based on a
specified percentage of gross closed commissions earned on the sale of
real estate. As provided in the franchise agreements, at the Company's
discretion, all of these fees are to be expended for marketing purposes
and the operation of a centralized brand-specific reservation system for
the respective franchisees and are controlled by the Company until
disbursement. Membership and service fee revenues included marketing and
reservation fees of $222.4 million, $215.4 million and $157.6 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
26. Segment Information
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
The provisions of SFAS No. 131 established revised standards for public
companies relating to reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports. It also established
standards for related disclosures about products and services, and
geographic areas. The adoption of SFAS No. 131 did not affect the
Company's primary financial statements, but did affect the disclosure of
segment information. The segment information for 1997 and 1996 has been
restated from the prior years' presentation in order to conform to the
requirements of SFAS No. 131.
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is
defined as earnings before non-operating interest, income taxes,
depreciation and amortization, adjusted for other charges which are of a
non-recurring or unusual nature, which are not measured in assessing
segment performance or are not segment specific. The Company determined
that it has eight reportable operating segments based primarily on the
types of services it provides, the consumer base to which marketing
efforts are directed and the methods used to sell services. Inter-segment
net revenues were not significant to the net revenues of any one segment
or the consolidated net revenues of the Company. A description of the
services provided within each of the Company's reportable operating
segments is as follows:
F-50
<PAGE>
Travel
Travel services include the franchising of lodging properties and car
rental locations, as well as vacation/timeshare exchange services. As a
franchiser of guest lodging facilities and car rental agency locations,
the Company licenses the independent owners and operators of hotels and
car rental agencies to use its brand names. Operation and administrative
services are provided to franchisees, which include access to a national
reservation system, national advertising and promotional campaigns,
co-marketing programs and volume purchasing discounts. As a provider of
vacation and timeshare exchange services, the Company enters into
affiliation agreements with resort property owners/developers (the
developers) to allow owners of weekly timeshare intervals (the
subscribers) to trade their owned weeks with other subscribers. In
addition, the Company provides publications and other travel-related
services to both developers and subscribers.
Individual membership
Individual membership provides customers with access to a variety of
services and discounted products in such areas as retail shopping,
travel, auto, dining, home improvement, credit information and special
interest outdoor and gaming clubs. The Company affiliates with business
partners such as leading financial institutions and retailers to offer
membership as an enhancement to their credit card customers. Individual
memberships are marketed primarily using direct marketing techniques.
Through the Company's membership based online consumer sites, similar
products and services are offered over the Internet.
Insurance/Wholesale
Insurance/Wholesale markets and administers competitively priced
insurance products, primarily accidental death and dismemberment
insurance and term life insurance. The Company also provides services
such as checking account enhancement packages, various financial products
and discount programs to financial institutions, which in turn provide
these services to their customers. The Company affiliates with financial
institutions, including credit unions and banks, to offer their
respective customer bases such products and services.
Relocation
Relocation services are provided to client corporations for the transfer
of their employees. Such services include appraisal, inspection and
selling of transferees' homes, providing equity advances to transferees
(generally guaranteed by the corporate customer), purchase of a
transferee's home which is sold within a specified time period for a
price which is at least equivalent to the appraised value, certain home
management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.
Real estate franchise
The Company licenses the owners and operators of independent real estate
brokerage businesses to use its brand names. Operational and
administrative services are provided to franchisees, which are designed
to increase franchisee revenue and profitability. Such services include
advertising and promotions, referrals, training and volume purchasing
discounts.
Fleet
Fleet services primarily consist of the management, purchasing, leasing,
and resale of vehicles for corporate clients and government agencies.
These services also include fuel, maintenance, safety and accident
management programs and other fee-based services for clients' vehicle
fleets. The Company leases vehicles primarily to corporate fleet users
under operating and direct financing lease arrangements.
Mortgage
Mortgage services primarily include the origination, sale and servicing
of residential mortgage loans. Revenues are earned from the sale of
mortgage loans to investors as well as from fees earned on the servicing
of loans for investors. The Company markets a variety of mortgage
products to consumers through relationships with corporations, affinity
F-51
<PAGE>
groups, financial institutions, real estate brokerage firms and other
mortgage banks.
The Company customarily sells all mortgages it originates to investors
(which include a variety of institutional investors) either as individual
loans, as mortgage-backed securities or as participation certificates
issued or guaranteed by Fannie Mae, the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association while
generally retaining mortgage servicing rights. Mortgage servicing
consists of collecting loan payments, remitting principal and interest
payments to investors, holding escrow funds for payment of
mortgage-related expenses such as taxes and insurance, and otherwise
administering the Company's mortgage loan servicing portfolio.
Other services
In addition to the previously described business segments, the Company
also derives revenues from providing a variety of other consumer and
business products and services which include the Company's tax
preparation services franchise, information technology services, car park
facility services, vehicle emergency support and rescue services, credit
information services, financial products, published products, welcoming
packages to new homeowners, value added-tax refund services to travelers
and other consumer-related services.
F-52
<PAGE>
Segment Information (1)
(In millions)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Individual Insurance/
Total Travel (2) Membership Wholesale Relocation
---------- ---------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 5,086.6 $ 1,063.3 $ 929.1 $ 544.0 $ 444.0
Adjusted EBITDA 1,557.9 542.5 (57.8) 137.8 124.5
Depreciation and amortization 314.0 88.3 23.7 14.0 16.7
Segment assets 19,739.6 2,761.6 839.0 371.5 1,130.3
Capital expenditures 351.1 79.0 28.4 16.6 69.6
Real Estate
Franchise Fleet Mortgage Other
------------ --------- --------- --------
Net revenues $ 455.8 $ 387.4 $ 353.4 $ 909.6
Adjusted EBITDA 348.6 173.8 187.6 100.9
Depreciation and amortization 53.2 22.2 8.8 87.1
Segment assets 2,014.3 4,697.2 3,504.0 4,421.7
Capital expenditures 5.8 57.7 36.4 57.6
-----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Individual Insurance/
Total Travel (2) Membership Wholesale Relocation
---------- ---------- ------------ ------------ -----------
Net revenues $ 4,051.9 $ 971.6 $ 778.7 $ 482.7 $ 401.6
Adjusted EBITDA 1,212.9 467.3 5.3 111.0 92.6
Depreciation and amortization 229.0 81.9 17.8 11.0 8.1
Segment assets 13,681.0 2,601.5 840.6 357.0 1,008.7
Capital expenditures 151.7 36.5 12.1 5.6 23.0
Real Estate
Franchise Fleet Mortgage Other
------------ --------- --------- ---------
Net revenues $ 334.6 $ 324.1 $ 179.2 $ 579.4
Adjusted EBITDA 226.9 120.5 74.8 114.5
Depreciation and amortization 43.6 16.3 5.1 45.2
Segment assets 1,827.1 4,125.8 2,233.3 687.0
Capital expenditures 12.6 24.3 16.2 21.4
----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Individual Insurance/
Total Travel (2) Membership Wholesale Relocation
---------- ---------- ------------ ---------- ------------
Net revenues $ 3,063.1 $ 429.2 $ 745.9 $ 448.0 $ 344.9
Adjusted EBITDA 780.7 189.5 43.2 99.0 65.5
Depreciation and amortization 138.5 36.9 12.8 12.8 11.2
Segment assets 12,558.5 2,686.2 882.7 297.1 1,086.4
Capital expenditures 97.6 20.8 8.9 5.2 9.1
Real Estate
Franchise Fleet Mortgage Other
------------- --------- --------- ---------
Net revenues $ 236.3 $ 293.5 $ 127.7 $ 437.6
Adjusted EBITDA 137.8 99.0 45.7 101.0
Depreciation and amortization 27.3 17.6 4.4 15.5
Segment assets 1,295.5 3,991.1 1,742.4 577.1
Capital expenditures 9.9 15.3 9.9 18.5
</TABLE>
- ------------
(1) Segment data includes the financial results associated with
acquisitions accounted for under the purchase method of accounting
since the respective dates of acquisition as follows:
F-53
<PAGE>
Acquisition
Segment Acquisition Date
--------------------- --------------- -------------
Travel Avis October 1996
RCI November 1996
Real Estate franchise Coldwell Banker May 1996
Other NPC April 1998
Jackson Hewitt January 1998
(2) Revenues and Adjusted EBITDA include the equity in earnings from the
Company's investment in ARAC of $13.5 million, $51.3 million and $1.2
million in 1998, 1997 and 1996, respectively. Revenues and Adjusted
EBITDA include a pre-tax gain of $17.7 million as a result of a 1998
sale of a portion of the Company's equity interest. Total assets
include such equity method investment in the amount of $139.1 million,
$123.8 million and $76.5 million at December 31, 1998, 1997 and 1996,
respectively.
Provided below is a reconciliation of total Adjusted EBITDA and total
assets for reportable segments to the consolidated amounts.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(In millions) 1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Adjusted EBITDA for reportable segments $ 1,557.9 $ 1,212.9 $ 780.7
Other charges
Litigation settlement 351.0 - -
Termination of proposed acquisitions 433.5 - -
Executive terminations 52.5 - -
Merger-related costs and other unusual charges (credits) (67.2) 704.1 109.4
Investigation-related costs 33.4 - -
Financing costs 35.1 - -
Depreciation and amortization 314.0 229.0 138.5
Interest, net 113.9 50.6 14.2
------------ ----------- -----------
Consolidated income from continuing operations before
income taxes, minority interest, extraordinary gain and
cumulative effect of accounting change $ 291.7 $ 229.2 $ 518.6
============ =========== ===========
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------ ----------- -----------
Total assets for reportable segments $ 19,739.6 $ 13,681.0 $ 12,558.5
Net assets of discontinued operations 462.5 360.5 189.1
------------ ----------- -----------
Consolidated total assets $ 20,202.1 $ 14,041.5 $ 12,747.6
============ =========== ===========
</TABLE>
F-54
<PAGE>
Geographic Segment Information
<TABLE>
<CAPTION>
(In millions) United United All Other
Total States Kingdom Countries
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Net revenues $ 5,086.6 $ 4,090.5 $ 695.5 $ 300.6
Assets 20,202.1 16,238.0 3,706.5 257.6
Long-lived assets 1,420.3 633.6 767.8(1) 18.9
1997
Net revenues $ 4,051.9 $ 3,481.0 $ 231.8 $ 339.1
Assets 14,041.5 12,717.3 1,014.7 309.5
Long-lived assets 530.9 463.8 49.1 18.0
1996
Net revenues $ 3,063.1 $ 2,772.7 $ 133.7 $ 156.7
Assets 12,747.6 11,551.7 830.7 365.2
Long-lived assets 509.3 429.8 65.9 13.6
</TABLE>
----------
(1) Includes $691.0 million of property and equipment acquired in connection
with the NPC acquisition.
F-55
<PAGE>
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property
and equipment.
27. Subsequent Event
On February 4, 1999, the Company announced its intention not to proceed
with the acquisition of RAC Motoring Services ("RACMS") due to certain
conditions imposed by the UK Secretary of State of Trade and Industry
that the Company determined to be not commercially feasible and therefore
unacceptable. The Company originally announced on May 21, 1998 its
definitive agreement with the Board of Directors of Royal Automobile Club
Limited to acquire RACMS for approximately $735.0 million in cash. The
Company wrote-off $7.0 million of deferred acquisition costs in the first
quarter of 1999 in connection with the termination of the proposed
acquisition of RACMS.
28. Selected Quarterly Financial Data - (unaudited)
Provided below is the selected unaudited quarterly financial data for
1998 and 1997. The underlying per share information is calculated from
the weighted average shares outstanding during each quarter, which may
fluctuate based on quarterly income levels. Therefore, the sum of the
quarters may not equal the total year amounts.
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
(In millions, except per share data) First Second (1) Third (2) Fourth (3) Total Year
--------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,119.9 $1,272.3 $1,362.0 $ 1,332.4 $ 5,086.6
--------- -------- -------- --------- -----------
Income (loss) from continuing
operations 196.3 184.7 86.1 (321.4) 145.7
Income (loss) from discontinued
operations, net of tax (23.4) (31.7) 24.9 19.4 (10.8)
Gain on sale of discontinued operations,
net of tax - - - 404.7(4) 404.7
--------- -------- --------- ------------ -----------
Net income $ 172.9 $ 153.0 $ 111.0 $ 102.7 $ 539.6
========= ======== ========= ============ ===========
Per share information:
Basic
Income (loss) from continuing
operations $ 0.23 $ 0.22 $ 0.10 $ (0.38) $ 0.17
Net income $ 0.21 $ 0.18 $ 0.13 $ 0.12 $ 0.64
Weighted average shares 838.7 850.8 850.8 850.0 848.4
Diluted
Income (loss) from continuing
operations $ 0.22 $ 0.21 $ 0.10 $ (0.38) $ 0.16
Net income $ 0.20 $ 0.18 $ 0.13 $ 0.12 $ 0.61
Weighted average shares 908.5 900.9 877.4 850.0 880.4
Common Stock Market Prices:
High 41 41 3/8 22 7/16 20 5/8
Low 32 7/16 18 9/16 10 7/16 7 1/2
</TABLE>
F-56
<PAGE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
First Second (5) Third Fourth (6) Total Year
--------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 936.7 $ 990.3 $1,095.1 $ 1,029.8 $ 4,051.9
--------- -------- --------- --------- ----------
Income (loss) from continuing operations
before extraordinary gain and
cumulative effect of accounting
change 130.3 (47.2) 165.9 (199.9) 49.1
Income (loss) from discontinued
operations, net of tax (13.7) (36.8) 36.7 4.2 (9.6)
Extraordinary gain, net of tax - - - 26.4 (8) 26.4
Cumulative effect of accounting
change, net of tax (283.1)(7) - - - (283.1)
---------- -------- -------- -------- ---------
Net income (loss) $ (166.5) $ (84.0) $ 202.6 $ (169.3) $ (217.2)
========= ======== ======== ======== =========
Per share information:
Basic
Income (loss) from continuing
operations before extraordinary
gain and cumulative
effect of accounting change $ 0.16 $ (0.06) $ 0.21 $ (0.24) $ 0.06
Net income (loss) $ (0.21) $ (0.11) $ 0.25 $ (0.20) $ (0.27)
Weighted average shares 799.4 804.2 805.9 828.4 811.2
Diluted
Income (loss) from continuing
operations before extraordinary
gain and cumulative
effect of accounting change $ 0.15 $ (0.06) $ 0.19 $ (0.24) $ 0.06
Net income (loss) $ (0.19) $ (0.11) $ 0.23 $ (0.20) $ (0.27)
Weighted average shares 877.1 804.2 889.0 828.4 851.7
Common Stock Market Prices:
High 26 7/8 26 3/4 31 3/4 31 3/8
Low 22 1/2 20 23 11/16 26 15/16
</TABLE>
------------------
(1) Includes charges of $32.2 million ($20.4 million, after tax or $0.02
per diluted share) comprised of the costs of the investigations into
previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs. Such charges
were partially offset by a credit of $27.5 million ($18.6 million,
after tax of $0.02 per diluted share) associated with changes to the
original estimate of costs to be incurred in connection with the 1997
Unusual Charges.
(2) Includes charges of: (i) $76.4 million ($49.2 million, after tax or
$0.06 per share) comprised of costs associated with the investigations
into previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs and separation
payments, principally to the Company's former chairman; and (ii) a
$50.0 million ($32.2 million, after-tax or $0.04 per diluted share)
non-cash write off of certain equity investments in interactive
membership businesses and impaired goodwill associated with the
National Library of Poetry, a Company subsidiary.
F-57
<PAGE>
(3) Includes charges of: (i) $433.5 million ($281.7 million, after tax or
$0.33 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers and Providian; (ii) $351.0 million
($228.2 million, after tax or $0.27 per diluted share) of costs
associated with an agreement to settle the PRIDES securities class
action suit, and (iii) $12.4 million (9.9 million, after tax or $0.01
per diluted share) comprised of the costs of the investigations into
previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs and separation
payments. Such charges were partially offset by a credit of $42.8
million ($27.5 million, after tax or $0.03 per diluted share)
associated with changes to the original estimate of costs to be
incurred in connection with the 1997 Unusual Charges.
(4) Represents gains associated with the sales of Hebdo Mag and CDS (see
Note 5 - Discontinued Operations).
(5) Includes Unusual Charges of $295.4 million primarily associated
with the PHH Merger. Unusual Charges of $278.9 million ($208.4 million,
after-tax or $.24 per diluted share) pertained to continuing operations
and $16.5 million were associated with discontinued operations.
(6) Includes Unusual Charges in the net amount of $442.6 million
substantially associated with the Cendant Merger and Hebdo Mag merger.
Net Unusual Charges of $425.2 million ($296.3 million, after-tax or
$.34 per diluted share) pertained to continuing operations and $17.4
million were associated with discontinued operations.
(7) Represents a non-cash after-tax charge of $0.35 per diluted share to
account for the cumulative effect of a change in accounting, effective
January 1, 1997, related to revenue and expenses recognition for
memberships.
(8) Represents the gain on the sale of Interval, which was sold coincident
to the Cendant Merger in consideration of Federal Trade Commission
anti-trust concerns within the timeshare industry.
F-59
Exhibit 12
Cendant Corporation and Subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
In connection with the Company's discovery and announcement of accounting
irregularities, previously reported information for periods prior to December
31, 1994 should not be relied upon. Accordingly, the computation of Ratio of
Earnings to Fixed Charges is presented for years subsequent to and including
December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income from continuing operations before
income taxes, minority interest, extraordinary gain
and cumulative effect of accounting change $ 291.7 $ 229.2 $ 518.6 $ 312.9
Plus: Fixed charges 674.5 407.3 323.6 289.4
Less: Equity income (loss) in unconsolidated affiliates 13.5 51.3 - -
Capitalized interest - - 0.6 -
Minority interest in mandatorily preferred
securities 80.4 - - -
--------- --------- --------- ---------
Earnings available to cover fixed charges $ 872.3 $ 585.2 $ 841.6 $ 602.3
========= ========= ========= =========
Fixed charges (1):
Interest, including amortization of deferred
financing costs $ 509.0 $ 379.0 $ 299.9 $ 270.4
Capitalized interest - - 0.6 -
Other charges, financing costs 27.9 - - -
Minority interest in mandatorily preferred securities 80.4 - - -
Interest portion of rental payment 57.2 28.3 23.1 19.0
--------- --------- --------- ---------
Total fixed charges $ 674.5 $ 407.3 $ 323.6 $ 289.4
========= ========= ========= =========
Ratio of earnings to fixed charges (2) 1.29x 1.44x 2.60x 2.08x
========= ========= ========= =========
</TABLE>
- ---------------
(1) 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).
(2) For the years ended December 31, 1998, 1997, 1996 and 1995, income from
continuing operations before income taxes, minority interest,
extraordinary gain and cumulative effect of accounting change includes
non-recurring other charges of $810.4 million (exclusive of financing
costs of $27.9 million), $704.1 million, $109.4 million and $97.0
million, respectively. Excluding such charges, the ratio of earnings to
fixed charges for the years ended December 31, 1998, 1997, 1996 and 1995
is 2.49x, 3.17x, 2.94x and 2.42x, respectively.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Cendant Corporation's
Registration Statement Nos. 333-11035, 333-17323, 333-17411, 333-20391,
333-23063, 333-26927, 333-35707, 333-35709, 333-45155, 333-45227, and 333-49405
on Form S-3, and Registration Statement Nos. 33-74066, 33-91658, 333-00475,
333-03237, 33-58896, 33-91656, 333-03241, 33-26875, 33-75682, 33-93322,
33-93372, 33-75684, 33-80834, 33-74068, 33-41823, 33-48175, 333-09633,
333-09655, 333-09637, 333-22003, 333-30649, 333-42503, 333-34517-2, 333-42549,
333-45183, 333-47537 and 333-69505 on Form S-8 of our report dated May 10, 1999,
(which expresses an unqualified opinion and includes explanatory paragraphs
relating to certain litigation as described in Note 18, and the change in the
method of recognizing revenue and membership solicitation costs as described in
Note 2) appearing in this Annual Report on Form 10-K/A of Cendant Corporation
for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
May 10, 1999
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PHH Corporation:
We consent to the incorporation by reference in Registration Statement Nos.
333-11035, 333-17323, 333-17411, 333-20391, 333-26927, 333-35709, 333-35707,
333-23063, 333-45155, 333-45227 and 333-49405 on Forms S-3 and in Registration
Statement Nos. 33-26875, 33-75682, 33-93322, 33-41823, 33-48175, 33-58896,
33-91656, 333-03241, 33-74068, 33-74066, 33-91658, 333-00475, 333-03237,
33-75684, 33-80834, 33-93372, 333-09633, 333-09637, 333-09655, 333-22003,
333-34517-2, 333-42503, 333-30649, 333-42549, 333-45183, 333-47537 and 333-69505
on Forms S-8 for Cendant Corporation of our report dated April 30, 1997, with
respect to the consolidated statements of income, shareholder's equity and cash
flows of PHH Corporation and subsidiaries (the "Company") for the year ended
December 31, 1996, before the restatement related to the merger of Cendant
Corporation's relocation business with the Company and reclassifications to
conform to the presentation used by Cendant Corporation, which report is
included in the Annual Report on Form 10-K/A of Cendant Corporation for the year
ended December 31, 1998.
KPMG LLP
/s/ KPMG LLP
Baltimore, Maryland
May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY TO BE
REFERENCED TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE IN MILLIONS, EXCEPT PER
SHARE DATA.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 1,007 65 0
<SECURITIES> 0 0 0
<RECEIVABLES> 1,601 1,183 0
<ALLOWANCES> 110 61 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 4,572 2,657 0
<PP&E> 1,886 832 0
<DEPRECIATION> 466 301 0
<TOTAL-ASSETS> 20,202 14,042 0
<CURRENT-LIABILITIES> 2,857 2,520 0
<BONDS> 3,363 1,246 0
1,472 0 0
0 0 0
<COMMON> 9 8 0
<OTHER-SE> 4,827 3,913 0
<TOTAL-LIABILITY-AND-EQUITY> 20,202 14,042 0
<SALES> 0 0 0
<TOTAL-REVENUES> 5,087 4,052 3,063
<CGS> 0 0 0
<TOTAL-COSTS> 3,843 3,068 2,421
<OTHER-EXPENSES> 838 704 109
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 114 51 14
<INCOME-PRETAX> 292 229 519
<INCOME-TAX> 95 180 214
<INCOME-CONTINUING> 146 49 305
<DISCONTINUED> 394 (10) 25
<EXTRAORDINARY> 0 27 0
<CHANGES> 0 (283) 0
<NET-INCOME> 540 (217) 330
<EPS-PRIMARY> .64 (.27) .44
<EPS-DILUTED> .61 (.27) .41
</TABLE>
