<PAGE>
EXHIBIT 99.3
INDEX TO RESTATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999,
1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the accompanying consolidated balance sheets of Cendant
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1999. 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 conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1997, the Company changed its method of recognizing revenue and
membership solicitation costs for its individual membership business.
As discussed in Notes 1 and 4, the accompanying consolidated financial
statements have been restated to reflect the discontinuance of the Company's
individual membership segment on October 25, 2000 (the "Measurement Date"). The
results prior to the Measurement Date are included in income (loss) from
discontinued operations in the accompanying consolidated financial statements.
/s/ Deloitte & Touche LLP
New York, New York
November 24, 2000
F-2
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
REVENUES
Service fees, net $ 4,302 $ 4,262 $ 3,396
Fleet leasing (net of depreciation and interest costs of $670,
$1,279 and $1,205) 30 89 60
Other 189 114 97
------- ------- -------
Net revenues 4,521 4,465 3,553
------- ------- -------
EXPENSES
Operating 1,605 1,652 1,130
Marketing and reservation 596 622 623
General and administrative 537 544 537
Depreciation and amortization 347 303 222
Other charges:
Litigation settlement and related costs 2,894 351 --
Termination of proposed acquisitions 7 433 --
Executive terminations -- 53 --
Investigation-related costs 21 33 --
Merger-related costs and other unusual charges (credits) 25 (67) 701
Investigation-related financing costs -- 35 --
Interest, net 196 112 51
------- ------- -------
Total expenses 6,228 4,071 3,264
------- ------- -------
Net gain on dispositions of businesses 967 -- --
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (740) 394 289
Provision (benefit) for income taxes (468) 135 207
Minority interest, net of tax 61 51 --
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (333) 208 82
Discontinued operations:
Income (loss) from discontinued operations, net of tax 104 (73) (42)
Gain on sale of discontinued operations, net of tax 174 405 --
------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (55) 540 40
Extraordinary gain, net of tax -- -- 26
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (55) 540 66
Cumulative effect of accounting change, net of tax -- -- (283)
------- ------- -------
NET INCOME (LOSS) $ (55) $ 540 $ (217)
======= ======= =======
INCOME (LOSS) PER SHARE
BASIC
Income (loss) from continuing operations $ (0.44) $ 0.25 $ 0.10
Income (loss) from discontinued operations 0.14 (0.09) (0.05)
Gain on sale of discontinued operations 0.23 0.48 --
Extraordinary gain -- -- 0.03
Cumulative effect of accounting change -- -- (0.35)
------- ------- -------
NET INCOME (LOSS) $ (0.07) $ 0.64 $ (0.27)
======= ======= =======
DILUTED
Income (loss) from continuing operations $ (0.44) $ 0.24 $ 0.10
Income (loss) from discontinued operations 0.14 (0.09) (0.05)
Gain on sale of discontinued operations 0.23 0.46 --
Extraordinary gain -- -- 0.03
Cumulative effect of accounting change -- -- (0.35)
------- ------- -------
NET INCOME (LOSS) $ (0.07) $ 0.61 $ (0.27)
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,168 $ 1,002
Receivables (net of allowance for doubtful accounts of $68 and $99) 991 1,485
Deferred income taxes 1,305 319
Other current assets 771 854
Net assets of discontinued operations -- 374
-------- -------
Total current assets 4,235 4,034
-------- -------
Property and equipment (net of accumulated depreciation of $325
and $426) 1,279 1,378
Franchise agreements (net of accumulated amortization of $216 and $169) 1,410 1,363
Goodwill (net of accumulated amortization of $286 and $230) 3,106 3,744
Other intangibles (net of accumulated amortization of $113 and $91) 655 742
Other assets 1,120 648
-------- -------
Total assets exclusive of assets under programs 11,805 11,909
-------- -------
Assets under management and mortgage programs
Relocation receivables 530 659
Mortgage loans held for sale 1,112 2,416
Mortgage servicing rights 1,084 636
Net investment in leases and leased vehicles -- 3,801
-------- -------
2,726 7,512
-------- -------
TOTAL ASSETS $ 14,531 $19,421
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,152 $ 1,369
Current portion of debt 400 --
Shareholder litigation settlement and related costs 2,892 --
Deferred income 228 368
Net liabilities of discontinued operations 241 318
-------- -------
Total current liabilities 4,913 2,055
-------- -------
Deferred income 413 222
Long-term debt 2,445 3,363
Other noncurrent liabilities 452 235
-------- -------
Total liabilities exclusive of liabilities under programs 8,223 5,875
-------- -------
Liabilities under management and mortgage programs
Debt 2,314 6,897
Deferred income taxes 310 341
-------- -------
2,624 7,238
-------- -------
Mandatorily redeemable preferred securities issued by subsidiary holding
solely senior debentures issued by the Company 1,478 1,472
-------- -------
Commitments and contingencies (Note 17)
Shareholders' equity
Preferred stock, $.01 par value -- authorized 10 million shares; none
issued and outstanding -- --
Common stock, $.01 par value -- authorized 2 billion shares; issued
870,399,635 and 860,551,783 shares 9 9
Additional paid-in capital 4,102 3,863
Retained earnings 1,425 1,480
Accumulated other comprehensive loss (42) (49)
Treasury stock, at cost, 163,818,148 and 27,270,708 shares (3,288) (467)
-------- -------
Total shareholders' equity 2,206 4,836
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,531 $19,421
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (55) $ 540 $ (217)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities from continuing operations:
(Income) loss from discontinued operations, net of tax (104) 73 42
Gain on sale of discontinued operations, net of tax (174) (405) --
Extraordinary gain, net of tax -- -- (26)
Cumulative effect of accounting change, net of tax -- -- 283
Asset impairments and termination benefits -- 63 --
Net gain on dispositions of businesses (967) -- --
Litigation settlement and related costs 2,894 351 --
Merger-related costs and other unusual charges (credits) 25 (67) 701
Payments of merger-related costs and other unusual charges (49) (149) (301)
Depreciation and amortization 347 303 222
Proceeds from sales of trading securities 180 136 --
Purchases of trading securities (147) (182) --
Deferred income taxes 289 (254) (35)
Net change in assets and liabilities from continuing operations:
Receivables (184) (129) (99)
Deferred membership commission costs -- (87) --
Income taxes receivable (133) (98) (84)
Accounts payable and other current liabilities (478) 111 78
Deferred income 39 5 (347)
Other, net (312) 16 (153)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 1,171 227 64
--------- --------- ---------
Management and mortgage programs:
Depreciation and amortization 698 1,260 1,122
Origination of mortgage loans (25,025) (26,572) (12,217)
Proceeds on sale and payments from mortgage loans
held for sale 26,328 25,792 11,829
--------- --------- ---------
2,001 480 734
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS 3,172 707 798
--------- --------- ---------
INVESTING ACTIVITIES
Property and equipment additions (254) (331) (153)
Proceeds from sales of marketable securities 741 -- 506
Purchases of marketable securities (672) -- (458)
Investments (18) (24) (273)
Net assets acquired (net of cash acquired) and
acquisition-related payments (205) (2,731) (567)
Net proceeds from dispositions of businesses 3,365 314 224
Other, net 53 113 (109)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE
PROGRAMS 3,010 (2,659) (830)
--------- --------- ---------
</TABLE>
F-5
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ --------------
<S> <C> <C> <C>
Management and mortgage programs:
Investment in leases and leased vehicles $ (2,378) $ (2,447) $(2,069)
Payments received on investment in leases and leased
vehicles 1,529 987 589
Proceeds from sales and transfers of leases and leased
vehicles to third parties 75 183 186
Equity advances on homes under management (7,608) (6,484) (6,845)
Repayment on advances on homes under
management 7,688 6,624 6,863
Additions to mortgage servicing rights (727) (524) (270)
Proceeds from sales of mortgage servicing rights 156 119 49
-------- -------- -------
(1,265) (1,542) (1,497)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS 1,745 (4,201) (2,327)
-------- -------- -------
FINANCING ACTIVITIES
Proceeds from borrowings 1,719 4,809 67
Principal payments on borrowings (2,213) (2,596) (174)
Issuance of convertible debt -- -- 544
Issuance of common stock 127 171 132
Repurchases of common stock (2,863) (258) (171)
Proceeds from mandatorily redeemable preferred
securities issued by subsidiary holding solely senior
debentures issued by the Company -- 1,447 --
Other, net -- -- (7)
-------- -------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS (3,230) 3,573 391
-------- -------- ---------
Management and mortgage programs:
Proceeds received for debt repayment in connection
with disposal of fleet segment 3,017 -- --
Proceeds from debt issuance or borrowings 5,263 4,300 2,816
Principal payments on borrowings (7,838) (3,090) (1,693)
Net change in short-term borrowings (2,000) (93) (613)
-------- -------- ---------
(1,558) 1,117 510
-------- -------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS (4,788) 4,690 901
-------- -------- ---------
Effect of changes in exchange rates on cash and cash
equivalents 51 (16) 15
-------- -------- ---------
Net cash provided by (used in) discontinued operations (14) (266) 563
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 166 914 (50)
Cash and cash equivalents, beginning of period 1,002 88 138
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,168 $ 1,002 $ 88
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments $ 447 $ 540 $ 375
======== ======== =========
Income tax payments (refunds), net $ (46) $ (23) $ 265
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
--------- -------- ------------ ------------ --------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 808 $ 8 $2,843 $1,186 $ (6) $ (75) $3,956
COMPREHENSIVE LOSS:
Net loss -- -- -- (217) -- --
Currency translation
adjustment -- -- -- -- (28) --
Unrealized loss on
marketable securities,
net of tax of $2 -- -- -- -- (4) --
TOTAL COMPREHENSIVE LOSS (249)
Issuance of common stock 6 -- 46 -- -- -- 46
Exercise of stock options 11 -- 133 -- -- (18) 115
Tax benefit from exercise of
stock options -- -- 94 -- -- -- 94
Amortization of restricted stock -- -- 28 -- -- -- 28
Cash dividends declared -- -- -- (7) -- -- (7)
Adjustment to reflect change in
fiscal year from Cendant
Merger -- -- -- (22) -- -- (22)
Conversion of convertible notes 20 -- 151 -- -- -- 151
Repurchase of common stock -- -- -- -- -- (171) (171)
Retirement of treasury stock (7) -- (190) -- -- 190 --
Other -- -- (20) -- -- -- (20)
---- --- ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1997 838 8 3,085 940 (38) (74) 3,921
COMPREHENSIVE INCOME:
Net income -- -- -- 540 -- --
Currency translation
adjustment -- -- -- -- (11) --
TOTAL COMPREHENSIVE INCOME 529
Exercise of stock options 17 1 168 -- -- -- 169
Tax benefit from exercise of
stock options -- -- 147 -- -- -- 147
Conversion of convertible notes 6 -- 114 -- -- -- 114
Repurchase of common stock -- -- -- -- -- (258) (258)
Mandatorily redeemable
preferred securities
issued by subsidiary
holding solely senior
debentures issued by the
Company -- -- (66) -- -- -- (66)
Common stock received as
consideration in sale of
discontinued operations -- -- -- -- -- (135) (135)
Rights issuable -- -- 350 -- -- -- 350
Other -- -- 65 -- -- -- 65
---- --- ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1998 861 $ 9 $3,863 $1,480 $(49) $ (467) $4,836
</TABLE>
F-7
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
----------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) STOCK EQUITY
-------- -------- ------------ ---------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 861 $ 9 $3,863 $1,480 $ (49) $ (467) $ 4,836
COMPREHENSIVE LOSS:
Net loss -- -- -- (55) -- --
Currency translation
adjustment -- -- -- -- (69) --
Unrealized gain on
marketable securities,
net of tax of $22 -- -- -- -- 37 --
Reclassification adjustments,
net of tax of $13 -- -- -- -- 39 --
TOTAL COMPREHENSIVE LOSS (48)
Exercise of stock options 9 -- 81 -- -- 42 123
Tax benefit from exercise of
stock options -- -- 52 -- -- -- 52
Repurchase of common stock -- -- -- -- -- (2,863) (2,863)
Modifications of stock option
plans due to dispositions of
businesses -- -- 83 -- -- -- 83
Rights issuable -- -- 22 -- -- -- 22
Other -- -- 1 -- -- -- 1
--- --- ------ ------ ----- -------- --------
BALANCE AT DECEMBER 31, 1999 870 $ 9 $4,102 $1,425 $ (42) $ (3,288) $ 2,206
=== === ====== ====== ===== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cendant Corporation is a global provider of a wide range of complementary
consumer and business services. The Consolidated Financial Statements
include the accounts of Cendant Corporation and its wholly-owned
subsidiaries (collectively, "the Company" or "Cendant"). In presenting the
Consolidated Financial Statements, management makes estimates and
assumptions that affect reported amounts and related disclosures. Estimates,
by their nature, are based on judgement and available information. As such,
actual results could differ from those estimates. Certain reclassifications
have been made to prior year amounts to conform to the current year
presentation. Unless otherwise noted, all dollar amounts presented are in
millions, except per share amounts.
On October 25, 2000, the Company's Board of Directors committed to a plan to
complete a tax-free spin-off of the Company's individual membership segment
(consisting of Cendant Membership Services, Inc. ("CMS"), a wholly-owned
subsidiary) and loyalty business (consisting of Cendant Incentives, formerly
National Card Control Inc., a wholly-owned subsidiary within the insurance/
wholesale segment) through a special dividend to CD common stockholders. In
connection with the planned spin-off, the account balances and activities of
the Company's individual membership segment were segregated and reported as
a discontinued operation for all periods presented (see Note 4 --
Discontinued Operations).
INVESTMENTS IN AFFILIATES
Investments in affiliates over which the Company has significant influence
but not a controlling interest are carried on the equity basis of
accounting.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
DEPRECIATION AND AMORTIZATION
Property and equipment is depreciated based upon a straight-line method over
the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed utilizing the straight-line method over the
estimated useful lives of the related assets or the lease term, if shorter.
Franchise agreements for hotel, real estate brokerage, car rental and tax
return preparation services are amortized on a straight-line basis over the
estimated periods to be benefited, ranging from 12 to 40 years.
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 periods
to be benefited, substantially ranging from 25 to 40 years.
Other intangibles are amortized on a straight-line method over the estimated
periods to be benefited.
ASSET IMPAIRMENT
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. Any enterprise goodwill and franchise
agreements are also evaluated using the undiscounted cash flow method.
Based on an evaluation of its intangible assets and in connection with the
Company's regular forecasting processes during 1998, the Company determined
that $37 million of goodwill associated
F-9
<PAGE>
with a Company subsidiary, National Library of Poetry, was permanently
impaired. In addition, the Company had equity investments in various
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 million of such investments in 1998. The
aforementioned impairments impacted the Company's diversified 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. Annual rebates given to certain
franchisees on royalty fees are recorded as a reduction to revenues and are
accrued in direct proportion to the recognition of the underlying gross
franchise revenue. 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 subscribing members. Subscription
revenue represents the fees from subscribing members. There is no separate
fee charged for the participation in the timeshare exchange network.
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 the subscribing
members. Subscriptions are cancelable and refundable on a prorata basis.
Subscription procurement costs are expensed as incurred. Such costs were $31
million for each of the years ended December 31, 1999 and 1998 and $27
million for the year ended December 31, 1997.
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 share of the excess of
premiums paid to insurance carriers less claims experience to date, claims
incurred but not reported and carrier management expenses. Such profit
commissions are accrued based on claims experience to date, including an
estimate of claims incurred but not reported.
During 1999, the Company changed the amortization period for customer
acquisition costs related to accidental death and dismemberment insurance
products, which resulted in a reduction in expenses of $16 million ($10
million, after tax or $0.01 per diluted share). The change was based upon
new information becoming available to determine customer retention rates.
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 the home based
on their ownership equity of the appraised home value. 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. 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 generally advances funds to cover a portion of such
carrying costs.
Revenues and related costs associated with the purchase and resale of a
transferee's residence are recognized as services are provided. Relocation
services revenue is generally recorded net of costs
F-10
<PAGE>
reimbursed by client corporations and interest expense incurred to fund the
purchase of a transferee's residence. Revenue for other fee-based programs,
such as home marketing assistance, household goods moves, and destination
services are recognized over the periods in which the services are provided
and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection with the
sale of loans, and certain direct loan origination costs associated with
loans are deferred until such loans are sold. Mortgage loans are recorded at
the lower of cost or market value on an aggregate basis. Sales of mortgage
loans are generally recorded on the date a loan is delivered to an investor.
Gains or losses on sales of mortgage loans are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans sold. See Note 9 -- Mortgage Loans Held For Sale.
Fees received for servicing loans owned by investors are credited to income
when earned. Costs associated with loan servicing are charged to expense as
incurred.
Mortgage servicing rights ("MSRs") are 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 net servicing
revenue in the Consolidated Statements of Operations. 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. 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 10 -- Mortgage Servicing Rights.
Fleet. The Company primarily leased its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). Each lease was either
classified as an operating lease or a direct financing lease, as defined.
Lease revenues were recognized based on rentals. Revenues from fleet
management services other than leasing were recognized over the period in
which services were provided and the related expenses were incurred. See
Note 3 -- Dispositions and Acquisitions of Businesses.
ADVERTISING EXPENSES
Advertising costs are generally expensed in the period incurred. Advertising
expenses for the years ended December 31, 1999, 1998 and 1997 were $175
million, $151 million and $167 million, respectively.
CHANGE IN ACCOUNTING POLICY
In August 1998, the Company changed its accounting policy with respect to
revenue and expense recognition for its membership businesses, effective
January 1, 1997. Prior to such adoption, the Company recorded deferred
membership income, net of estimated cancellations, at the time members were
billed (upon expiration of the free trial period), which was recognized as
revenue ratably over the membership term and modified periodically based on
actual cancellation experience. In addition, membership acquisition and
renewal costs, which related primarily to membership solicitations, were
capitalized as direct response advertising costs due to the Company's
ability to demonstrate that the direct response advertising resulted in
future economic benefits. Such costs were amortized on a straight-line basis
as revenues were recognized (over the average membership period).
The Company concluded that when membership fees are fully refundable during
the entire membership period, membership revenue should be recognized at the
end of the membership period upon the expiration of the refund offer. The
Company further concluded that non-refundable solicitation costs should be
expensed as incurred since such costs are not recoverable if membership fees
are refunded. The Company adopted such accounting policy effective January
1, 1997 and accordingly, recorded a non-cash charge of $450 million ($283
million, after tax) on such date to account for the cumulative effect of the
accounting change, which related primarily to its discontinued membership
business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial
F-11
<PAGE>
Accounting Standards ("SFAS") No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
was previously amended by SFAS No. 137 " Accounting For Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," which deferred the effective date of SFAS No. 133 to
fiscal years commencing after June 15, 2000. The Company has appointed a
team to implement these standards on an enterprise-wide basis. The Company
has identified certain contracts, which contain embedded derivatives, and
additional freestanding derivatives as defined by SFAS No. 133. Completion
of the Company's implementation plan and determination of the impact of
adopting these standards is expected by the end of the fourth quarter of
2000. Since the impact is dependent upon market fluctuations and the
notional value of such contracts at the time of adoption, the impact of
adopting these standards is not fully determinable. However, the Company
currently does not anticipate material changes to any of its existing
hedging strategies as a result of such adoption. The Company will adopt SFAS
No. 138 concurrently with SFAS No. 133 on January 1, 2001, as required.
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of FASB Statement No. 125." SFAS No. 140 revises criteria for
accounting for securitizations, other financial-asset transfers, and
collateral and introduces new disclosures, but otherwise carries forward
most of the provisions of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" without
amendment. The Company will adopt SFAS No. 140 on December 31, 2000, as
required.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 draws upon the existing accounting rules and
explains those rules, by analogy, to other transactions that the existing
rules do not specifically address. In accordance with SAB No. 101, the
Company will revise certain revenue recognition policies regarding the
recognition of non-refundable one-time fees and the recognition of pro rata
refundable subscription revenues. The Company currently recognizes
non-refundable one-time fees at the time of contract execution and cash
receipt. This policy will be changed to the recognition of non-refundable
one-time fees on a straight line basis over the life of the underlying
contract. The Company currently recognizes revenue equal to procurement cost
upon initiation of a subscription. Additionally, the Company currently
recognizes pro rata refundable subscription revenue, equal to procurement
costs upon initiation of a subscription. Additionally, the amount in excess
of procurement costs is recognized over the subscription period. This policy
will be changed to recognition of the pro rata refundable subscription
revenue on a straight line basis over the subscription period. Procurement
costs will continue to be expensed as incurred. The percentage of annual
revenues earned from non-refundable one-time fees and from refundable
subscription revenues is not material to consolidated net revenues. The
Company will adopt SAB No. 101 on January 1, 2000, and will record a
non-cash charge of approximately $89 million ($56 million, after tax) to
account for the cumulative effect of the accounting change.
2.EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed based solely on the weighted
average number of common shares outstanding during the period. Diluted EPS
further reflects all potential dilution of common stock, including the
assumed exercise of stock options and warrants using the treasury method,
and convertible debt. At December 31, 1999, 183 million stock options (with
a weighted average exercise price of $15.24 per option) and 2 million stock
warrants (with a weighted average exercise price of $16.77 per warrant) were
outstanding and antidilutive. At December 31, 1998 and 1997, 38 million
stock options (with a weighted average exercise price of $29.58 per option)
and 54 million stock options (with a weighted average exercise price of
$31.16 per option), respectively, were outstanding and antidilutive.
Therefore, such options and warrants were excluded from the computation of
diluted EPS. In addition, the Company's 3% convertible subordinated notes
F-12
<PAGE>
convertible into 18 million shares of Company common stock were antidultive;
therefore, such notes were excluded from the computation of diluted EPS at
December 31, 1999, 1998 and 1997. Diluted weighted average shares were
calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
(IN MILLIONS) ------ ------ -----
<S> <C> <C> <C>
Weighted average shares for basic EPS 751 848 811
Stock options -- 32 41
--- --- ---
Weighted average shares for diluted EPS 751 880 852
=== === ===
</TABLE>
3.DISPOSITIONS AND ACQUISITIONS OF BUSINESSES
DISPOSITIONS
Entertainment Publications, Inc. On November 30, 1999, the Company completed
the sale of approximately 85% of its Entertainment Publications, Inc.
("EPub") business unit for $281 million in cash. The Company retained
approximately 15% of EPub's common equity in connection with the
transaction. In addition, the Company has a designee on EPub's Board of
Directors. The Company accounts for its investment in EPub using the equity
method. The Company realized a net gain of approximately $156 million ($78
million, after tax). EPub is a marketer and publisher of coupon books and
discount programs which provides customers with unique products and services
that are designed to enhance a customer's purchasing power.
Green Flag. On November 26, 1999, the Company completed the sale of its
Green Flag business unit for approximately $401 million in cash, including
dividends of $37 million. The Company realized a net gain of approximately
$27 million ($8 million, after tax). Green Flag is a roadside assistance
organization based in the UK, which provides a wide range of emergency
support and rescue services.
Fleet. On June 30, 1999, the Company completed the disposition of the fleet
business segment ("fleet segment" or "fleet businesses") pursuant to an
agreement between PHH Corporation ("PHH"), a wholly-owned subsidiary of the
Company, and Avis Rent A Car, Inc. ("ARAC," subsequently renamed Avis Group
Holdings, Inc.) Pursuant to the agreement, ARAC acquired the net assets of
the fleet businesses through the assumption and subsequent repayment of
$1.44 billion of intercompany debt and the issuance of $360 million of
convertible preferred stock of Avis Fleet Leasing and Management Corporation
("Avis Fleet"), a wholly-owned subsidiary of ARAC. Coincident with the
closing of the transaction, ARAC refinanced the assumed debt under
management programs which was payable to the Company. Accordingly, the
Company received additional consideration from ARAC comprised of $3.0
billion of cash proceeds and a $30 million receivable.
The convertible preferred stock of Avis Fleet is convertible into common
stock of ARAC at the Company's option upon the satisfaction of certain
conditions, including the per share price of ARAC Class A common stock
equaling or exceeding $50 per share and the fleet segment attaining certain
EBITDA (earnings before interest, income taxes, depreciation and
amortization) thresholds, as defined. There are additional circumstances
upon which the shares of Avis Fleet convertible preferred stock are
automatically or mandatorily convertible into ARAC common stock.
The Company realized a net gain on the disposition of the fleet business
segment of $881 million ($866 million, after tax) of which $715 million
($702 million, after tax) was recognized at the time of closing and $166
million ($164 million, after tax) was deferred at the date of disposition.
The realized gain is net of approximately $90 million of transaction costs.
The Company deferred the portion of the realized net gain, which was
equivalent to its common equity ownership percentage in ARAC at the time of
closing. The deferred gain is being recognized into income over forty years,
which is consistent with the period ARAC is amortizing the goodwill
generated from the transaction and is included within other revenue in the
Consolidated Statements of Operations ($2 million in 1999). During 1999, the
Company recognized $9 million of the deferred portion of the realized net
gain due to the sale of a portion of the Company's ownership of ARAC. The
deferred net gain is included in deferred income as presented in the
Consolidated Balance Sheet at December 31, 1999. The fleet segment
disposition
F-13
<PAGE>
was structured as a tax-free reorganization and, accordingly, no tax
provision has been recorded on a majority of the gain. However, pursuant to
a recent interpretive ruling, the Internal Revenue Service ("IRS") has taken
the position that similarly structured transactions do not qualify as
tax-free reorganizations under the Internal Revenue Code Section
368(a)(1)(A). If the transaction is not considered a tax-free
reorganization, the resultant incremental liability could range between $10
million and $170 million depending upon certain factors including
utilization of tax attributes and contractual indemnification provisions.
Notwithstanding the IRS interpretive ruling, the Company believes that,
based upon analysis of current tax law, its position would prevail, if
challenged.
Other 1999 Dispositions. The Company completed the dispositions of certain
businesses, including Central Credit, Inc., Global Refund Group, Spark
Services, Inc., National Leisure Group and National Library of Poetry.
Aggregate consideration received on such dispositions was comprised of
approximately $265 million in cash, including dividends of $21 million in
marketable securities. The Company realized a net gain of $60 million ($5
million loss, after tax) on the dispositions of these businesses.
Interval International Inc. On December 17, 1997, as directed by the Federal
Trade Commission in connection with a merger, the Company sold all of the
outstanding shares of its timeshare exchange businesses, Interval
International Inc., for net proceeds of $240 million less transaction
related costs amortized as services were provided. The Company recognized a
gain on the sale of Interval of $77 million ($26 million, after tax), which
was reflected as an extraordinary gain in the Consolidated Statements of
Operations.
ACQUISITIONS
During 1998, the Company completed the acquisitions of National Parking
Corporation Limited ("NPC"), The Harpur Group Ltd. ("Harpur"), Jackson
Hewitt Inc. ("Jackson Hewitt") and certain other entities, which were
accounted for using the purchase method of accounting. Accordingly, assets
acquired and liabilities assumed were recorded at their fair values. The
excess of purchase price over the fair value of the underlying net assets
acquired was allocated to goodwill. During 1999 and 1998, the Company
recorded additional goodwill of $50 million and $100 million, respectively,
in satisfaction of a contingent purchase liability to the seller of Resort
Condominiums International, Inc., a company acquired in 1996. The operating
results of such acquired entities are included in the Company's Consolidated
Statements of Operations since the respective dates of acquisition. The
following table presents information about the acquisitions.
<TABLE>
<CAPTION>
JACKSON
NPC HARPUR HEWITT OTHER
--------- -------- -------- -----------
<S> <C> <C> <C> <C>
Cash paid $1,638 $206 $476 $ 564
Fair value of identifiable net assets
acquired (1) 590 51 99 218
------ ---- ---- -------
Goodwill $1,048 $155 $377 $ 346
====== ==== ==== =======
Goodwill benefit period (years) 40 40 40 25 to 40
====== ==== ==== ===========
</TABLE>
(1) Cash acquired in connection with these acquisitions was $58 million.
4.DISCONTINUED OPERATIONS
On October 25, 2000, the Company's Board of Directors committed to a plan to
complete a tax-free spin-off of the Company's individual membership segment
and loyalty business through a special dividend to CD common stockholders.
The final transaction is expected to be completed by mid-2001. See Note 1 --
Summary of Significant Accounting Policies.
On January 12, 1999, the Company completed the sale of Cendant Software
Corporation ("CDS"), a developer, publisher and distributor of educational
and entertainment software, for net cash proceeds of $770 million. The
Company realized a net gain of $323 million ($372 million, after tax)
F-14
<PAGE>
on the disposition of CDS, of which $299 million ($174 million, after tax)
was recognized during 1999 and $24 million ($198 million, after tax) was
recognized during 1998, substantially in the form of a tax benefit and
corresponding deferred tax asset.
On December 15, 1998, the Company completed the sale of Hebdo Mag
International, Inc. ("Hebdo Mag"), a publisher and distributor of classified
advertising information. The Company received $315 million in cash and 7
million shares of Company common stock valued at $135 million (approximately
$19 per share market value) on the date of sale. The Company recognized a
net gain of $155 million ($207 million, after tax) on the sale of Hebdo Mag
partially in the form of a tax benefit.
Summarized financial data of discontinued operations for the years ended
December 31, consisted of:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
CMS CDS HEBDO MAG
------------------------------ -------------------- -------------------
1999 1998 1997 1998 1997 1998 1997
------ --------- --------- --------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $895 $ 836 $ 702 $ 346 $434 $202 $209
---- ----- ----- ----- ---- ---- ----
Income (loss) before income taxes $166 $ (79) $ (32) $ (57) $ (6) $ 17 $ (4)
Provision (benefit) for income taxes 62 (31) (16) (23) 2 8 (1)
Extraordinary loss from early
extinguishment of debt, net of $5
million tax benefit -- -- -- -- -- -- (15)
---- ----- ----- ----- ---- ---- ------
Net income (loss) $104 $ (48) $ (16) $ (34) $ (8) $ 9 $(18)
==== ===== ===== ===== ==== ==== ======
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
CMS CDS
----------------------- ---------
1999 1998 1998
--------- ----------- ---------
<S> <C> <C> <C>
Current assets $ 357 $ 513 $ 285
Goodwill 164 179 106
Other assets 96 103 88
Total liabilities (858) (1,113) (105)
------ -------- ------
Net assets (liabilities) of
discontinued operations $ (241) $ (318) $ 374
====== ======== ======
</TABLE>
5.OTHER CHARGES
LITIGATION SETTLEMENTS
Common Stock Litigation Settlement. On December 7, 1999, the Company reached
a preliminary agreement to settle the principal securities class action
pending against the Company, other than certain claims relating to FELINE
PRIDES securities discussed below. This settlement is subject to final
documentation and court approval. See Note 17 -- Commitments and
Contingencies.
FELINE PRIDES Litigation Settlement. On March 17, 1999, the Company reached
a final agreement (the "FELINE PRIDES settlement") 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. See Note 13 -- Mandatorily Redeemable Trust
Preferred Securities Issued by Subsidiary Holding Solely Senior Debentures
Issued by the Company.
TERMINATION OF PROPOSED ACQUISITIONS
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 not to be commercially feasible and therefore unacceptable. In
connection with such termination, the Company wrote off $7 million of
deferred acquisition costs.
F-15
<PAGE>
On October 13, 1998, the Company and American Bankers Insurance Group, Inc.
("American Bankers") terminated an agreement which provided for the
Company's acquisition of American Bankers. In connection with this
agreement, the Company made a $400 million cash payment to American Bankers
and wrote off $32 million of costs, primarily professional fees, resulting
in a total charge of $432 million.
On October 5, 1998, the Company announced the termination of an agreement to
acquire Providian Auto and Home Insurance Company. In connection with the
termination of this agreement, the Company wrote off $1 million of costs.
EXECUTIVE TERMINATIONS
The Company incurred $53 million of costs on July 28, 1998 related to the
termination of certain former executives, principally Walter A. Forbes, who
resigned as Chairman and as a member of the Board of Directors. Aggregate
benefits given to Mr. Forbes resulted in a charge of $51 million, comprised
of $38 million in cash payments and approximately one million Company stock
options, with a fair value of $13 million, as calculated by the
Black-Scholes model. Such options were immediately vested and expire on July
28, 2008. The main benefit to the Company from Mr. Forbes' termination was
the resolution of the division of governance issues that existed at the time
between the members of the Board of Directors formerly associated with CUC
International, Inc. ("CUC") and the members of the Board of Directors
formerly associated with HFS Incorporated ("HFS").
INVESTIGATION-RELATED COSTS
The Company incurred professional fees, public relations costs and other
miscellaneous expenses of $21 million and $33 million during 1999 and 1998,
respectively, in connection with accounting irregularities and resulting
investigations into such matters.
INVESTIGATION-RELATED 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 $28 million in fees
associated with waivers and various financing arrangements. Additionally,
during 1998, the Company exercised its option to redeem its 43/4%
Convertible Senior Notes (the "43/4% Notes"). At such time, the Company
anticipated that all holders of the 43/4% Notes would elect to convert the
43/4% Notes to Company common stock. However, at the time of redemption,
holders of the 43/4% Notes elected not to convert the 43/4% Notes to Company
common stock resulting in the Company redeeming such notes at a premium.
Accordingly, the Company recorded a $7 million loss on such redemption.
1999 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
During 1999, the Company incurred $23 million of additional charges to fund
an irrevocable contribution to the independent technology trust responsible
for completing the transition of the Company's lodging franchisees to a
Company sponsored property management system and $2 million of costs
primarily resulting from further consolidation of European call centers in
Cork, Ireland which are included below as a component of the 1999 adjustment
activity for the Fourth Quarter 1997 Charge.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
Fourth Quarter 1997 Charge. The Company incurred unusual charges ("Unusual
Charges") in the fourth quarter of 1997 totaling $455 million substantially
associated with the merger of HFS and CUC (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. 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 as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
1997
UNUSUAL 1997 1998 1998
CHARGES REDUCTIONS REDUCTIONS ADJUSTMENTS
--------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Professional fees $ 93 $ (43) $ (38) $(10)
Personnel related 171 (45) (61) (4)
Business terminations 78 (78) 1 (1)
Facility related and
other 113 (92) (5) (12)
----- ------ -------- ------
Total Unusual Charges 455 (258) (103) (27)
Reclassification for
discontinued
operations (21) 21 -- --
----- ------ ------- ------
Total Unusual Charges
related to continuing
operations $ 434 $ (237) $(103) $(27)
===== ====== ======= ======
<CAPTION>
1999 ACTIVITY
BALANCE AT ------------------------ BALANCE AT
DECEMBER 31, CASH DECEMBER 31,
1998 PAYMENTS ADJUSTMENTS 1999
-------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Professional fees $ 2 $(1) $ -- $ 1
Personnel related 61 (5) 3 59
Business terminations -- -- -- ---
Facility related and
other 4 (2) (1) 1
--- ------ ------ ---
Total Unusual Charges 67 (8) 2 61
Reclassification for
discontinued
operations -- -- -- --
--- ----- ----- ---
Total Unusual Charges
related to continuing
operations $67 $(8) $ 2 $ 61
=== ===== ===== ===
</TABLE>
Professional fees primarily consisted of investment banking, legal and
accounting fees incurred in connection with the mergers. Personnel related
costs included $73 million of retirement and employee benefit plan costs,
$24 million of restricted stock compensation, $61 million of severance
resulting from consolidations of European call centers and certain corporate
functions and $13 million of other personnel related costs. The Company
provided for 474 employees to be terminated, substantially all of which have
been severed. Business termination costs consisted of a $48 million
impairment write-down of hotel franchise agreement assets associated with a
quality upgrade program and $30 million of costs incurred to terminate a
contract which may have restricted the Company from maximizing opportunities
afforded by the Cendant Merger. Facility related and other unusual charges
included $70 million of irrevocable contributions to independent technology
trusts for the direct benefit of lodging and real estate franchisees, $16
million of building lease termination costs, and a $22 million reduction in
intangible assets associated with the Company's wholesale annuity business
for which impairment was determined in 1997. During 1999 and 1998, the
Company recorded a net adjustment of $2 million and ($27) million,
respectively, to Unusual Charges with a corresponding increase (decrease) to
liabilities primarily as a result of a change in the original estimate of
costs to be incurred. Such adjustments to original estimates were recorded
in the periods in which events occurred or information became available
requiring accounting recognition. Liabilities of $61 million remained at
December 31, 1999, which were primarily attributable to future severance
costs and executive termination benefits, which the Company anticipates that
such liabilities will be settled upon resolution of related contingencies.
Second Quarter 1997 Charge. The Company incurred $295 million of Unusual
Charges in the second quarter of 1997 primarily associated with the merger
of HFS with PHH in April 1997 (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 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 headquarter
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. The reduction of
liabilities from inception is summarized by category of expenditure as
follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
1999 ACTIVITY
1997 BALANCE AT --------------- BALANCE AT
UNUSUAL 1997 1998 1998 DECEMBER 31, CASH DECEMBER 31,
CHARGES REDUCTIONS REDUCTIONS ADJUSTMENTS 1998 PAYMENTS 1999
--------- ------------ ------------ ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Professional fees $ 30 $ (29) $ -- $ (1) $ -- $ -- $ --
Personnel related 154 (112) (13) (19) 10 (2) 8
Business terminations 56 (52) 3 (6) 1 (1) --
Facility related and
other 43 (14) (10) (14) 5 (2) 3
----- ------ ----- ------ ---- ------ ----
Total Unusual Charges 283 (207) (20) (40) 16 (5) 11
Reclassification for
discontinued
operations (16) 16 -- -- -- -- --
----- ------ ----- ------ ---- ----- ----
Total Unusual Charges
related to continuing
operations $ 267 $ (191) $ (20) $(40) $ 16 $(5) $ 11
===== ====== ===== ====== ==== ===== ====
</TABLE>
Professional fees were primarily comprised of investment banking,
accounting, and legal fees incurred in connection with the PHH Merger.
Personnel related costs were 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. Business terminations were comprised of
$39 million of costs to exit certain activities primarily within the
Company's fleet management business (including $36 million of asset
write-offs associated with exiting certain activities), a $7 million
termination fee associated with a joint venture that competed with the PHH
Mortgage Services business (now Cendant Mortgage Corporation) and $10
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 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 second quarter
1997 restructuring activities at December 31, 1998. During the year ended
December 31, 1998, the Company recorded a net adjustment of $40 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. Such
adjustments to original estimates were recorded in the periods in which
events occurred or information became available requiring accounting
recognition. Liabilities of $11 million remained at December 31, 1999, which
were attributable to future severance and lease termination payments. The
Company anticipates that severance will be paid in installments through
April 2003 and the lease terminations will be paid in installments through
August 2002.
6.PROPERTY AND EQUIPMENT -- NET
Property and equipment -- net consisted of:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1999 1998
------------- -------- ---------
<S> <C> <C> <C>
Land -- $ 145 $ 153
Building and leasehold improvements 5 -- 50 674 721
Furniture, fixtures and equipment 3 -- 10 785 930
------ ------
1,604 1,804
Less accumulated depreciation and amortization 325 426
------ ------
$1,279 $1,378
====== ======
</TABLE>
F-18
<PAGE>
7.OTHER INTANGIBLES -- NET
Other intangibles -- net consisted of:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
BENEFIT PERIODS ----------------
IN YEARS 1999 1998
---------------- ------ -------
<S> <C> <C> <C>
Avis trademark 40 $402 $402
Other trademarks 40 161 171
Customer lists 3 -- 10 140 153
Other 3 -- 25 65 107
---- ----
768 833
Less accumulated amortization 113 91
---- ----
$655 $742
==== ====
</TABLE>
8.ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Accounts payable $ 314 $ 445
Merger and acquisition obligations 93 109
Accrued payroll and related 228 178
Advances from relocation clients 80 60
Other 437 577
------ ------
$1,152 $1,369
====== ======
</TABLE>
9.MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. 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. At December 31, 1999 and 1998, mortgage loans sold with recourse
amounted to approximately $52 million and $58 million, respectively. The
Company believes adequate allowances are maintained to cover any potential
losses.
The Company has a revolving sales agreement, under which an unaffiliated
buyer, Bishops Gate Residential Mortgage Trust, a special purpose entity
(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 $2.1 billion. Under the terms of this sale agreement, the Company
retains the servicing rights on the mortgage loans sold to the Buyer and
arranges for the sale or securitization of the mortgage loans into the
secondary market. The Buyer retains the right to select alternative sale or
securitization arrangements. At December 31, 1999 and 1998, the Company was
servicing approximately $813 million and $2.0 billion, respectively, of
mortgage loans owned by the Buyer.
F-19
<PAGE>
10.MORTGAGE SERVICING RIGHTS
Capitalized MSRs consisted of:
<TABLE>
<CAPTION>
MSRS ALLOWANCE TOTAL
---------- ----------- ------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 290 $(1) $ 289
Additions to MSRs 252 -- 252
Amortization (96) -- (96)
Write-down/provision -- (4) (4)
Sales (33) -- (33)
Deferred hedge, net 19 -- 19
Reclassification of mortgage-related securities (54) -- (54)
------ ----- -------
BALANCE, DECEMBER 31, 1997 378 (5) 373
Additions to MSRs 475 -- 475
Additions to hedge 49 -- 49
Amortization (82) -- (82)
Write-down/recovery -- 5 5
Sales (99) -- (99)
Deferred hedge, net (85) -- (85)
------ ----- -------
BALANCE, DECEMBER 31, 1998 636 -- 636
Additions to MSRs 698 (5) 693
Additions to hedge 23 -- 23
Amortization (118) -- (118)
Write-down/recovery -- 5 5
Sales (161) -- (161)
Deferred hedge, net 6 -- 6
------ ----- -------
BALANCE, DECEMBER 31, 1999 $1,084 $-- $1,084
====== ===== =======
</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. The Company uses 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 derivative 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
Consolidated Statement of Operations in the current period. Deferrals under
the hedge programs are allocated to each applicable stratum of MSRs based
upon its original designation and included in the impairment measurement.
For purposes of performing its impairment evaluation, the Company
stratifies its portfolio on the basis of interest rates of the underlying
mortgage loans. The Company measures impairment for each stratum by
comparing estimated fair value to the recorded book value. The Company
records amortization expense in proportion to and over the period of the
projected net servicing revenue. Temporary impairment is recorded through a
valuation allowance in the period of occurrence.
F-20
<PAGE>
11.LONG-TERM DEBT
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- ---------
<S> <C> <C>
Term Loan Facilities $ 750 $1,250
71/2% Senior Notes 400 400
73/4% Senior Notes 1,148 1,148
3% Convertible Subordinated Notes 547 545
Other -- 20
------ ------
2,845 3,363
Less current portion 400 --
------ ------
$2,445 $3,363
====== ======
</TABLE>
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
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 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
two year term loan facility (the "New Facility") which provided for
borrowings of $1.25 billion with a syndicate of financial institutions.
The Company used $1.25 billion of the proceeds from the New Facility to
refinance the outstanding borrowings under the Term Loan Facility. At
December 31, 1999, outstanding borrowings under the New Facility were $750
million. The New Facility bears interest at a rate of LIBOR plus a margin
of 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 discussed below. The
weighted average interest rate on the New Facility was 6.2% at December
31, 1999.
71/2% AND 73/4% SENIOR NOTES
In November 1998, the Company issued $1.55 billion of Senior Notes (the
"Notes") in two tranches consisting of $400 million principal amount of
71/2% Senior Notes due December 1, 2000 (see Note 27 -- Subsequent Events
-- Debt Redemption) and $1.15 billion principal amount of 73/4% Senior
Notes due December 1, 2003. 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 as defined in the indenture.
3% CONVERTIBLE SUBORDINATED NOTES
During 1997, the Company completed a public offering of $550 million
principal amount of 3% Convertible Subordinated Notes (the "3% Notes") due
2002. Each $1,000 principal amount of 3% Notes is convertible into 32.65
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.
F-21
<PAGE>
CREDIT FACILITIES
The Company's credit facilities consist of (i) a $750 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
17, 2000, 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 $5 million were outstanding
under the Five Year Revolving Credit Facility at December 31, 1999. The
Revolving Credit Facilities contain certain restrictive covenants
including restrictions on indebtedness of material subsidiaries, mergers,
limitations on liens, liquidations and sale and leaseback transactions,
and require the maintenance of certain financial ratios. There were no
outstanding borrowings related to the above-mentioned credit facilities at
December 31, 1999 and 1998.
DEBT MATURITIES
The aggregate maturities of debt are as follows: 2000, $400 million; 2001,
$750 million; 2002, $547 million; and 2003, $1,148 million.
12. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs, which
are not classified based on contractual maturities since such debt
corresponds directly with assets under management and mortgage programs,
consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- ---------
<S> <C> <C>
Commercial paper $ 619 $2,484
Medium-term notes 1,248 2,338
Secured obligations 345 1,902
Other 102 173
------ ------
$2,314 $6,897
====== ======
</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 6.7% and 6.1% at December 31, 1999 and 1998,
respectively.
MEDIUM-TERM NOTES
Medium-term notes primarily represent unsecured loans, which mature
through 2002. The weighted average interest rates on such medium-term
notes were 6.4% and 5.6% at December 31, 1999 and 1998, respectively.
SECURED OBLIGATIONS
The Company maintains separate financing facilities, the outstanding
borrowings under which are secured by corresponding assets under
management and mortgage programs. The collective weighted average interest
rates on such facilities were 7.0% and 5.8% at December 31, 1999 and 1998,
respectively. Such secured obligations are described below.
Mortgage Facility. In December 1999, the Company renewed its 364 day
financing agreement to sell mortgage loans under an agreement to
repurchase such mortgages. This agreement is collateralized by the
underlying mortgage loans held in safekeeping by the custodian to the
F-22
<PAGE>
agreement. The total commitment under this agreement is $500 million and
is renewable on an annual basis at the discretion of the lender. Mortgage
loans financed under this agreement at December 31, 1999 and 1998 totaled
$345 million and $378 million, respectively, and are included in mortgage
loans held for sale in the Consolidated Balance Sheets.
Relocation Facilities. The Company entered into a 364 day asset
securitization agreement effective December 1998 under which an
unaffiliated buyer committed to purchase an interest in the right to
payments related to certain Company relocation receivables. The revolving
purchase commitment provided for funding up to a limit of $325 million and
was 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 retained the servicing rights related to the
relocation receivables. This facility matured and $248 million was repaid
on December 22, 1999. At December 31, 1998, the Company was servicing $248
million of assets, which were funded under this agreement.
The Company also maintained an asset securitization agreement with a
separate unaffiliated buyer, which had a purchase commitment up to a limit
of $350 million. The terms of this agreement were similar to the
aforementioned facility with the Company retaining the servicing rights on
the right of payment. This facility matured and $85 million was repaid on
October 5, 1999. At December 31, 1998, the Company was servicing $171
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. Loans were funded by commercial paper conduits in the
amounts of $500 million and $604 million and were secured by leased assets
(specified beneficial interests in a trust which owned the leased vehicles
and the leases) totaling $600 million and $725 million. In connection with
the disposition of the fleet segment, all secured financing arrangements
were repaid.
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 mature in 2000. The
weighted average interest rates on such debt were 6.8% and 5.5% at
December 31, 1999 and 1998, respectively.
Interest incurred on borrowings used to finance fleet leasing activities
was $89 million for the year ended December 31, 1999 and $177 million for
each of the years ended December 31, 1998 and 1997 and is included net
within fleet leasing revenues in the Consolidated Statements of
Operations. Interest related to equity advances on homes was $24 million,
$27 million and $32 million for the years ended December 31, 1999, 1998
and 1997, respectively. Interest related to origination and mortgage
servicing activities was $109 million, $139 million and $78 million for
the years ended December 31, 1999, 1998 and 1997, 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.
As of December 31, 1999, the Company, through its PHH subsidiary,
maintained $2.5 billion in committed and unsecured credit facilities,
which were backed by domestic and foreign banks. The facilities were
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 2002.
Under such credit facilities, the Company paid annual commitment fees of
$4 million for the year ended December 31, 1999 and $2 million for each of
the years ended December 31, 1998 and 1997. The full amount of the
Company's committed facility was undrawn and available at December 31,
1999 and 1998.
13. MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES ISSUED BY SUBSIDIARY
HOLDING SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
On March 2, 1998, Cendant Capital I (the "Trust"), a wholly-owned
consolidated subsidiary of the Company, issued 30 million FELINE PRIDES
and 2 million trust preferred securities and received approximately $1.5
billion in gross proceeds in connection with such issuance. The Trust then
F-23
<PAGE>
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 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 28 million Income PRIDES and 2
million Growth PRIDES (Income PRIDES and Growth PRIDES hereinafter
referred to as "PRIDES"), each with a face amount of $50 per PRIDES. The
Income PRIDES consist of trust preferred securities and forward purchase
contracts under which the holders are required to purchase common stock
from the Company in February 2001. The Growth PRIDES consist of zero
coupon U.S. Treasury securities and forward purchase contracts under which
the holders are required to purchase common stock from the Company in
February 2001. The 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
of $96 million ($60 million, after tax) and $80 million ($49 million,
after tax) for the years ended December 31, 1999 and 1998, respectively,
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 1.04 shares and a maximum of 1.35 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.
Under the terms of the FELINE PRIDES settlement discussed in Note 5, 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
million. Accordingly, the Company recorded a non-cash charge of $351
million in the fourth quarter of 1998 with an increase in additional
paid-in capital and accrued liabilities of $350 million and $1 million,
respectively, based on the prospective issuance of the Rights.
The FELINE PRIDES settlement also requires the Company to offer to sell 4
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. The offering of additional PRIDES will be made only pursuant
to a prospectus filed with the SEC. 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, the Company also agreed to
file a shelf registration statement for an additional 15 million special
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
F-24
<PAGE>
PRIDES available to holders of Rights at a price in cash equal to 105% of
their theoretical value. The special PRIDES, if issued, would have the
same terms as the currently outstanding PRIDES and could be used to
exercise Rights. Based on an average market price of $17.78 per share of
Company common stock (calculated based on the average closing price per
share of Company common stock for the consecutive five-day period ended
February 18, 2000), the effect of the issuance of the New PRIDES will be
to distribute approximately 18 million more shares of Company common stock
when the mandatory purchase of Company common stock associated with the
PRIDES occurs in February 2001.
14. SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The after-tax components of accumulated other comprehensive income (loss)
are as follows:
<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) OTHER
TRANSLATION ON MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME/(LOSS)
------------- ---------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1997 $(10) $ 4 $ (6)
Current-period change (28) (4) (32)
---- ------ -----
Balance, December 31, 1997 (38) -- (38)
Current-period change (11) -- (11)
---- ----- -----
Balance, December 31, 1998 (49) -- (49)
Current-period change (9) 16 7
------- ----- -----
Balance, December 31, 1999 $(58) $16 $ (42)
====== ===== =====
</TABLE>
The currency translation adjustments are not currently adjusted for income
taxes since they relate to indefinite investments in foreign subsidiaries.
SHARE REPURCHASES
During 1999, the Company's Board of Directors authorized an additional
$1.8 billion of Company common stock to be repurchased under a common
share repurchase program, increasing the total authorized amount to be
repurchased under the program to $2.8 billion. The Company executed this
program through open market purchases or privately negotiated
transactions, subject to bank credit facility covenants and certain rating
agency constraints. As of December 31, 1999, the Company repurchased
approximately $2.0 billion (104 million shares) of Company common stock
under the program.
In July 1999, pursuant to a Dutch Auction self-tender offer to the
Company's shareholders, the Company purchased 50 million shares of its
common stock at a price of $22.25 per share.
1998 EMPLOYEE STOCK PURCHASE PLAN
On December 1, 1998, the Company's Board of Directors amended and restated
the 1998 Employee Stock Purchase Plan (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 Company reserved 2.5 million shares of Company common stock in
connection with the Plan.
PENDING ISSUANCE OF TRACKING STOCK
The shareholders of Cendant voted on March 21, 2000 for a proposal (the
"Tracking Stock Proposal") to authorize the issuance of a new series of
Cendant common stock ("tracking stock"). The tracking stock is intended to
reflect the performance of the Move.com Group, a group of businesses owned
by the Company offering a wide selection of quality relocation, real estate
and home-related products and services through a network of Web sites.
Before the tracking stock is first issued, the Company's existing common
stock will be re-designated as CD common stock and that stock will be
intended to reflect the performance of the Company's other businesses (the
"Cendant Group"). The Tracking Stock Proposal allowed the Company to amend
and restate its charter to increase the number of authorized shares of
common stock from 2.0 billion to 2.5 billion initially
F-25
<PAGE>
comprised of 2.0 billion shares of CD common stock and 500 million shares
of the Move.com common stock. In connection with the announcement of the
Tracking Stock Proposal, the Move.com Group results are reported as a
separate business segment. See Note 24--Segment Information for a
description of the services provided by the Move.com Group. Although the
issuance of the Move.com common stock is intended to track the performance
of the Move.com Group, holders, if any, will still be subject to all the
risks associated with an investment in the Company and all of its
businesses, assets and liabilities. See Note 27 -- Subsequent Events.
OTHER
In connection with the recapitalization of NRT Incorporated ("NRT") in
September 1999, the Company entered into an agreement with Chatham Street
Holdings, LLC ("Chatham") as consideration for certain amendments made
with respect to the NRT franchise agreements, which amendments provided
for additional payments of certain royalties to the Company. Pursuant to
the agreement, Chatham was granted the right, until September 30, 2001, to
purchase up to approximately 1.6 million shares of Move.com common stock
for approximately $16.02 per share. In addition, for every two shares of
Move.com common stock purchased by Chatham pursuant to the agreement,
Chatham will be entitled to receive a warrant to purchase one share of
Move.com common stock at a price equal to $64.08 per share and a warrant
to purchase one share of Move.com common stock at a price equal to $128.16
per share. The shareholders of Chatham are also shareholders of NRT. See
Note 21 -- Related Party Transactions for a detailed discussion of NRT.
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, anticipated mortgage loan closings arising
from commitments issued and changes in value of MSRs. 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 anticipate
non-performance by any of the counterparties and no material loss would be
expected from such non-performance.
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements 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 as an adjustment to
interest expense in the Consolidated Statements of Operations. The
Company's hedging activities had an immaterial effect on interest expense
and the Company's weighted average borrowing rate for the year ended
December 31, 1999. For the years ended December 31, 1998 and 1997, the
Company's hedging activities increased interest expense by $2 million and
$4 million, respectively, but had an immaterial effect on its weighted
average borrowing rate. The following table summarizes the maturity and
weighted average rates of the Company's interest rate swaps relating to
liabilities under management and mortgage programs at December 31:
F-26
<PAGE>
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE SWAP
AMOUNT RECEIVE RATE PAY RATE MATURITIES (1)
--------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
1999
Medium-term notes $ 610 5.57% 6.29% 2000
======
1998
Commercial paper $ 355 4.92% 5.84% 1999-2006
Medium-term notes 931 5.27% 5.04% 1999-2000
Canada commercial paper 90 5.52% 5.27% 1999-2002
Sterling liabilities 662 6.26% 6.62% 1999-2002
Deutsche mark liabilities 32 3.24% 4.28% 1999-2001
------
$2,070
======
</TABLE>
----------
(1) Interest rate swaps held during 1998, with maturities ranging from
1999 through 2006, were assumed by ARAC in 1999 in connection with the
disposition of the Company's fleet segment.
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates, the Company enters into foreign exchange contracts on a
selective basis. 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 also hedges certain anticipated transactions denominated in
foreign currencies. The principal currency hedged by the Company is the
British pound sterling. Gains and losses on foreign currency hedges
related to intercompany loans are deferred and recognized upon maturity of
the underlying loan in the Consolidated Statements of Operations. Gains
and losses on foreign currency hedges of anticipated transactions are
recognized in the Consolidated Statements of Operations, on a
mark-to-market basis, as exchange rates change.
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 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 at December 31, 1999 and 1998 was $286 million and $267
million, respectively, and is based upon quoted market prices or
investment advisor estimates and approximates carrying value. Realized
gains or losses on marketable securities are calculated on a specific
identification basis. The Company reported realized gains in other
revenues in the Consolidated Statements of Operations of $65 million, $27
million and $18 million for the years ended December 31, 1999, 1998 and
1997, respectively (which included the change in net unrealized holding
gains on trading securities of $8 million and $16 million in 1999 and
1998, respectively).
RELOCATION RECEIVABLES
Fair value approximates carrying value due to the short-term nature of the
relocation receivables.
F-27
<PAGE>
PREFERRED STOCK INVESTMENTS
Fair value approximates carrying value of the preferred stock investments.
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
Fair value of the Company's Senior Notes, Convertible Subordinated Notes
and medium-term notes are estimated based on quoted market prices or
market comparables.
MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY SUBSIDIARY HOLDING
SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
Fair value is estimated based on quoted market prices and incorporates the
settlement of the FELINE PRIDES litigation and the resulting modification
of terms (see Note 5 -- Other Charges).
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, AND OTHER FINANCIAL
INSTRUMENTS
Fair value is estimated, using dealer quotes, as the amount that the
Company would receive or pay to execute a new agreement with terms
identical to those remaining on the current agreement, considering
interest rates at the reporting date.
F-28
<PAGE>
The carrying amounts and fair values of material financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ---------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ---------- -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS UNDER MANAGEMENT AND MORTGAGE
PROGRAMS
Mortgage loans held for sale -- 1,112 1,124 -- 2,416 2,463
Mortgage servicing rights -- 1,084 1,202 -- 636 788
--------------------------------------------- -- ----- ------- -- ----- -----
DEBT
Current portion of debt -- 400 402 -- -- --
Long-term debt -- 2,445 2,443 -- 3,363 3,351
--------------------------------------------- -- ----- ------- -- ----- -----
OFF BALANCE SHEET DERIVATIVES RELATING TO
LONG-TERM DEBT
Foreign exchange forwards -- -- -- 1 -- --
OTHER OFF BALANCE SHEET DERIVATIVES
Foreign exchange forwards 173 -- (1) 48 -- --
--------------------------------------------- --- ----- ------- -- ----- -----
LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Debt -- 2,314 2,314 -- 6,897 6,895
--------------------------------------------- --- ----- ------- -- ----- -----
MANDATORILY REDEEMABLE PREFERRED
SECURITIES ISSUED BY SUBSIDIARY HOLDING
SOLELY SENIOR DEBENTURES ISSUED BY THE
COMPANY -- 1,478 1,113 -- 1,472 1,333
--------------------------------------------- --- ----- ------- -- ----- -----
OFF BALANCE SHEET DERIVATIVES RELATING TO
LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Interest rate swaps
in a gain position 161 -- -- 696 -- 8
in a loss position 449 -- 1 1,374 -- (12)
Foreign exchange forwards 21 -- -- 349 -- --
--------------------------------------------- --- ----- ------- ----- ----- -----
MORTGAGE-RELATED POSITIONS
Forward delivery commitments (1) 2,434 6 20 5,057 3 (4)
Option contracts to sell (1) 440 2 3 701 9 4
Option contracts to buy (1) 418 1 -- 948 5 1
Commitments to fund mortgages 1,283 -- 1 3,155 -- 35
Commitments to complete
securitizations (1) 813 -- (2) 2,031 -- 14
Constant maturity treasury floors (2) 4,420 57 13 3,670 44 84
Interest rate swaps (2)
in a gain position 100 -- -- 575 -- 35
in a loss position 250 -- (26) 200 -- (1)
Treasury futures (2) 152 -- (5) 151 -- (1)
Principal only swaps (2) 324 -- (15) 66 -- 3
</TABLE>
----------
(1) 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 commitments to complete
securitizations on loans held by an unaffiliated buyer as described in
Note 9 -- Mortgage Loans Held for Sale.
(2) Carrying amounts and gains (losses) on these mortgage-related positions
are capitalized and recorded as a component of MSRs. Gains (losses) on
such positions are included in the determination of the respective
carrying amounts and fair value of MSRs.
F-29
<PAGE>
17.COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various facilities
and equipment, which primarily expire through the year 2005. Rental expense
for the years ended December 31, 1999, 1998 and 1997 was $189 million, $165
million and $83 million, respectively. The Company incurred contingent
rental expenses in 1999 and 1998 of $49 million and $44 million,
respectively, which is included in total rental expense, principally based
on rental volume or profitability at certain parking facilities. The
Company has been granted rent abatements for varying periods on certain
facilities. Deferred rent relating to those abatements is amortized on a
straight-line basis over the applicable lease terms. Commitments under
capital leases are not significant.
In 1998, the Company entered into an agreement with an independent third
party to sell and leaseback vehicles subject to operating leases. Pursuant
to the agreement, the net carrying value of the vehicles sold was $101
million. Since the net carrying value of these vehicles was equal to their
sales price, no gain or loss was recognized on the sale. The lease
agreement was for a minimum lease term of 12 months with three one-year
renewal options. For the years ended December 31, 1999 and 1998, the total
rental expense incurred by the Company under this lease was $13 million and
$18 million, respectively. In connection with the disposition of the fleet
businesses, the Company elected not to execute its renewal option thereby
terminating the lease agreement.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-------------- -------
<S> <C>
2000 $ 89
2001 79
2002 69
2003 59
2004 53
Thereafter 108
----
$457
====
</TABLE>
LITIGATION
Class Action Litigation and Government Investigations. Since the April 15,
1998 announcement of the discovery of accounting irregularities in the
former business units of CUC, approximately 70 lawsuits claiming to be
class actions, two lawsuits claiming to be brought derivatively on the
Company's behalf and several individual lawsuits and arbitration
proceedings have commenced in various courts and other forums against the
Company and other defendants by or on behalf of persons claiming to have
purchased or otherwise acquired securities or options issued by CUC or the
Company between May 1995 and August 1998.
The SEC and the United States Attorney for the District of New Jersey are
also conducting investigations relating to the matters referenced above. As
a result of the findings from the Company's internal investigations, the
Company made all adjustments considered necessary by the Company, which are
reflected in its previously filed restated financial statements for the
years ended December 31, 1997, 1996 and 1995 and for the six months ended
June 30, 1998. On June 14, 2000, pursuant to an offer of settlement made by
the Company, the SEC issued an Order Instituting Public Administrative
Proceedings Pursuant to Section 21C of the Securities and Exchange Act of
1934, Making Findings and Imposing a Cease and Desist Order. In such Order,
the SEC found that the Company had violated certain financial reporting
provisions of the Securities and Exchange Act of 1934 and ordered the
Company to cease and desist from committing any future violations of such
provisions. No financial penalties were imposed against the Company.
On December 7, 1999, the Company announced that it reached a preliminary
agreement to settle the principal securities class action pending against
the Company in the U.S. District Court in Newark,
F-30
<PAGE>
New Jersey (the "Settlement Agreement") brought on behalf of purchasers of
all Cendant and CUC publicly traded securities, other than PRIDES, between
May 1995 and August 1998. Under the Settlement Agreement, the Company would
pay the class members approximately $2.85 billion in cash. The definitive
settlement document was approved by the U.S. District Court by order dated
August 14, 2000. Certain parties in the class action have appealed the
District Court's orders approving the plan of allocation of the settlement
fund and awarding of attorneys' fees and expenses to counsel for the lead
plaintiffs. No appeals challenging the fairness of the $2.85 billion
settlement amount were filed. The U.S. Court of Appeals for the Third
Circuit has not issued a briefing schedule for the appeals. Accordingly, the
Company will not be required to fund the settlement amount of $2.85 billion
for some time. However, the Settlement Agreement required the Company to
post collateral in the form of credit facilities and/or surety bonds by
November 13, 2000. See Note 27 -- Subsequent Events.
The settlement does not encompass all litigation asserting claims associated
with the accounting irregularities. The Company does not believe that it is
feasible to predict or determine the final outcome or resolution of these
unresolved proceedings. An adverse outcome from such unresolved proceedings
could be material with respect to earnings in any given reporting period.
However, the Company does not believe that the impact of such unresolved
proceedings should result in a material liability to the Company in relation
to its consolidated financial position or liquidity.
Other pending litigation. The Company is 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.
F-31
<PAGE>
18. INCOME TAXES
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Current
Federal $ 229 $ (28) $175
State 3 18 31
Foreign 44 56 29
------ ----- -----
276 46 235
------ ----- -----
Deferred
Federal (728) 71 (27)
State (23) 17 (4)
Foreign 7 1 3
------ ----- ------
(744) 89 (28)
------ ----- ------
Provision (benefit) for income taxes $ (468) $ 135 $207
====== ===== ======
</TABLE>
Pre-tax income (loss) for domestic and foreign operations consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---------- ------ -------
<S> <C> <C> <C>
Domestic $ (959) $157 $216
Foreign 219 237 73
------ ---- ----
Pre-tax income (loss) $ (740) $394 $289
====== ==== ====
</TABLE>
Deferred income tax assets and liabilities are comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
CURRENT DEFERRED INCOME TAX ASSETS
Merger and acquisition-related liabilities $ 17 $ 53
Accrued liabilities and deferred income 169 97
Excess tax basis on assets held for sale -- 190
Provision for doubtful accounts 18 5
Deferred membership acquisition costs -- 3
Shareholder litigation settlement and related costs 1,058 --
Net operating loss carryforward 75 --
----- -----
Current deferred income tax assets 1,337 348
----- -----
CURRENT DEFERRED INCOME TAX LIABILITIES
Insurance retention refund (18) (21)
Franchise acquisition costs (10) (7)
Other (4) (1)
-------- -------
Current deferred income tax liabilities (32) (29)
------- ------
CURRENT NET DEFERRED INCOME TAX ASSET $1,305 $319
======= ======
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
NONCURRENT DEFERRED INCOME TAX ASSETS
Deductible goodwill -- taxable poolings $ -- $ 49
Merger and acquisition-related liabilities 29 26
Accrued liabilities and deferred income 29 64
Net operating loss carryforward 84 84
State net operating loss carryforward 151 44
Foreign tax credit carryforward 10 --
Other (17) --
Valuation allowance (161) (44)
------ ------
Noncurrent deferred income tax assets 125 223
------ ------
NONCURRENT DEFERRED INCOME TAX LIABILITIES
Depreciation and amortization (511) (333)
Other -- 1
------ ------
Noncurrent deferred income tax liabilities (511) (332)
------ ------
NONCURRENT NET DEFERRED INCOME TAX LIABILITY $ (386) $ (109)
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX ASSETS
Depreciation $ 7 $ --
Accrued liabilities 11 26
Alternative minimum tax carryforwards -- 2
------ ------
Management and mortgage program deferred income tax assets 18 28
------ ------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX LIABILITIES
Depreciation -- (121)
Unamortized mortgage servicing rights (328) (248)
------ ------
Management and mortgage program deferred income tax liabilities (328) (369)
------ ------
Net deferred income tax liability under management and mortgage
programs $ (310) $ (341)
====== ======
</TABLE>
Net operating loss carryforwards at December 31, 1999 expire as follows:
2001, $8 million; 2002, $90 million; 2005, $7 million; 2009, $18 million;
2010, $116 million; and 2018, $215 million. The Company also has
alternative minimum tax credit carryforwards of $28 million.
The valuation allowance at December 31, 1999 relates to deferred tax assets
for state net operating loss carryforwards of $151 million and foreign tax
credit carryforwards of $10 million. The valuation allowance will be
reduced when and if the Company determines that the deferred income tax
assets are likely to be realized.
No provision has been made for U.S. federal deferred income taxes on
approximately $225 million of accumulated and undistributed earnings of
foreign subsidiaries at December 31, 1999 since it is the present intention
of management to reinvest the undistributed earnings indefinitely in
foreign operations. In addition, the determination of the amount of
unrecognized U.S. federal deferred income tax liability for unremitted
earnings is not practicable.
F-33
<PAGE>
The Company's effective income tax rate for continuing operations differs
from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Federal statutory rate (35.0%) 35.0% 35.0%
State and local income taxes, net of federal tax
benefits ( 1.8%) 5.9% 6.2%
Non-deductible merger-related costs -- -- 25.9%
Amortization of non-deductible goodwill 1.9% 4.5% 3.8%
Taxes on foreign operations at rates different than
statutory U.S. federal rate ( 4.1%) (6.4%) 0.2%
Nontaxable gain on disposal (24.0%) -- --
Recognition of excess tax basis on assets held for sale -- (2.2%) --
Other ( 0.2%) (2.5%) 0.5%
----- ---- ----
(63.2%) 34.3% 71.6%
===== ==== ====
</TABLE>
19.STOCK PLANS
CENDANT PLANS
The 1999 Broad-Based Employee Stock Option Plan (the "Broad-Based Plan"),
as amended, authorizes the granting of up to 60 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). Employees (other than executive officers)
and independent contractors of the Company and its affiliates are eligible
to receive awards under the Broad-Based Plan. Options granted under the
plan generally have a ten year term and have vesting periods ranging from
20% to 33% per year.
The 1997 Stock 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 or are immediately vested. The Company also maintains two
other stock plans adopted in 1997: 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 have vesting periods
ranging from 20% to 33% per year.
The Company also grants options to employees pursuant to two additional
stock option plans under which the Company may grant options to purchase in
the aggregate up to 80 million shares of Company common stock. Annual
vesting periods under these plans are 20% commencing one year from the
respective grant dates.
At December 31, 1999 there were 56 million shares available for grant under
the Company's stock option plans discussed above.
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 during
F-34
<PAGE>
December 1997 and the first quarter of 1998. Such options, with exercise
prices ranging from $31.38 to $37.50, were effectively repriced on October
14, 1998 at $9.81 per share (the "New Price"), which was the fair market
value (as defined in the option plans) on the date of such repricing. 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 a revocation of 13 million existing options.
Additionally, a management equity ownership program was adopted requiring
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, with exercise prices ranging from $16.78 to $34.31, and issuing a
lesser amount of options at the New Price and, with respect to certain
options of executive officers and senior managers, at prices above the New
Price, specifically $12.27 and $20.00. Additionally, certain options
replacing options that were fully vested provide for vesting ratably over
four years beginning January 1, 1999.
MOVE.COM GROUP PLAN
On October 29, 1999, the Board of Directors of Move.com, Inc. (a company
included within the Move.com Group) adopted the Move.com, Inc. 1999 Stock
Option Plan (the "Move.com Plan"), as amended January 13, 2000, which
authorizes the granting of up to 6 million shares of Move.com, Inc. common
stock. All active employees of Move.com Group and its affiliates are
eligible to be granted options under the Move.com Plan. Options under the
Move.com Plan generally have a 10 year term and are exercisable at 33% per
year commencing one year from the grant date. On October 29, 1999,
approximately 2.5 million options to purchase shares of Move.com, Inc.
common stock were granted to employees of Move.com, Inc. under the Move.com
Plan (the "Existing Grants") at a weighted average exercise price of
$11.59. Such options were all outstanding and not vested at December 31,
1999. The fair value of Move.com, Inc. common stock on October 29, 1999 was
$13.16. Subject to the approval of the shareholders of the Company (i) the
Move.com Plan and Existing Grants will be ratified and assumed by the
Company, (ii) all Existing Grants will be equitably adjusted to become
options of Move.com common stock (see Note 14 -- Shareholders' Equity --
Pending Issuance of Tracking Stock for a description of the Move.com common
stock proposal) and (iii) the remaining shares available to be issued in
connection with the grant of options under the Move.com Plan will be
equitably adjusted to become shares of Move.com common stock.
The annual activity of Cendant's stock option plans consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. EXERCISE AVG. EXERCISE AVG. EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------------- --------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
(Shares in millions)
Balance at beginning of year 178 $ 14.64 172 $ 18.66 118 $ 11.68
Granted
Equal to fair market value 30 18.09 84 19.16 78 27.94
Greater than fair market
value 1 16.04 21 17.13 -- --
Canceled (13) 19.91 (82) 29.36 (6) 27.29
Exercised (13) 9.30 (17) 10.01 (14) 7.20
PHH Conversion (1) -- -- -- (4) --
--- --- ------
Balance at end of year 183 $ 15.24 178 $ 14.64 172 $ 18.66
=== === =====
</TABLE>
----------
(1) In connection with the PHH Merger, all unexercised PHH stock options
were canceled and converted into 2 million shares of Company common
stock.
F-35
<PAGE>
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 to employees. Under APB No. 25, compensation expense
is recognized when the exercise prices of the Company's employee stock
options are less than the market prices of the underlying Company stock on
the date of grant. Although the Company generally grants employee stock
options at fair value, certain options were granted below fair value during
1999. As such, compensation expense is being recognized over the applicable
vesting period.
Had the Company elected to recognize and measure compensation expense for
its stock option plans to employees 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) and per share data would have
been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ---------------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED(1) PRO FORMA(1)
---------- ----------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (55) $ (213) $ 540 $ 393 $ (217) $ (664)
Basic income (loss) per share (0.07) (0.28) 0.64 0.46 (0.27) (0.82)
Diluted income (loss) per share (0.07) (0.28) 0.61 0.46 (0.27) (0.82)
</TABLE>
----------
(1) Includes incremental compensation expense of $335 million ($205
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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
CENDANT MOVE.COM GROUP
----------------------------------------------- ---------------
1999 1998 1997 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Dividend yield -- -- -- --
Expected volatility 60.0% 55.0% 32.5% 60.0%
Risk-free interest rate 6.4% 4.9% 5.6% 6.4%
Expected holding period 6.2 years 6.3 years 7.8 years 6.2 years
</TABLE>
The weighted average grant date fair value of Company and Move.com stock
options granted during the year ended December 31, 1999 were $11.36 and
$7.28, respectively. The weighted average grant date fair value 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 repricing, were $19.69 and $18.10, respectively. The
weighted average grant date fair value of the stock options granted during
the year ended December 31, 1998 which were not repriced was $10.16. The
weighted average grant date fair value of Company stock options granted
during the year ended December 31, 1997 was $13.71.
F-36
<PAGE>
The table below summarizes information regarding Company stock options
outstanding and exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
(Shares in millions) CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
-------------------------- -------- --------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
$.01 to $10.00 79 5.9 $ 7.36 53 $ 6.20
$10.01 to $20.00 60 8.0 16.83 21 15.89
$20.01 to $30.00 23 7.2 22.93 19 23.14
$30.01 to $40.00 21 7.8 32.00 16 31.88
-- --
183 7.0 $ 15.24 109 $ 14.77
=== ===
</TABLE>
20.EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution pension 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 specified in the
plans. The Company's cost for contributions to these plans was $30 million,
$22 million and $15 million for the years ended December 31, 1999, 1998
and 1997, respectively.
The Company's PHH subsidiary maintains a domestic non-contributory defined
benefit pension plan covering eligible employees of PHH and its
subsidiaries employed prior to July 1, 1997. Additionally, the Company
sponsors 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 plans were $145 million and $196
million and plan assets, at fair value, were $147 million and $162 million
at December 31, 1999 and 1998, respectively. The net pension cost and
recorded liability were not material to the accompanying Consolidated
Financial Statements.
During 1999, the Company recognized a net curtailment gain of $10 million
as a result of the disposition of its fleet business segment and the
freezing of pension benefits related to the Company's PHH subsidiary
defined benefit pension plan.
21.RELATED PARTY TRANSACTIONS
NRT INCORPORATED
The Company maintains a relationship with NRT, a corporation created to
acquire residential real estate brokerage firms. 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. NRT is party to other agreements
and arrangements with the Company and its subsidiaries. Under these
agreements, the Company acquired $182 million of NRT preferred stock, of
which $24 million will be convertible, at the Company's option, upon the
occurrence of certain events, into no more than 50% of NRT's common stock.
Certain officers of the Company serve on the Board of Directors of NRT. The
Company recognized preferred dividend income of $16 million, $15 million
and $5 million during the years ended December 31, 1999, 1998 and 1997,
respectively, which are included in other revenue in the Consolidated
Statements of Operations. During 1999, approximately $8 million of the
preferred dividend income increased the basis of the underlying preferred
stock investment. Additionally, the Company sold preferred shares and
recognized a gain of $20 million during 1999, which is also included in
other revenue in the Consolidated Statements of Operations. During 1999,
1998 and 1997, total franchise royalties earned by the Company from NRT and
its predecessors were $172 million, $122 million and $61 million,
respectively.
F-37
<PAGE>
The Company, at its election, may participate in NRT's acquisitions by
acquiring up to an aggregate $946 million (plus an additional $500 million
if certain conditions are met) of intangible assets, and in some cases
mortgage operations of real estate brokerage firms acquired by NRT. As of
December 31, 1999, the Company acquired $537 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 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 RENT A CAR, INC.
The Company continues to maintain an equity interest in ARAC. During 1999
and 1998, the Company sold approximately two million and one million
shares, respectively, of Avis Rent A Car, Inc. common stock and recognized
a pre-tax gain of approximately $11 million and $18 million, respectively,
which is included in other revenue in the Consolidated Statements of
Operations. The Company accounts for its investment in ARAC common stock
using the equity method. The Company recorded its equity in the earnings of
ARAC, which amounted to $18 million, $14 million and $51 million for the
years ended December 31, 1999, 1998 and 1997, respectively, as a component
of other revenue in the Consolidated Statements of Operations. On June 30,
1999, in connection with the Company's disposition of its fleet segment,
the Company received, as part of the total consideration, $360 million of
non-voting convertible preferred stock in a subsidiary of ARAC and
additional consideration of a $30 million receivable (see Note 3 --
Dispositions and Acquisitions of Businesses). The Company accounts for its
convertible preferred stock investment using the cost method. Conversion of
the convertible preferred stock is at the Company's option subject to
earnings and stock price thresholds with specified intervals of time. As of
December 31, 1999, the conversion conditions have not been satisfied. The
Company received dividends of $9 million, which increased the basis of the
underlying convertible preferred stock investment. Such amount is included
as a component of other revenue in the Consolidated Statements of
Operations. At December 31, 1999, the Company's common equity interest in
ARAC was approximately 18% (see Note 27 -- Subsequent Events).
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
1999, 1998 and 1997, total franchise royalties earned by the Company from
ARAC were $102 million, $92 million and $82 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. As of December 31, 1999 and 1998, the Company had accounts
receivable of $34 million and $26 million, respectively, due from ARAC.
Certain officers of the Company serve on the Board of Directors of ARAC.
22.FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Revenues from franchising activities include royalty revenues and initial
franchise fees charged to lodging properties, car rental locations, tax
preparation offices and real estate brokerage offices.
Franchised outlet revenues are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Royalty revenues $839 $703 $574
Initial franchise fees 37 45 26
</TABLE>
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees related
to the Company's lodging brands' franchisees are
F-38
<PAGE>
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. Service fees, net included marketing and reservation
fees of $280 million, $228 million and $215 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Additionally, rebates are
given to franchisees that meet certain levels of annual gross revenue as
defined by the respective franchise agreements. Membership and service fee
revenues are net of annual rebates of $43 million, $35 million, and $26
million for the years ended December 31, 1999, 1998, and 1997,
respectively.
Franchised outlet information is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998 (1) 1997
-------- ---------- -------
<S> <C> <C> <C>
Franchised units in operation 22,719 22,471 18,876
Backlog (franchised units sold but not yet
opened) 1,478 2,063 1,547
</TABLE>
----------
(1) Approximately 2,000 franchised units were acquired in connection with
the acquisition of Jackson Hewitt Inc.
23.NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles were disposed of during 1999
in connection with the disposition of the Company's fleet business segment
(see Note 3 -- Dispositions and Acquisitions of Businesses). In 1998,
vehicles were 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 were amortized using the
straight-line method over the expected lease term. The Company's experience
indicated that the full term of the leases varied considerably due to
extensions beyond the minimum lease term.
The Company had two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease was
generally for the account of the lessee except for a minimum residual value
which the Company had guaranteed. The Company's experience had been that
vehicles under this type of lease agreement were sold for amounts exceeding
the residual value guarantees. Maintenance and repairs of vehicles under
these agreements were 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.
Under the second type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease was for the account of
the Company. The lessee generally paid for or provided maintenance, vehicle
licenses and servicing. The original cost and accumulated depreciation of
vehicles under these agreements were $1.0 billion and $191 million,
respectively, at December 31, 1998. The Company, based on historical
experience and an assessment of the used vehicle market, established an
allowance in the amount of $14 million for potential losses on residual
values on vehicles under these leases at December 31, 1998.
Under the direct financing lease agreements, the minimum lease term was 12
months with a month-to-month renewal option thereafter. In addition, resale
of the vehicles upon termination of the lease was for the account of the
lessee. Maintenance and repairs of these vehicles were the responsibility
of the lessee.
F-39
<PAGE>
Open-end operating leases and direct financing leases generally had a
minimum lease term of 12 months with monthly renewal options thereafter.
Closed-end operating leases typically had a longer term, usually 24 months
or more, but were cancelable under certain conditions.
Gross leasing revenues, which were included in fleet leasing revenues in
the Consolidated Statements of Operations, consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------ --------- ---------
<S> <C> <C> <C>
Operating leases $683 $1,330 $1,223
Direct financing leases, primarily interest 17 38 42
---- ------ ------
$700 $1,368 $1,265
==== ====== ======
</TABLE>
Net investment in leases and leased vehicles consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Vehicles under open-end operating leases $2,726
Vehicles under closed-end operating leases 822
Direct financing leases 252
Accrued interest on leases 1
------
$3,801
======
</TABLE>
24.SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation and amortization and
minority interest calculation. For this purpose, Adjusted EBITDA is defined
as earnings before non-operating interest, income taxes, depreciation and
amortization and minority interest, adjusted to exclude certain items,
which are of a non-recurring or unusual nature and are not measured in
assessing segment performance or are not segment specific. The Company
determined its 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.
Prior to the third quarter of 2000, the historical operating results of
Cendant Travel, a subsidiary which facilitates travel arrangements for the
Company's travel-related and membership businesses, were included within the
discontinued individual membership segment. Beginning the third quarter of
2000, the operations of Cendant Travel began being managed as a component of
the travel segment. Accordingly, the operating results of Cendant Travel are
reflected in the Travel segment for all periods presented.
In connection with the individual membership segment being reported as
discontinued operations, general corporate overhead previously allocated to
the individual membership segment has been reclassified to the diversified
services segment for all periods presented.
The Company disposed of its fleet segment on June 30, 1999, and the Company
added Move.com Group as a reportable operating segment, thereby maintaining
the seven reportable operating segments which collectively comprise the
Company's continuing operations. Included in the Move.com Group are RentNet,
Inc., ("RentNet"), acquired during January 1996, National Home Connections,
LLC, acquired in May 1999, and the assets of MetroRent, acquired in December
1999. Prior to the formation of the Move.com Group, RentNet's historical
financial information was included in the Company's discontinued individual
membership segment. The Company reclassified the financial results of
RentNet for the years ended December 31, 1998 and 1997. Inter-segment net
revenues were not significant to the net revenues of any one segment. A
description of the services provided within each of the Company's reportable
operating segments is as follows:
F-40
<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.
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.
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.
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.
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 groups,
financial institutions, real estate brokerage firms and other mortgage
banks.
Mortgage services 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.
MOVE.COM GROUP
Move.com Group provides a broad range of quality relocation, real estate,
and home-related products and services through its flagship portal site,
move.com, and the move.com network. The Move.com Group integrates and
enhances the online efforts of the Company's residential real estate brand
names and those of the Company's other real estate business units.
F-41
<PAGE>
DIVERSIFIED 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,
welcoming packages to new homeowners, and other consumer-related services.
FLEET
The fleet segment provided fleet and fuel card related products and
services to corporate clients and government agencies. These services
included management and leasing of vehicles, fuel card payment and
reporting and other fee-based services for clients' vehicle fleets. The
Company leased vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements.
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INSURANCE/ REAL ESTATE
TOTAL TRAVEL (1) WHOLESALE FRANCHISE
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 4,521 $1,239 $575 $ 571
Adjusted EBITDA 1,783 593 180 424
Depreciation and amortization 347 99 19 59
Segment assets 14,531 3,204 393 2,102
Capital expenditures 254 55 19 --
</TABLE>
<TABLE>
<CAPTION>
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES (2) FLEET
------------ ---------- ---------- -------------- ------
<S> <C> <C> <C> <C> <C>
Net revenues $ 415 $ 397 $ 18 $1,099 $207
Adjusted EBITDA 122 182 (22) 223 81
Depreciation and amortization 17 19 2 117 15
Segment assets 1,033 2,817 22 4,960 --
Capital expenditures 21 48 2 86 23
</TABLE>
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
INSURANCE/ REAL ESTATE
TOTAL TRAVEL (1) WHOLESALE FRANCHISE
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 4,465 $1,163 $544 $ 456
Adjusted EBITDA 1,647 552 138 349
Depreciation and amortization 303 90 14 53
Segment assets 19,047 2,789 372 2,014
Capital expenditures 331 81 17 6
</TABLE>
<TABLE>
<CAPTION>
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES FLEET
------------ ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net revenues $ 444 $ 353 $10 $1,108 $ 387
Adjusted EBITDA 125 188 1 120 174
Depreciation and amortization 17 9 2 96 22
Segment assets 1,130 3,504 9 4,532 4,697
Capital expenditures 70 36 1 62 58
</TABLE>
----------------------------------------------------------------------------
F-42
<PAGE>
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INSURANCE/ REAL ESTATE
TOTAL TRAVEL (1) WHOLESALE FRANCHISE
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 3,553 $1,057 $483 $ 335
Adjusted EBITDA 1,263 485 111 227
Depreciation and amortization 222 83 11 44
Segment assets 13,179 2,618 357 1,827
Capital expenditures 153 46 6 13
</TABLE>
<TABLE>
<CAPTION>
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES FLEET
------------ ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net revenues $ 402 $ 179 $ 6 $767 $ 324
Adjusted EBITDA 93 75 (1) 152 121
Depreciation and amortization 8 5 1 54 16
Segment assets 1,009 2,233 7 1,002 4,126
Capital expenditures 23 16 1 24 24
</TABLE>
----------
(1) Net revenues and Adjusted EBITDA include the equity in earnings from
the Company's investment in ARAC of $18 million, $14 million and $51
million in 1999, 1998 and 1997, respectively. Net revenues and
Adjusted EBITDA for 1999 and 1998 include a pre-tax gain of $11
million and $18 million, respectively, as a result of the 1999 and
1998 sale of a portion of the Company's equity interest. Segment
assets include such equity method investment in the amount of $118
million, $139 million and $124 million at December 31, 1999, 1998 and
1997, respectively.
(2) Net revenues include a $23 million gain on the sales of car park
facilities. Segment assets include the Company's equity investment of
$17 million in EPub.
Provided below is a reconciliation of Adjusted EBITDA and total assets for
reportable segments to the consolidated amounts.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
------------- --------- ---------
<S> <C> <C> <C>
Adjusted EBITDA for reportable segments $ 1,783 $1,647 $1,263
Other charges:
Litigation settlement and related costs (2,894) (351) --
Termination of proposed acquisitions (7) (433) --
Executive terminations -- (53) --
Investigation-related costs (21) (33) --
Merger-related costs and other unusual charges (credits) (25) 67 (701)
Investigation-related financing costs -- (35) --
Depreciation and amortization (347) (303) (222)
Interest, net (196) (112) (51)
Net gain on dispositions of businesses 967 -- --
--------- ------ ------
Consolidated income (loss) before income taxes and minority
interest $ (740) $ 394 $ 289
========= ====== ======
</TABLE>
F-43
<PAGE>
GEOGRAPHIC SEGMENT INFORMATION
<TABLE>
<CAPTION>
UNITED UNITED ALL OTHER
TOTAL STATES KINGDOM COUNTRIES
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
1999
Net revenues $ 4,521 $ 3,482 $ 748 $ 291
Assets 14,531 11,104 3,215 212
Long-lived assets 1,279 522 723 34
1998
Net revenues $ 4,465 $ 3,458 $ 696 $ 311
Assets 19,047 15,081 3,707 259
Long-lived assets 1,378 591 768(1) 19
1997
Net revenues $ 3,553 $ 2,982 $ 232 $ 339
Assets 13,179 11,855 1,015 309
Long-lived assets 504 437 49 18
</TABLE>
----------
(1) Includes $691 million of property and equipment acquired in
connection with the NPC acquisition.
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property and
equipment.
25. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 1999
and 1998. The underlying per share information is calculated from the
weighted average shares outstanding during each quarter, which may
fluctuate based on quarterly income levels, market prices, and share
repurchases. Therefore, the sum of the quarters per share information may
not equal the total year amounts.
<TABLE>
<CAPTION>
1999
------------------------------------------------------
FIRST (2) SECOND (3) THIRD (4) FOURTH (5)
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 1,102 $1,171 $1,154 $ 1,094
------- ------ ------- --------
Income (loss) from continuing operations (1) 167 846 233 (1,579)
Income (loss) from discontinued operations, net
of tax 2 28 (24) 98
Gain (loss) on sale of discontinued operations,
net of tax (6) 193 (12) (7) --
------- ------ -------- --------
Net income (loss) $ 362 $ 862 $ 202 $ (1,481)
======= ====== ======= ========
Per share information:
Basic
Income (loss) from continuing operations $ 0.21 $ 1.10 $ 0.32 $ (2.22)
Net income (loss) $ 0.45 $ 1.12 $ 0.28 $ (2.08)
Weighted average shares (in millions) 800 770 726 711
Diluted
Income (loss) from continuing operations $ 0.20 $ 1.03 $ 0.30 $ (2.22)
Net income (loss) $ 0.43 $ 1.05 $ 0.26 $ (2.08)
Weighted average shares (in millions) 854 824 780 711
Common Stock Market Prices:
High $227/16 $203/4 $225/8 $ 269/16
Low $155/16 $151/2 $ 17 $ 149/16
</TABLE>
F-44
<PAGE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
FIRST (7) SECOND (8) THIRD (9) FOURTH (10)
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 957 $ 1,094 $ 1,245 $ 1,169
------- ------- ------- -------
Income (loss) from continuing operations 199 183 132 (306)
Income (loss) from discontinued operations,
net of tax (26) (30) (21) 4
Gain on sale of discontinued operations,
net of tax (6) -- -- -- 405
------- ------- ------- -------
Net income $ 173 $ 153 $ 111 $ 103
======= ======= ======= =======
Per share information:
Basic
Income (loss) from continuing
operations $ 0.24 $ 0.22 $ 0.15 $ (0.36)
Net income $ 0.21 $ 0.18 $ 0.13 $ 0.12
Weighted average shares (in millions) 839 851 852 850
Diluted
Income (loss) from continuing
operations $ 0.22 $ 0.21 $ 0.15 $ (0.36)
Net income $ 0.20 $ 0.18 $ 0.13 $ 0.12
Weighted average shares (in millions) 917 901 861 850
Common Stock Market Prices:
High $ 41 $ 413/8 $227/16 $ 205/8
Low $327/16 $189/16 $107/16 $ 71/2
</TABLE>
----------
(1) Includes net gains associated with the dispositions of businesses of
$716 million, $83 million and $168 million for the second, third, and
fourth quarters, respectively (see Note 3 -- Dispositions and
Acquisitions of Businesses).
(2) Includes charges of $7 million ($4 million, after tax or $0.01 per
diluted share) in connection with the termination of the proposed
acquisition of RACMS, $2 million ($1 million, after tax) for
investigation -- related costs and a $1 million gain on the sale of a
company subsidiary.
(3) Includes charges of $23 million ($15 million, after tax or $0.02 per
diluted share) of additional charges to fund an irrevocable
contribution to an independent technology trust responsible for
completing the transition of the Company's lodging franchisees to a
Company sponsored property management system and $6 million ($4
million, after tax) for investigation-related costs.
(4) Includes charges of $5 million ($3 million, after tax) for
investigation-related costs and $5 million ($3 million, after tax)
principally related to the consolidation of European call centers in
Cork, Ireland.
(5) Includes charges of $2,894 million ($1,839 million, after tax or
$2.59 per diluted share) associated with the preliminary agreement to
settle the principal shareholder securities class action suit and $8
million ($5 million, after tax or $0.01 per diluted share) of
investigation-related costs. Such charges were partially offset by a
$2 million ($1 million, after tax) credit associated with changes to
the estimate of previously recorded merger-related costs and other
unusual charges.
(6) Represents gains associated with the sales of Hebdo Mag and CDS (see
Note 4 -- Discontinued Operations).
(7) Includes a charge of $3 million ($2 million, after tax) for
investigation-related costs, including incremental financing costs,
and executive terminations.
(8) Includes a charge of $32 million ($20 million, after tax or $0.02 per
diluted share) for investigation-related costs, including incremental
financing costs, and executive terminations. Such charge was partially
offset by a credit of $27 million ($19 million, after tax or $0.02 per
diluted share) associated with changes to the estimate of previously
recorded merger-related costs and other unusual charges.
(9) Includes a charge of $76 million ($49 million, after tax or $0.06 per
share) for investigation-related costs, including incremental
financing costs, and executive terminations.
(10) Includes charges of (i) $433 million ($282 million, after tax or
$0.33 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers and Providian, (ii) $351 million
($228 million, after tax or $0.27 per diluted share) associated with
the agreement to settle the PRIDES securities class action suit and
(iii) $13 million ($10 million, after tax or $0.01 per diluted share)
for investigation-related costs, including incremental financing
costs, and executive terminations. Such charges were partially offset
by a credit of $43 million ($27 million, after tax or $0.03 per
diluted share) associated with changes to the estimate of previously
recorded merger-related costs and other unusual charges.
F-45
<PAGE>
26. CONDENSED CONSOLIDATING INFORMATION
In connection with the pending issuance of the tracking stock described in
Note 14 -- Shareholder's Equity, the Company intends to disclose
separately, for financial reporting purposes, financial information for
the Cendant Group and the Move.com Group. Cendant Group provides various
services to and receives various services from the Move.com Group.
Inter-group revenues and expenses have been broken out separately and
self-eliminate in consolidation.
ALLOCATION POLICIES
Treasury Activities. Cendant Group provides all necessary funding for the
operations and investments of the Move.com Group since inception and such
funding has been accounted for as capital contributions from the Cendant
Group. Accordingly, no interest charges from the Cendant Group were
reflected in the accompanying Consolidating Condensed Statements of
Income. Surplus cash, transferred from the Move.com Group to the Cendant
Group from time to time, has been accounted for as a return of capital.
Revenues. Revenue allocations are supported by signed agreements between
the Cendant Group and the Move.com Group and are intended to approximate
the fair value of services provided.
Expenses. Cendant Group allocates the cost of its corporate overhead
services to the Move.com Group generally based on utilization. Where
determinations based on utilization are impracticable, the Cendant Group
uses percentages of revenues or other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of costs
attributable to the Move.com Group. The allocations of corporate overhead
to the Move.com Group are consistent with the allocations made to
subsidiaries within the Cendant Group. Corporate overhead includes charges
for legal, accounting (tax and financial), information and
telecommunications services, marketing, intellectual property, public
relations, corporate offices and travel.
Expenses, other than corporate overhead allocations, are allocated based
upon utilization and usage volume.
Income Taxes. The income tax benefit and balance sheet accounts include
allocations from the Cendant Group and are computed as if the Move.com
Group filed its federal and state income tax returns on a stand-alone
basis.
ALLOCATIONS
The allocations from the Cendant Group to the Move.com Group are comprised
as follows: (a) revenues for selling advertising space and links on the
Cendant Group real estate franchise systems Web sites, (b) revenues for
Web site management associated with the Cendant Group's real estate
franchise systems, (c) revenues associated with the Web site development
of the Cendant Group's Welcome Wagon subsidiary, (d) expenses for overhead
charges, (e) expenses associated with an Internet engineering services
agreement and (f) expenses associated with the Web site development of
Cendant Group's Welcome Wagon subsidiary. Additionally, portions of the
benefit for income taxes and balance sheet accounts of Move.com Group are
based on allocations from the Cendant Group.
F-46
<PAGE>
The consolidating condensed financial information, which includes certain
allocations between the Cendant Group and the Move.com Group, is presented
as follows.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
------------- ---------- -------------
<S> <C> <C> <C>
Net Revenues
External revenues $4,504 $ 17 $4,521
Inter-group agreements (1) 1 --
-------- ----- ------
Net revenues 4,503 18 4,521
Expenses:
Operating:
External expenses 1,570 35 1,605
Inter-group allocated expenses (3) 3 --
Marketing and reservation 596 -- 596
General and administrative 535 2 537
Depreciation and amortization 345 2 347
Other charges 2,947 -- 2,947
Interest, net 196 -- 196
------- ----- ------
Total expenses 6,186 42 6,228
Net gain on dispositions of businesses 967 -- 967
------- ----- ------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (716) (24) (740)
Benefit for income taxes (458) (10) (468)
Minority interest, net of tax 61 -- 61
------- ----- ------
LOSS FROM CONTINUING OPERATIONS (319) (14) (333)
Discontinued operations:
Income from discontinued operations, net of tax 104 -- 104
Gain on sale of discontinued operations, net of tax 174 -- 174
------- ----- ------
NET LOSS $ (41) $ (14) $ (55)
======= ===== ======
</TABLE>
F-47
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- -------------
<S> <C> <C> <C>
Net revenues $4,455 $10 $4,465
------ ---- ------
Expenses:
Operating:
External expenses 1,651 1 1,652
Inter-group allocated expenses -- -- --
Marketing and reservation 619 3 622
General and administrative 539 5 544
Depreciation and amortization 301 2 303
Other charges 838 -- 838
Interest, net 112 -- 112
------ ---- ------
Total expenses 4,060 11 4,071
------ ---- ------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST 395 (1) 394
Provision for income taxes 135 -- 135
Minority interest, net of tax 51 -- 51
------ ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 209 (1) 208
Discontinued operations:
Loss from discontinued operations, net of tax (73) -- (73)
Gain on sale of discontinued operations, net of tax 405 -- 405
------ ----- ------
NET INCOME (LOSS) $ 541 $(1) $ 540
====== ===== ======
</TABLE>
F-48
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- -------------
<S> <C> <C> <C>
Net revenues $3,547 $ 6 $3,553
------ ---- ------
Expenses:
Operating:
External expenses 1,129 1 1,130
Inter-group allocated expenses -- -- --
Marketing and reservation 621 2 623
General and administrative 533 4 537
Depreciation and amortization 221 1 222
Other charges 701 -- 701
Interest, net 51 -- 51
------ ---- ------
Total expenses 3,256 8 3,264
------ ---- ------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST 291 (2) 289
Provision (benefit) for income taxes 208 (1) 207
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 83 (1) 82
Loss from discontinued operations, net of tax (42) -- (42)
------ ----- ------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 41 (1) 40
Extraordinary gain, net of tax 26 -- 26
------ ----- ------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 67 (1) 66
Cumulative effect of accounting change, net of tax (283) -- (283)
------ ----- ------
NET LOSS $ (216) $(1) $ (217)
====== ===== ======
</TABLE>
F-49
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1999
----------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
----------- ---------- -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,167 $ 1 $ 1,168
Receivables 983 8 991
Deferred income taxes 1,305 -- 1,305
Other current assets 768 3 771
Property and equipment 1,276 3 1,279
Goodwill 3,101 5 3,106
Other noncurrent assets 3,183 2 3,185
Assets under management and mortgage programs 2,726 -- 2,726
-------- ----- --------
TOTAL ASSETS $ 14,509 $ 22 $ 14,531
======== ===== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 4,892 $ 21 $ 4,913
Noncurrent liabilities 3,310 -- 3,310
Liabilities under management and mortgage programs 2,624 -- 2,624
Mandatorily redeemable preferred securities issued
by subsidary holding senior debentures issued by
the Company 1,478 -- 1,478
Shareholders' equity
Common stock 9 -- 9
Additional paid-in-capital 4,083 19 4,102
Retained earnings (accumulated deficit) 1,443 (18) 1,425
Accumulated other comprehensive loss (42) -- (42)
Treasury stock, as cost (3,288) -- (3,288)
-------- ----- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,509 $ 22 $ 14,531
======== ===== ========
</TABLE>
F-50
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
----------- ---------- -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,002 $-- $ 1,002
Receivables 1,482 3 1,485
Deferred income taxes 319 -- 319
Other current assets 1,228 -- 1,228
Property and equipment 1,376 2 1,378
Goodwill 3,741 3 3,744
Other noncurrent assets 2,752 1 2,753
Assets under management and mortgage programs 7,512 -- 7,512
------- --- -------
TOTAL ASSETS $19,412 $ 9 $19,421
======= === =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 2,050 $ 5 $ 2,055
Noncurrent liabilities 3,820 -- 3,820
Liabilities under management and mortgage programs 7,238 -- 7,238
Mandatorily redeemable preferred securities issued
by subsidiary holding senior debentures issued by
the Company 1,472 -- 1,472
Shareholders' equity
Common stock 9 -- 9
Additional paid-in-capital 3,855 8 3,863
Retained earnings (accumulated deficit) 1,484 (4) 1,480
Accumulated other comprehensive loss (49) -- (49)
Treasury stock, as cost (467) -- (467)
------- ----- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,412 $ 9 $19,421
======= ===== =======
</TABLE>
F-51
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
--------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
----------- ---------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (41) $(14) $ (55)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities from
continuing operations:
Income from discontinued operations (104) -- (104)
Gain on sale of discontinued operations, net of tax (174) -- (174)
Depreciation and amortization 345 2 347
Other charges 2,919 -- 2,919
Net gain on dispositions of businesses (967) -- (967)
Management and mortgage programs 2,001 -- 2,001
Other, net (803) 8 (795)
-------- ---- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
FROM CONTINUING OPERATIONS 3,176 (4) 3,172
-------- ------- --------
INVESTING ACTIVITIES:
Net proceeds from dispositions of businesses 3,365 -- 3,365
Net assets acquired (net of cash acquired) and
acquisition related payments (202) (3) (205)
Management and mortgage programs (1,265) -- (1,265)
Other, net (148) (2) (150)
-------- ------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
FROM CONTINUING OPERATIONS 1,750 (5) 1,745
-------- ------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,719 -- 1,719
Principal payments on borrowings (2,213) -- (2,213)
Issuance of common stock 127 -- 127
Repurchases of common stock (2,863) -- (2,863)
Management and mortgage programs (1,558) -- (1,558)
Inter-group funding (10) 10 --
-------- ------ --------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES
FROM CONTINUING OPERATIONS (4,798) 10 (4,788)
-------- ------ --------
Effect of changes in exchange rates on cash and cash
equivalents 51 -- 51
-------- ------ --------
Net cash used in discontinued operations (14) -- (14)
-------- ------ --------
Net increase in cash and cash equivalents 165 1 166
Cash and cash equivalents, beginning of period 1,002 -- 1,002
-------- ------ --------
Cash and cash equivalents, end of period $ 1,167 $ 1 $ 1,168
======== ====== ========
</TABLE>
F-52
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
----------- ---------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 541 $ (1) $ 540
Adjustments to reconcile net income (loss) to net
cash provided by operating activities from
continuing operations:
Loss from discontinued operations, net of tax 73 -- 73
Gain on sale of discontinued operations, net of tax (405) -- (405)
Depreciation and amortization 301 2 303
Other charges 347 -- 347
Management and mortgage programs 480 -- 480
Other, net (631) -- (631)
-------- --- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS 706 1 707
-------- --- --------
INVESTING ACTIVITIES:
Net proceeds from dispositions of businesses 314 -- 314
Net assets acquired (net of cash acquired) and
acquisition related payments (2,731) -- (2,731)
Management and mortgage programs (1,542) -- (1,542)
Other, net (241) (1) (242)
-------- ------ --------
CASH FLOWS USED IN INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS (4,200) (1) (4,201)
-------- ------ --------
FINANCING ACTIVITIES:
Proceeds from borrowings 4,809 -- 4,809
Principal payments on borrowings (2,596) -- (2,596)
Issuance of common stock 171 -- 171
Repurchases of common stock (258) -- (258)
Management and mortgage programs 1,117 -- 1,117
Proceeds from mandatorily redeemable preferred
securities issued by subsidiary holding solely
senior debentures issued by the Company 1,447 -- 1,447
-------- ----- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS 4,690 -- 4,690
-------- ----- --------
Effect of changes in exchange rates on cash and cash
equivalents (16) -- (16)
-------- ----- --------
Net cash used in discontinued operations (266) -- (266)
-------- ----- --------
Net increase in cash and cash equivalents 914 -- 914
Cash and cash equivalents, beginning of period 88 -- 88
-------- ----- --------
Cash and cash equivalents, end of period $ 1,002 $-- $ 1,002
======== ===== ========
</TABLE>
F-53
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
------------- ---------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (216) $(1) (217)
Adjustments to reconcile net loss to net cash
provided by operating activities from continuing
operations:
Loss from discontinued operations, net of tax 42 -- 42
Extraordinary gain, net of tax (26) -- (26)
Cumulative effect of accounting change, net of tax 283 -- 283
Depreciation and amortization 221 1 222
Other charges 701 -- 701
Management and mortgage programs 734 -- 734
Other, net (942) 1 (941)
------- --- ----
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS 797 1 798
------- --- ----
INVESTING ACTIVITIES:
Net proceeds from dispositions of businesses 224 -- 224
Net assets acquired (net of cash acquired) and
acquisition related payments (564) (3) (567)
Management and mortgage programs (1,497) -- (1,497)
Other, net (486) (1) (487)
------- ------ ------
CASH FLOWS USED IN INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS (2,323) (4) (2,327)
------- ------ ------
FINANCING ACTIVITIES:
Proceeds from borrowings 67 -- 67
Principal payments on borrowings (174) -- (174)
Issuance of convertible debt 544 -- 544
Issuance of common stock 132 -- 132
Repurchases of common stock (171) -- (171)
Management and mortgage programs 510 -- 510
Other, net (7) -- (7)
Inter-group funding (3) 3 --
---------- ----- --------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS 898 3 901
--------- ----- --------
Effect of changes in exchange rates on cash and cash
equivalents 15 -- 15
--------- ----- --------
Net cash used in discontinued operations 563 -- 563
--------- ----- --------
Net decrease in cash and cash equivalents (50) -- (50)
Cash and cash equivalents, beginning of period 138 -- 138
--------- ----- --------
Cash and cash equivalents, end of period $ 88 $-- $ 88
========= ===== =========
</TABLE>
27. SUBSEQUENT EVENTS
PENDING ACQUISITIONS
Avis Group Holdings, Inc. On November 13, 2000, the Company announced that
they entered into a definitive agreement to acquire all of the outstanding
shares of Avis Group Holdings, Inc. ("Avis," formerly Avis Rent A Car,
Inc.) that are not currently owned by the Company at a price of $33.00 per
F-54
<PAGE>
share in cash. Approximately 26 million outstanding shares of Avis common
stock, and options to purchase approximately 7.9 million additional shares,
are not currently owned by the Company. Accordingly, the transaction is
valued at approximately $937 million, inclusive of the net cash obligation
related to Avis stock options expected to be cancelled prior to
consummation.
The acquisition will be made by PHH. PHH will distribute the consumer car
rental business to a Company subsidiary not within PHH's ownership
structure. After the acquisition and the distribution of the consumer car
rental business, PHH will own and operate Avis Fleet as well as the Wright
Express fuel card business. The merger is conditioned upon, among other
things, approval of a majority of the votes cast by Avis stockholders who
are unaffiliated with the Company and also customary regulatory approvals.
Although no assurances can be given, the Company expects the transaction to
close in the first quarter of 2001.
Fairfield Communities, Inc. On November 2, 2000, the Company announced that
it had entered into a definitive agreement with Fairfield Communities, Inc.
("Fairfield") to acquire all of its outstanding common stock at $15 per
share, or approximately $635 million in aggregate. The final acquisition
price may increase to a maximum of $16 per share depending upon a formula
based on the average trading price of CD common stock over a twenty trading
day period prior to the date on which Fairfield stockholders meet to
approve the transaction. At least 50% of the consideration will be in cash
and the balance will either be in cash or CD common stock, at the Company's
election. Consummation of the transaction is subject to customary
regulatory approvals. Although no assurances can be given, the Company
expects to complete the acquisition in early 2001.
PENDING DISPOSITION
On October 27, 2000, the Company announced that it had entered into a
definitive agreement (the "Homestore Transaction") with Homestore.com, Inc.
("Homestore") to sell its Internet real estate portal, move.com, certain
other businesses within its Move.com Group segment and Welcome Wagon
International, Inc. ("Welcome Wagon") (a wholly-owned subsidiary included
with the diversified services segment) in exchange for approximately 26
million shares of Homestore common stock valued at approximately $761
million. The Company intends on allocating a portion of the Homestore
common stock shares received to existing Move.com common stockholders and
option holders. After such allocation, the Company expects to retain
approximately 19 or 20 million shares of Homestore common stock.
Consummation of the transaction is subject to certain customary closing
conditions, including Hart Scott Rodino anti-trust approval. Although no
assurances can be given, the Company expects to complete the transaction
during the first quarter of 2001.
FUNDING OF THE CLASS ACTION LITIGATION
Under the Settlement Agreement, the Company had the option of forming a
trust established for the benefit of the plaintiffs in lieu of posting
collateral. On November 13, 2000, the Company funded such trust with a cash
deposit of approximately $350 million. Such deposit will serve to reduce
the collateral required to be posted under the Settlement Agreement.
CREDIT FACILITIES
During August 2000, the Company replaced its existing $1.0 billion, 364-day
revolving credit facility with a $1.75 billion, three-year competitive
advance and revolving credit agreement maturing on August 29, 2003. On
November 13, 2000, the Company posted letters of credit of $1.71 billion
from this agreement as collateral required under the Settlement Agreement.
During November 2000, the Company obtained $790 million in commitments for
surety bonds and posted this entire amount as collateral required under the
Settlement Agreement on November 13, 2000.
During February 2000, PHH reduced the availability of its unsecured
committed credit facilities from $2.5 billion to $1.5 billion to reflect
the reduced borrowing needs of PHH as a result of the disposition of its
fleet businesses.
F-55
<PAGE>
During September and November of 2000, PHH obtained lines of credit of $125
million and $150 million maturing in September 2001 and November 2001,
respectively.
PHH SHELF REGISTRATION
On September 22, 2000, PHH filed a shelf registration statement registering
an additional $2.625 billion of debt securities. PHH currently has $3.0
billion available for issuing medium-term notes under its existing shelf
registration statement.
SECURITIZATIONS
During the second and third quarters of 2000, the Company entered into
three separate financing agreements with Apple Ridge Funding LLC ("Apple
Ridge"), a bankruptcy remote, special purpose entity. Under the terms of
these agreements, certain relocation receivables will be transferred for
cash, on a revolving basis, to Apple Ridge until March 31, 2007. The
Company retains a subordinated residual interest and the related servicing
rights and obligations in the relocation receivables.
DEBT REDEMPTION
On January 21, 2000, the Company redeemed all outstanding 71/2% senior
notes at a redemption price of 100.695% of par plus accrued interest. In
connection with the redemption, the Company recorded an extraordinary loss
of $4 million ($2 million after tax) in the first quarter of 2000.
During March and November of 2000, the Company made principal payments
totaling $500 million to reduce its outstanding borrowings under its
existing term loan facility.
MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIARY
In March 2000, a Company-formed limited liability corporation ("LLC")
issued a mandatorily redeemable preferred interest ("Senior Preferred
Interest") in exchange for $375 million in cash. The Senior Preferred
Interest is mandatorily redeemable 15 years from the date of issuance and
may be redeemed after 5 years, or earlier in certain circumstances.
Distributions on the Senior Preferred Interest are based on the three-month
LIBOR plus an applicable margin (1.77%). Simultaneously with the issuance
of the Senior Preferred Interest, the Company transferred certain assets to
the LLC. After the sale of the Senior Preferred Interest, the Company owned
100% of both the common interest and the junior preferred interest in the
LLC. In the event of default, holders of the Senior Preferred Interest have
certain liquidation preferences.
SHARE REPURCHASES
Subsequent to December 31, 1999, the Company repurchased an additional $306
million (approximately 18 million shares) of its common stock under its
repurchase program as of September 30, 2000.
STRATEGIC ALLIANCE
In February 2000, pursuant to a previously announced strategic alliance,
Liberty Media Corporation ("Liberty Media") invested $400 million in cash
to purchase 18 million shares of CD common stock and a two-year warrant to
purchase approximately 29 million shares of CD common stock at an exercise
price of $23.00 per share. In addition, in March 2000, Liberty Media's
Chairman, John C. Malone, Ph.D., purchased one million shares of CD common
stock for approximately $17 million in cash.
On November 16, 2000, Liberty Media purchased approximately 4.1 million
additional shares of CD common stock for consideration consisting of $12.34
per share, or $50 million in aggregate, in cash and approximately 2.3
million shares of CD common stock for consideration consisting of a warrant
to purchase up to approximately 29 million shares of CD common stock.
F-56
<PAGE>
MOVE.COM COMMON STOCK
Authorization of Tracking Stock. On March 21, 2000, the Company's
shareholders approved a proposal authorizing a new series of common stock
to track the performance of the Move.com Group, a group of businesses which
provide a broad range of quality relocation, real estate and home-related
products and services through its flagship portal site, move.com, and
through the move.com network. The Company's existing common stock was
reclassified as CD common stock, which reflects the performance of the
Company's other businesses and also a retained interest in the Move.com
Group (collectively referred to as the "Cendant Group"). In addition, the
Company's charter was amended and restated to increase the number of
authorized shares of common stock from 2.0 billion to approximately 2.5
billion, comprised of 2.0 billion shares of CD common stock and 500 million
shares of Move.com common stock. Although the issuance of Move.com common
stock is intended to track the performance of the Move.com Group, holders
are subject to all of the risks associated with an investment in the
Company and all of its businesses, assets and liabilities. On October 27,
2000, the Company entered into a definitive agreement to sell certain
businesses within its Move.com Group segment, as well as certain other
businesses (see Disposition above).
The Company issued shares of Move.com common stock in several private
financings, including the following transactions:
NRT Incorporated Investment. On April 14, 2000, NRT purchased 319,591
shares of Move.com common stock for $31.29 per share or approximately $10
million in cash. The Company owns $179 million of NRT convertible preferred
stock, of which $21 million will be convertible, at the Company's option
upon occurrence of certain events, into no more than 50% of NRT's common
stock.
Chatham Street Holdings, LLC Investment. On March 31, 2000, Chatham Street
Holdings, LLC ("Chatham") exercised a contractual right to purchase
1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash. In connection with such exercise, for
every two shares of Move.com common stock purchased, Chatham received a
warrant to purchase one share of Move.com common stock at a price equal to
$64.08 per share and a warrant to purchase one share of Move.com common
stock at a price equal to $128.16 per share. Also during March 2000, the
Company invested $25 million in convertible preferred stock of WMC Finance
Co. ("WMC"), an online provider of sub-prime mortgages and an affiliate of
Chatham (which is convertible into 2,541,946 shares or approximately 12% of
WMC's common stock at September 30, 2000), and was granted an option to
purchase approximately 5 million shares of WMC common stock.
On November 24, 2000 the Company and Chatham entered into an agreement
whereby Chatham sold to the Company (i) 2.6 million shares of Series E
cumulative preferred stock of WMC, (ii) 1,561,000 shares of Move.com common
stock and, (iii) warrants to purchase 1,561,000 shares of Move.com common
stock in exchange for $75.1 million in cash and 2.6 million shares of Class
A common stock of WMC. In consideration for such securities, the Company
also agreed to pay Chatham an additional $15 million within 90 days after
consummation of the Homestore Transaction.
Liberty Digital, Inc. Investment. On March 31, 2000, Liberty Digital, Inc.
("Liberty Digital") purchased 1,598,030 shares of Move.com common stock for
$31.29 per share in exchange for consideration consisting of $10 million in
cash and 813,215 shares of Liberty Digital Class A common stock valued at
approximately $40 million. In the event Move.com common stock is not
publicly traded by June 30, 2001, the Company will be required to exchange
such shares for CD common stock.
RESTRUCTURING COSTS AND OTHER UNUSUAL CHARGES
First Quarter 2000 Charge. During the three months ended March 31, 2000,
the Company incurred restructuring and other unusual charges of $86 million
as a result of initiatives aimed at improving the overall level of
organizational efficiency, consolidating and rationalizing existing
processes, reducing cost structures in the Company's underlying businesses
and other related efforts. These initiatives primarily affect the Company's
travel and insurance/wholesale segments.
F-57
<PAGE>
PRIDES LITIGATION SETTLEMENT
On March 14, 2000, pursuant to a court order approving the previously
disclosed PRIDES settlement, the Company issued approximately 25 million
Rights with a calculated value of $11.71 per Right. Right holders may sell
or exercise the Rights by delivering 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 are the same as the
original PRIDES, except that the conversion rate was revised and fixed so
that, at the time of the issuance of the Rights, the New PRIDES had a value
equal to $17.57 more than the original PRIDES.
In connection with the issuance of the Rights, the Company recorded a
non-cash credit of $41 million to litigation settlement and related costs
during the first quarter of 2000, with a corresponding decrease to
additional paid-in capital. The credit represented an adjustment related to
the number of Rights to be issued, which was decreased by approximately 3
million, as such Rights were unclaimed and uncontested.
On May 3, 2000, pursuant to the PRIDES settlement, the Company issued
approximately 4 million additional PRIDES (the "Additional PRIDES"), with a
face value of $50 per Additional PRIDES, and received approximately $91
million in cash proceeds related to the issuance of such securities. Only
Additional Income PRIDES (having identical terms to the originally issued
Income PRIDES) were issued, of which 3,619,374 were immediately converted
into 3,619,374 New Income PRIDES and 380,626 remained Additional Income
PRIDES. No Additional Growth PRIDES were issued in the offering. Upon the
issuance of the Additional Income PRIDES, the Company recorded a reduction
to stockholders' equity of $108 million equal to the value of the total
future contract adjustment payments to be made.
OTHER LITIGATION
During the third quarter of 2000, the Company incurred charges of $20
million in connection with litigation asserting claims associated with
accounting irregularities in the former business units of CUC and outside
of the principal common shareholder class action lawsuit.
----------------
F-58
