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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------
JANUARY 29, 1998 (JANUARY 29, 1998)
(Date of Report (date of earliest event reported))
CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 1-10308 06-0918165
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or organization) File No.) Identification Number)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
(973) 428-9700
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if applicable)
ITEM 5. OTHER EVENTS
This Current Report on Form 8-K includes the supplemental consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations of Cendant Corporation, formerly CUC
International Inc. (the "Company"), and gives retroactive effect to the merger
with HFS Incorporated, which has been accounted for as a pooling of interests.
ITEM 7. EXHIBITS
Exhibit
No. Description
- ------- -----------
11.1 Computation of per share earnings for year ended December 31, 1996,
1995 and 1994 (as restated to reflect the merger with HFS
Incorporated).
11.2 Computation of per share earnings for three months ended March 31,
1997 and 1996 (as restated to reflect the merger with HFS
Incorporated).
11.3 Computation of per share earnings for three and six months ended June
30, 1997 and 1996 (as restated to reflect the merger with HFS
Incorporated).
11.4 Computation of per share earnings for three and nine months ended
September 30, 1997 and 1996 (as restated to reflect the merger with
HFS Incorporated).
12 Computation of ratio of earnings to fixed charges
23.1 Consent of Deloitte & Touche LLP relating to the audited financial
statements of the Company.
23.2 Consent of Ernst & Young LLP relating to the audited financial
statements of CUC International Inc.
23.3 Consent of KPMG Peat Marwick LLP relating to the audited financial
statements of PHH Corporation.
23.4 Consent of Deloitte & Touche LLP relating to the audited financial
statements of Sierra On-Line, Inc.
23.5 Consent of KPMG Peat Marwick LLP relating to the audited financial
statements of Davidson & Associates, Inc.
23.6 Consent of Price Waterhouse LLP relating to the audited financial
statements of Ideon Group, Inc.
27.1 Restated financial data schedule for the years ended December 31,
1996, 1995 and 1994 (as restated to reflect the merger with HFS
Incorporated).
27.2 Restated financial data schedule for the three months ended March 31,
1997 and 1996 (as restated to reflect the merger with HFS
Incorporated).
27.3 Restated financial data schedule for the six months ended June 30,
1997 and 1996 (as restated to reflect the merger with HFS
Incorporated).
27.4 Restated financial data schedule for the nine months ended
September 30, 1997 and 1996 (as restated to reflect the merger with
HFS Incorporated).
99.1 Supplemental Consolidated Financial Statements of the Company for the
years ended December 31, 1996, 1995 and 1994 (as restated to reflect
the merger with HFS Incorporated on December 17, 1997).
99.2 Supplemental Interim Consolidated Financial Statements of the Company
for the three month periods ended March 31, 1997 and 1996, three and
six month periods ended June 30, 1997 and 1996 and the three and nine
month periods ended September 30, 1997 and 1996 (as restated to
reflect the merger with HFS Incorporated on December 17, 1997).
99.3 Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company for the years ended
December 31, 1996 and 1995. Supplemental Interim Management's
Discussion and Analysis of Financial Condition and Results of
Operations of the Company for the three month periods ended March 31,
1997 and 1996, three and six month periods ended June 30, 1997 and
1996, and three and nine month periods ended September 30, 1997 and
1996. (all Supplemental Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company are
restated to reflect the merger with HFS Incorporated on December 17,
1997).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CENDANT CORPORATION
BY: /s/ Scott E. Forbes
Scott E. Forbes
Senior Vice President
and Chief Accounting Officer
Date: January 29, 1998
CENDANT CORPORATION
CURRENT REPORT ON FORM 8-K
REPORT DATED JANUARY 29, 1998 (JANUARY 29, 1998)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11.1 Computation of per share earnings for year ended December 31,
1996, 1995 and 1994 (as restated to reflect the merger with HFS
Incorporated).
11.2 Computation of per share earnings for three months ended March
31, 1997 and 1996 (as restated to reflect the merger with HFS
Incorporated).
11.3 Computation of per share earnings for three and six months ended
June 30, 1997 and 1996 (as restated to reflect the merger with
HFS Incorporated).
11.4 Computation of per share earnings for three and nine months ended
September 30, 1997 and 1996 (as restated to reflect the merger
with HFS Incorporated).
12 Computation of ratio of earnings to fixed charges
23.1 Consent of Deloitte & Touche LLP relating to the audited
financial statements of the Company.
23.2 Consent of Ernst & Young LLP relating to the audited financial
statements of CUC International Inc.
23.3 Consent of KPMG Peat Marwick LLP relating to the audited
financial statements of PHH Corporation.
23.4 Consent of Deloitte & Touche LLP relating to the audited
financial statements of Sierra On-Line, Inc.
23.5 Consent of KPMG Peat Marwick LLP relating to the audited
financial statements of Davidson & Associates, Inc.
23.6 Consent of Price Waterhouse LLP relating to the audited financial
statements of Ideon Group, Inc.
27.1 Restated financial data schedule for the years ended December 31,
1996, 1995 and 1994 (as restated to reflect the merger with HFS
Incorporated).
27.2 Restated financial data schedule for the three months ended March
31, 1997 and 1996 (as restated to reflect the merger with HFS
Incorporated).
27.3 Restated financial data schedule for the six months ended
June 30, 1997 and 1996 (as restated to reflect the merger with
HFS Incorporated).
27.4 Restated financial data schedule for the nine months ended
September 30, 1997 and 1996 (as restated to reflect the merger
with HFS Incorporated).
99.1 Supplemental Consolidated Financial Statements of the Company for
the years ended December 31, 1996, 1995 and 1994 (as restated to
reflect the merger with HFS Incorporated on December 17, 1997).
99.2 Supplemental Interim Consolidated Financial Statements of the
Company for the three month periods ended March 31, 1997 and
1996, three and six month periods ended June 30, 1997 and 1996
and the three and nine month periods ended September 30, 1997 and
1996 (as restated to reflect the merger with HFS Incorporated on
December 17, 1997).
99.3 Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company for the years
ended December 31, 1996 and 1995. Supplemental Interim
Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company for the three month periods
ended March 31, 1997 and 1996, three and six month periods ended
June 30, 1997 and 1996, and three and nine month periods ended
September 30, 1997 and 1996. (all Supplemental Management's
Discussion and Analysis of Financial Condition and Results of
Operations of the Company are restated to reflect the merger with
HFS Incorporated on December 17, 1997).
EXHIBIT 11.1
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
-------- -------- -------- -------- -------- --------
Net income $423,611 $423,611 $302,825 $302,825 $286,590 $286,590
Convertible debt interest and
amortization of deferred
loan costs, net of tax 4,500 5,788 4,505 6,720 -- 3,141
-------- -------- -------- -------- -------- --------
Net income, as adjusted $428,111 $429,399 $307,330 $309,545 $286,590 $289,731
======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding 754,363 754,363 670,466 670,466 643,486 643,486
Incremental shares for
outstanding stock options
and warrants 40,099 42,096 44,294 51,193 39,549 41,788
Contingent shares -- -- -- -- 7,512 7,512
Convertible debt 19,830 24,127 19,864 27,045 -- 9,423
-------- -------- -------- -------- -------- --------
Weighted average common
equivalent shares outstanding 814,292 820,586 734,624 748,704 690,547 702,209
======== ======== ======== ======== ======== ========
Net income per share $ 0.53 $ 0.52 $ 0.42 $ 0.41 $ 0.42 $ 0.41
======== ======== ======== ======== ======== ========
EXHIBIT 11.2
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1997 1996
------------------- -------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
-------- -------- -------- --------
Net income $165,868 $165,868 $ 95,974 $ 95,974
Convertible debt interest and amortization
of deferred loan costs, net of tax 3,355 3,596 1,122 1,591
-------- -------- -------- --------
Net income, as adjusted $169,223 $169,464 $ 97,096 $ 97,565
======== ======== ======== ========
Weighted average common shares outstanding 799,404 799,404 705,401 705,401
Incremental shares for outstanding
stock options and warrants 37,288 37,287 43,672 46,484
Convertible debt 34,796 37,882 19,845 26,394
-------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding 871,488 874,573 768,918 778,279
======== ======== ======== ========
Net income per share $ 0.19 $ 0.19 $ 0.13 $ 0.13
======== ======== ======== ========
EXHIBIT 11.3
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------------------
1997 1996
---------------------- ---------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
--------- --------- --------- ---------
Net income (loss) $ (13,437) $ (13,437) $ 101,064 $ 101,064
Convertible debt interest and
amortization of deferred loan
costs, net of tax -- -- 1,122 1,644
--------- --------- --------- ---------
Net income (loss), as adjusted $ (13,437) $ (13,437) $ 102,186 $ 102,708
========= ========= ========= =========
Weighted average common shares
outstanding 804,246 804,246 735,841 735,841
Incremental shares for outstanding
stock options and warrants -- -- 41,995 43,457
Convertible debt -- -- 19,842 24,186
--------- --------- --------- ---------
Weighted average common and
common equivalent shares
outstanding 804,246 804,246 797,678 803,484
========= ========= ========= =========
Net income (loss) per share $ (0.02) $ (0.02) $ 0.13 $ 0.13
========= ========= ========= =========
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------
1997 1996
---------------------- ---------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
--------- --------- --------- ---------
Net income $ 152,432 $ 152,432 $ 197,038 $ 197,038
Convertible debt interest and
amortization of deferred loan
costs, net of tax 7,028 7,476 2,244 3,235
--------- --------- --------- ---------
Net income, as adjusted $ 159,460 $ 159,908 $ 199,282 $ 200,273
========= ========= ========= =========
Weighted average common shares
outstanding 803,188 803,188 723,929 723,929
Incremental shares for outstanding
stock options and warrants 36,016 36,034 40,335 43,476
Convertible debt 36,292 39,169 19,842 25,289
--------- --------- --------- ---------
Weighted average common and
common equivalent shares
outstanding 875,496 878,391 784,106 792,694
========= ========= ========= =========
Net income per share $ 0.18 $ 0.18 $ 0.25 $ 0.25
========= ========= ========= =========
EXHIBIT 11.4
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996
------------------- -------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
-------- -------- -------- --------
Net income $248,264 $248,264 $ 68,466 $ 68,466
Convertible debt interest and
amortization of deferred loan
costs, net of tax 5,539 5,771 1,134 1,586
-------- -------- -------- --------
Net income, as adjusted $253,803 $254,035 $ 69,600 $ 70,052
======== ======== ======== ========
Weighted average common shares
outstanding 807,447 807,447 773,519 773,519
Incremental shares for outstanding
stock options and warrants 34,642 43,529 41,080 41,975
Convertible debt 45,972 48,471 19,842 22,989
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding 888,061 899,447 834,441 838,483
======== ======== ======== ========
Net income per share $ 0.29 $ 0.28 $ 0.08 $ 0.08
======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996
------------------- -------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
-------- -------- -------- --------
Net income $400,694 $400,694 $265,504 $265,504
Convertible debt interest and
amortization of deferred loan
costs, net of tax 10,648 11,328 3,369 4,812
-------- -------- -------- --------
Net income, as adjusted $411,342 $412,022 $268,873 $270,316
======== ======== ======== ========
Weighted average common shares
outstanding 804,338 804,338 740,557 740,557
Incremental shares for outstanding
stock options and warrants 33,677 33,966 40,317 42,528
Convertible debt 36,364 39,115 19,842 24,522
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding 874,379 877,419 800,716 807,607
======== ======== ======== ========
Net income per share $ 0.47 $ 0.47 $ 0.34 $ 0.33
======== ======== ======== ========
EXHIBIT 12
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes, minority interest
and extraordinary
loss (1) $ 747,230 $ 713,670 $ 503,332 $ 464,332 $ 365,930 $ 236,949
Plus: Fixed charges 304,720 345,421 302,539 238,212 206,031 240,103
Less: Capitalized interest -- (560) -- (246) (440) --
----------- ----------- ----------- ----------- ----------- -----------
Earnings available to
cover fixed charges $ 1,051,950 $ 1,058,531 $ 805,871 $ 702,298 $ 571,521 $ 477,052
=========== =========== =========== =========== =========== ===========
Fixed charges (1, 2):
Interest, including
amortization of
deferred loans costs $ 281,207 $ 317,127 $ 280,499 $ 219,417 $ 187,447 $ 226,350
Capitalized interest -- 560 -- 246 440 --
Interest portion of
rental payment 23,513 27,734 22,040 18,549 18,144 13,753
----------- ----------- ----------- ----------- ----------- -----------
Total fixed charges $ 304,720 $ 345,421 $ 302,539 $ 238,212 $ 206,031 $ 240,103
=========== =========== =========== =========== =========== ===========
Ratio of earnings to
fixed charges 3.45 3.06 2.66 2.95 2.77 1.99
=========== =========== =========== =========== =========== ===========
- ---------
(1) For years ended 1992 through 1995, information included for the Company and
PHH Corporation is based on the fiscal years ended January 31.
(2) Fixed charges consist of interest expense on all indebtedness (including
amortization of deferred financing costs) and the portion of operating
lease rental expense that is representative of the interest factor (deemed
to be one-third of operation lease rentals).
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-63237, 33-95126, 333-11035, 333-13537, 333-17323, 333-17411, 333-20391,
333-26927, 333-35709, 333-35707, and 333-23063 for Cendant Corporation on
Forms S-3 and in Registration Statement Nos. 33-26875, 33-75682, 33-93322,
33-41823, 33-48175, 33-58896, 33-91656, 333-03241, 33-74068, 33-74066,
33-91658, 333-00475, 333-03237, 33-75684, 33-80834, 33-93372, 333-09633,
333-09637, 333-09655, 333-22003, 333-34517-2, 333-42503, 333-30649, and
333-42549 for Cendant Corporation on Form S-8 of our report dated
December 17, 1997, appearing in the Current Report on Form 8-K for Cendant
Corporation dated January 28, 1998.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
January 28, 1998
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference of our report dated March 10,
1997, with respect to the consolidated financial statements and schedule of CUC
International Inc. included in this Current Report on Form 8-K dated January
28, 1998, filed with the Securities and Exchange Commission, in the following
Registration Statements and related Prospectuses:
Form S-3s
- ---------
33-63237, 33-95126, 333-11035, 333-13537, 333-17323, 333-17411, 333-20391,
333-23063, 333-26927, 333-35709 and 333-35707
Form S-8s
- ---------
33-26875 CUC International Inc. 1987 Stock Option Plan
33-75682 CUC International Inc. 1987 Stock Option Plan as amended
33-93322 CUC International Inc. 1987 Stock Option Plan as amended
33-41823 CUC International Inc. 1990 Directors Stock Option Plan
33-48175 Entertainment Publications Inc. 1988 Non-Qualified Stock Option
Plan
33-58896 CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan
33-91656 CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan as amended
333-03241 CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan as amended
33-74068 CUC International Inc. 1992 Directors Stock Option Plan
33-74066 CUC International Inc. 1992 Employee Stock Option Plan
33-91658 CUC International Inc. 1992 Employee Stock Option Plan as amended
333-00475 CUC International Inc. 1992 Employee Stock Option Plan as amended
333-03237 CUC International Inc. 1992 Employee Stock Option Plan as amended
33-75684 CUC International Inc. 1994 Employee Stock Purchase Plan
33-80834 CUC International Inc. Savings Incentive Plan
33-93372 CUC International Inc. 1994 Directors Stock Option Plan
333-09633 Sierra On-Line, Inc. 1987 Stock Option Plan
333-09637 Sierra On-Line, Inc. 1995 Stock Option and Award Plan
333-09655 Papyrus Design Group Inc. 1992 Stock Option Plan
333-22003 Knowledge Adventure 1993 Stock Option Plan
333-30649 CUC International Inc. 1997 Stock Option Plan; 1992 Employee Stock
Option Plan; 1992 Bonus and Salary Replacement Stock Option Plan
and Individual Option Agreements with Certain Employees
333-42503 CUC International Inc. 1997 Stock Incentive Plan
333-34517-2 HFS Incorporated 1992 Incentive Stock Option Plan; HFS
Incorporated Amended and Restated 1993 Plan; and Cendant
Corporation 1997 Employee Stock Option Plan
333-42549 HFS Incorporated Employee Savings Plan; PHH Corporation Amended
and Restated Employee Investment Plan
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Stamford, Connecticut
January 28, 1998
The Board of Directors
PHH Corporation:
We consent to the incorporation by reference in Registration Statement Nos.
33-63237, 33-95126, 333-11035, 333-13537, 333-17323, 333-17411, 333-20391,
333-26927, 333-35709, 333-35707, and 333-23063 on Forms S-3 and in Registration
Statement Nos. 33-26875, 33-75682, 33-93322, 33-41823, 33-48175, 33-58896,
33-91656, 333-03241, 33-74068, 33-74066, 33-91658, 333-00475, 333-03237,
33-75684,33-80834, 33-93372, 333-09633, 333-09637, 333-09655, 333-22003,
333-34517-2, 333-42503, 333-30649 and 333-42549 on Forms S-8 for Cendant
Corporation of our report dated April 30, 1997, with respect to the
consolidated balance sheets of PHH Corporation and subsidiaries (the
"Company") at December 31, 1996 and January 31, 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows
for the year ended December 31, 1996 and each of the years in the two year
period ended January 31, 1996, which report appears in the Form 8-K of Cendant
Corporation dated January 28, 1998, incorporated by reference in the above
Registration Statements.
Our report contains an explanatory paragraph that states that the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," in the year ended January 31, 1996.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
January 28, 1998
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-63237, 33-95126, 333-11035, 333-13537, 333-17323, 333-17411, 333-20391,
333-26927, 333-35709, 333-35707, and 333-23063 for Cendant Corporation on
Forms S-3 and in Registration Statement Nos. 33-26875, 33-75682, 33-93322,
33-41823, 33-48175, 33-58896, 33-91656, 333-03241, 33-74068, 33-74066,
33-91658, 333-00475, 333-03237, 33-75684, 33-80834, 33-93372, 333-09633,
333-09637, 333-09655, 333-22003, 333-34517-2, 333-42503, 333-30649, and
333-42549 for Cendant Corporation on Form S-8 of our report dated
June 24, 1996, appearing in the Current Report on Form 8-K for Cendant
Corporation dated January 28, 1998.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
January 28, 1998
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cendant Corporation
We consent to the incorporation by reference in the Registration Statement
(Form S-8s: Numbers 33-26875, 33-75682, 33-93322, 33-41823, 33-48175, 33-58896,
33-91656, 333-03241, 33-74068, 33-74066, 33-91658, 333-00475, 333-03237,
33-75684, 33-80834, 33-93372, 333-09633, 333-09637, 333-09655, 333-22003,
333-30649, 333-42503, 333-34517 and 333-42549) pertaining to the CUC
International Inc. 1987 Stock Option Plan, the CUC International Inc. 1987
Stock Option Plan as amended, the CUC International Inc. 1987 Stock Option
Plan as amended, the CUC International Inc. 1990 Directors' Stock Option Plan,
the Entertainment Publications, Inc. 1988 Non-Qualified Stock Option Plan,
the CUC International Inc. 1992 Bonus and Salary Replacement Stock Option Plan,
the CUC International Inc. 1992 Bonus and Salary Replacement Stock Option Plan
as amended, the CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan as amended, the CUC International Inc. 1992 Directors Stock Option
Plan, the CUC International Inc. 1992 Employee Stock Option Plan, the CUC
International Inc. 1992 Employee Stock Option Plan as amended, the CUC
International Inc. 1992 Employee Stock Option Plan as amended, the CUC
International Inc. 1992 Employee Stock Option Plan as amended, the CUC
International Inc. 1994 Employee Stock Purchase Plan, the CUC International
Inc. Savings Incentive Plan, the CUC International Inc. 1994 Directors Stock
Option Plan, the Sierra On-Line, Inc. 1987 Stock Option Plan, the Sierra
On-Line, Inc. 1995 Stock Option and Award Plan, the Papyrus Design Group, Inc.
1992 Stock Option Plan, the Knowledge Adventure 1993 Stock Option Plan, the
1992 Employee Stock Option Plan and 1992 Bonus and Salary Replacement Stock
Option Plan and 1997 Stock Option Plan and Davidson non-plan options, the
1997 Stock Incentive Plan, the HFS 1992 Plan and HPS 1993 Plan and 1997
Employee Stock Option Plan and the HFS and PHH 401k Plans, respectively, and
in the Registration Statements (Form S-3s: Numbers 33-63237, 33-95126,
333-11035, 333-13537, 333-17323, 333-17411, 333-20391, 333-23063, 333-26927,
333-35709 and 333-35707) of our report dated February 21, 1996, with respect
to the consolidated balance sheet of Davidson & Associates, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements
of earnings, shareholders' equity, and cash flows and related schedule for
each of the years in the two-year period ended December 31, 1995.
/s/ KPMG Peat Marwick LLP
Long Beach, California
January 27, 1998
Exhibit 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference of our report dated February 2,
1996, with respect to the consolidated financial statements of Ideon Group,
Inc. which appears in the Current Report on Form 8-K of Cendant Corporation
filed with the Securities and Exchange Commission on or about January 28, 1998
in the following registration statements.
Form S-3s
- ---------
33-63237, 33-95126, 333-11035, 333-13537, 333-17323, 333-17411, 333-20391,
333-23063, 333-26927, 333-35707 and 333-35709.
Form S-8s
- ---------
33-26875 CUC International Inc. 1987 Stock Option Plan
33-75682 CUC International Inc. 1987 Stock Option Plan as amended
33-93322 CUC International Inc. 1987 Stock Option Plan as amended
33-41823 CUC International Inc. 1990 Directors Stock Option Plan
33-48175 Entertainment Publications Inc. 1988 Non-Qualified Stock Option
Plan
33-58896 CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan
33-91656 CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan as amended
333-03241 CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan as amended
33-74068 CUC International Inc. 1992 Directors Stock Option Plan
33-74066 CUC International Inc. 1992 Employee Stock Option Plan
33-91658 CUC International Inc. 1992 Employee Stock Option Plan as amended
333-00475 CUC International Inc. 1992 Employee Stock Option Plan as amended
333-03237 CUC International Inc. 1992 Employee Stock Option Plan as amended
33-75684 CUC International Inc. 1994 Employee Stock Purchase Plan
33-80834 CUC International Inc. Savings Incentive Plan
33-93372 CUC International Inc. 1994 Directors Stock Option Plan
333-09633 Sierra On-Line, Inc. 1987 Stock Option Plan
333-09637 Sierra On-Line, Inc. 1995 Stock Option and Award Plan
333-09655 Papyrus Design Group Inc. 1992 Stock Option Plan
333-22003 Knowledge Adventure 1993 Stock Option Plan
333-30649 CUC International Inc. 1997 Stock Option Plan; CUC International
Inc. 1992 Employee Stock Option Plan; CUC International Inc. 1992
Bonus and Salary Replacement Stock Option Plan
and the Davidson non-plan individual option agreements
333-42503 CUC International Inc. 1997 Stock Incentive Plan
333-42549 HFS Incorporated Employee Savings Plan and PHH Corporation Amended
and Restated Employee Investment Plan
333-34517-2 HFS Incorporated 1992 Incentive Stock Option Plan and HFS
Incorporated Amended and Restated 1993 Stock Option Plan
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Tampa, Florida
January 28, 1998
5
1,000
YEAR YEAR YEAR
DEC-31-1996 DEC-31-1995 DEC-31-1994
JAN-01-1996 JAN-01-1995 JAN-01-1994
DEC-31-1996 DEC-31-1995 DEC-31-1994
633,903 355,959 0
94,200 97,164 0
1,376,265 1,095,035 0
85,640 66,059 0
0 0 0
2,529,593 1,804,145 0
0 0 0
0 0 0
13,588,368 8,994,384 0
1,664,946 919,057 0
1,004,584 353,977 0
0 0 0
0 0 0
8,047 7,004 0
4,314,622 2,141,642 0
13,588,368 8,994,384 0
0 0 0
3,908,780 2,992,122 2,446,731
0 0 0
2,989,720 2,378,497 1,963,946
179,945 97,029 (11,839)
0 0 0
25,445 13,264 10,553
713,670 503,332 464,332
290,059 200,507 179,742
423,611 302,825 284,590
0 0 0
0 0 0
0 0 2,000
423,611 302,825 286,590
$0.53 $0.42 $0.42
$0.52 $0.41 $0.41
5
1,000
3-MOS 3-MOS
DEC-31-1997 DEC-31-1996
JAN-01-1997 JAN-01-1996
MAR-31-1997 MAR-31-1996
842,041 0
347,451 0
1,258,317 0
0 0
0 0
2,974,020 0
0 0
0 0
14,009,501 0
1,542,668 0
1,757,205 0
0 0
0 0
8,129 0
4,271,827 0
14,009,501 0
0 0
1,164,106 821,411
0 0
866,922 655,609
0 0
0 0
19,066 7,502
278,118 158,300
112,250 62,326
165,868 95,974
0 0
0 0
0 0
165,868 95,974
$0.19 $0.13
$0.19 $0.13
5
1,000
6-MOS 6-MOS
DEC-31-1997 DEC-31-1996
JAN-01-1997 JAN-01-1996
JUN-30-1997 JUN-30-1996
791,001 0
473,501 0
1,409,026 0
0 0
0 0
3,255,501 0
0 0
0 0
14,142,793 0
1,768,450 0
1,928,394 0
0 0
0 0
8,184 0
4,284,579 0
14,142,793 0
0 0
2,458,711 1,757,050
0 0
1,794,381 1,375,924
303,000 28,635
0 0
28,358 14,761
332,972 337,730
180,540 140,692
152,432 197,038
0 0
0 0
0 0
152,432 197,038
$0.18 $0.25
$0.18 $0.25
5
1,000
9-MOS 9-MOS
DEC-31-1997 DEC-31-1996
JAN-01-1997 JAN-01-1996
SEP-30-1997 SEP-30-1996
902,777 0
308,947 0
1,538,415 0
0 0
0 0
3,380,796 0
0 0
0 0
14,997,006 0
1,358,767 0
2,422,524 0
0 0
0 0
8,245 0
4,600,648 0
14,997,006 0
0 0
3,890,015 2,799,951
0 0
2,795,865 2,156,593
303,000 175,835
0 0
43,920 17,224
747,230 450,299
346,536 184,795
400,694 265,504
0 0
0 0
0 0
400,694 265,504
$0.47 $0.34
$0.47 $0.33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the supplemental consolidated balance sheets of Cendant
Corporation and subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related supplemental consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the supplemental consolidated
financial statements based on our audits. The supplemental consolidated
financial statements give retroactive effect to the merger of CUC International
Inc. with HFS Incorporated to form Cendant Corporation, which has been
accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. We did not audit the balance
sheets of CUC International Inc. as of January 31, 1997 and 1996, or the
related statements of income, shareholders' equity, and cash flows of CUC
International Inc. for the years ended January 31, 1997, 1996 and 1995, which
statements reflect total assets of approximately $2.5 billion and $2.1 billion
as of January 31, 1997 and 1996, respectively, and net income of approximately
$164.1 million, $145.0 million and $164.1 million for the years ended
January 31, 1997, 1996 and 1995, respectively. Nor did we audit the balance
sheets of PHH Corporation (a consolidated subsidiary of HFS Incorporated) as
of December 31, 1996 and January 31, 1996, or the related statements of income,
shareholders' equity, and cash flows of PHH Corporation for the years ended
December 31, 1996, January 31, 1996 and 1995, which statements reflect total
assets of approximately $6.6 billion and $5.8 billion as of December 31, 1996
and January 31, 1996, respectively, and net income of approximately $87.6
million, $78.1 million and $69.0 million for the years ended December 31, 1996,
January 31, 1996 and 1995, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for CUC International Inc. and PHH
Corporation for such periods, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cendant Corporation
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in the notes to the supplemental consolidated financial statements,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights", in the year
ended December 31, 1995.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
December 17, 1997
1
Report of Independent Auditors
Board of Directors and Shareholders
CUC International Inc.
We have audited the accompanying consolidated balance sheets of CUC
International Inc. ("CUC") as of January 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended January 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of the following
wholly-owned subsidiaires: Davidson & Associates, Inc. ("Davidson") as of
December 31, 1995 and for the years ended December 31, 1995 and 1994, Sierra
On-Line, Inc. ("Sierra") as of March 31, 1996 and for the years ended March 31,
1996 and 1995 and Ideon Group, Inc. ("Ideon") as of December 31, 1995 and for
the year ended December 31, 1995 and the year ended October 31, 1994. Effective
January 1, 1995, Ideon changed its fiscal year end from October 31 to
December 31 (the "Ideon Transition Period"). We also did not audit the
statement of operations for the Ideon Transition Period which includes a loss
of $49.9 million included as a charge to retained earnings in the 1996
consolidated financial statements. These financial statements reflect, as of
January 31, 1996, total assets constituting 31.5% of the consolidated finanical
statements total and reflect total revenues constituting 27.6% and 28.2% of the
consolidated financial statements totals for the years ended January 31, 1996
and 1995, respectively, and were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to Davidson,
Sierra and Ideon for the periods indicated above, is based solely on the
reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall finanical
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CUC at January 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended January 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 10, 1997
2
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PHH Corporation
We have audited the consolidated balance sheets of PHH Corporation and
subsidiaries as of December 31, 1996 and January 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year ended December 31, 1996 and each of the years in the two-year period ended
January 31, 1996, not presented separately herein. These consolidated statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PHH Corporation and
subsidiaries as of December 31, 1996 and January 31, 1996, and the results of
their operations and their cash flows for the year ended December 31, 1996 and
for each of the years in the two-year period ended January 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights", in the year ended January 31, 1996.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
April 30, 1997
3
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Sierra On-Line, Inc.
Bellevue, Washington
We have audited the consolidated balance sheet of Sierra On-Line Inc. and
subsidiaries (the "Company") as of March 31, 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended March 31, 1996, not presented separately herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
fairly, in all material respects, the financial position of the Company as of
March 31, 1996, and the results of their operations and their cash flows for
each of the two years in the period ended March 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Seattle, Washington
June 24, 1996
4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Davidson & Associates, Inc.
We have audited the consolidated balance sheet of Davidson & Associates, Inc.
and subsidiaries as of December 31, 1995 and the related consolidated
statements of earnings, shareholders' equity and cash flows and related
financial statement schedule for each of the years in the two-year period
ended December 31, 1995, not presented separately herein. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Davidson & Associates, Inc. and subsidiaries as of December 31, 1995
and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1995 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ KPMG Peat Marwick LLP
Long Beach, California
February 21, 1996
5
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated financial statements of Ideon Group, Inc.
(formerly known as SafeCard Services, Incorporated), and its subsidiaries
(not presented separately herein), present fairly, in all material respects,
the financial position of Ideon Group, Inc. and its subsidiaries at
December 31, 1995, and the results of their operations and their cash flows
for the year ended December 31, 1995, the two months ended December 31, 1994,
and the year ended October 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Ideon Group, Inc. for any
period subsequent to December 31, 1995.
As discussed in Note 1, the Company changed the amortization periods for
deferred subscriber acquisition costs effective December 31, 1994.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Tampa, Florida
February 2, 1996
6
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
ASSETS 1996 1995
----------- -----------
Current assets
Cash and cash equivalents $ 633,903 $ 355,959
Marketable securities 94,200 97,164
Receivables, net of allowance for doubtful accounts
of $85,640 and $66,059 1,290,625 1,028,976
Deferred income taxes 141,251 50,563
Other current assets 369,614 271,483
----------- -----------
Total current assets 2,529,593 1,804,145
----------- -----------
Deferred membership acquisition costs 401,564 404,655
Franchise agreements - net 995,947 517,218
Goodwill - net 2,302,226 700,375
Other intangibles - net 636,230 38,845
Other assets 993,574 573,537
----------- -----------
Total assets exclusive of assets under programs 7,859,134 4,038,775
----------- -----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,418,666 3,243,236
Relocation receivables 773,326 736,038
Mortgage loans held for sale 1,248,299 784,901
Mortgage servicing rights and fees 288,943 191,434
----------- -----------
5,729,234 4,955,609
----------- -----------
TOTAL ASSETS $13,588,368 $ 8,994,384
=========== ===========
See accompanying notes to supplemental consolidated financial statements.
7
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
Accounts payable, accrued expenses and other
current liabilities $ 1,664,946 $ 919,057
------------ ------------
Deferred income 1,099,393 747,414
Long-term debt 1,004,584 353,977
Deferred income taxes 46,770 59,899
Other noncurrent liabilities 78,115 102,601
------------ ------------
Total liabilities exclusive of liabilities under programs 3,893,808 2,182,948
------------ ------------
Liabilities under management and mortgage programs
Debt 5,089,943 4,427,872
Deferred income taxes 281,948 234,918
------------ ------------
5,371,891 4,662,790
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized
10 million shares; none issued and outstanding -- --
Common stock, $.01 par value - authorized
2 billion shares; issued 804,655,850
and 700,361,629 shares 8,047 7,004
Additional paid-in capital 2,870,422 994,814
Retained earnings 1,556,300 1,202,589
Net unrealized gain on marketable securities 4,334 593
Currency translation adjustment (12,452) (25,356)
Restricted stock, deferred compensation (28,212) --
Treasury stock, at cost, 6,911,757 and 5,115,947 shares (75,770) (30,998)
------------ ------------
Total shareholders' equity 4,322,669 2,148,646
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,588,368 $ 8,994,384
============ ============
See accompanying notes to supplemental consolidated financial statements.
8
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
REVENUES
Membership and service fees - net $ 3,433,917 $ 2,606,196 $ 2,178,984
Fleet leasing (net of depreciation and
interest costs of $1,132,408, $1,088,993
and $976,244, respectively) 56,660 52,079 47,860
Other 418,203 333,847 219,887
----------- ----------- -----------
Net revenues 3,908,780 2,992,122 2,446,731
----------- ----------- -----------
EXPENSES
Operating 1,392,788 1,110,928 921,832
Marketing and reservation 1,089,482 875,155 742,933
General and administrative 339,543 279,500 221,745
Depreciation and amortization 167,907 112,914 97,175
Interest - net 25,445 13,264 10,553
Merger and related costs and other unusual charges 179,945 97,029 7,900
Gain on sale of the ImagiNation Network -- -- (19,739)
----------- ----------- -----------
Total expenses 3,195,110 2,488,790 1,982,399
----------- ----------- -----------
Income before income taxes 713,670 503,332 464,332
Provision for income taxes 290,059 200,507 179,742
----------- ----------- -----------
Net income before cumulative effect of
accounting change for income taxes 423,611 302,825 284,590
Cumulative effect of accounting change for
income taxes -- -- 2,000
----------- ----------- -----------
Net income $ 423,611 $ 302,825 $ 286,590
=========== =========== ===========
PER SHARE INFORMATION
Net income per share
Primary $ 0.53 $ 0.42 $ 0.42
Fully diluted $ 0.52 $ 0.41 $ 0.41
Weighted average shares
Primary 814,292 734,624 690,547
Fully diluted 820,586 748,704 702,209
See accompanying notes to supplemental consolidated financial statements.
9
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance, January 1, 1994 643,258 $ 6,433 $ 533,807 $ 822,399 $ -- $ (26,481) $ -- $(7,160) $(9,745)
Issuance of common stock 10,592 106 62,043 -- -- -- -- -- --
Exercise of stock options
by payment of cash and
common stock 7,732 76 53,649 (10,140) -- -- -- -- (760)
Tax benefit from exercise
of stock options and
vesting of restricted
stock -- -- 44,151 -- -- -- -- -- --
Amortization of
restricted stock -- -- 303 -- -- -- -- -- --
Amortization of ESOP
obligation -- -- -- -- -- -- -- 2,331 --
Adjustment to reflect
change in GETKO and
NAOG fiscal years -- -- -- (4,067) -- -- -- 3,071 --
Cash dividends declared -- -- -- (29,199) -- -- -- -- --
Conversion of convertible
notes 4,484 45 22,650 -- -- -- -- -- --
Net unrealized loss on
marketable securities -- -- -- -- (748) -- -- -- --
Purchase of common stock -- -- -- -- -- -- -- -- (25,885)
Retirement of treasury
stock (2,832) (28) (25,873) -- -- -- -- -- 25,885
Currency translation
adjustment -- -- -- -- -- 4,529 -- -- --
Distribution of Chartwell
Leisure Inc. -- -- (18,445) (79,775) -- -- -- -- --
Net income -- -- -- 286,590 -- -- -- -- --
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance, December 31, 1994 663,234 6,632 672,285 985,808 (748) (21,952) -- (1,758) (10,505)
See accompanying notes to supplemental consolidated financial statements.
10
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance,
January 1, 1995 663,234 $6,632 $672,285 $985,808 $ (748) $(21,952) $ -- $(1,758) $(10,505)
Issuance of common
stock 20,810 208 183,384 -- -- -- -- -- --
Exercise of stock
options by
payment of cash
and common stock 12,435 124 64,421 -- -- -- -- -- (20,493)
Tax benefit from
exercise of
stock options -- -- 54,842 -- -- -- -- -- --
Amortization of
ESOP obligation -- -- 1,242 -- -- -- -- 1,758 --
Exercise of stock
warrants 2,381 24 14,872 -- -- -- -- -- --
Cash dividends
declared and
other equity
distributions -- -- 175 (36,005) -- -- -- -- --
Adjustment to
reflect change
in Advance Ross
and Ideon fiscal
years -- -- -- (50,039) -- -- -- -- --
Conversion of
convertible notes 2,126 21 13,670 -- -- -- -- -- --
Net unrealized gain
on marketable
securities -- -- -- -- 1,341 -- -- -- --
Purchase of common
stock -- -- -- -- -- -- -- -- (10,083)
Retirement of
treasury stock (624) (5) (10,077) -- -- -- -- -- 10,083
Currency
translation
adjustment -- -- -- -- -- (3,404) -- -- --
Net income -- -- -- 302,825 -- -- -- -- --
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance,
December 31, 1995 700,362 7,004 994,814 1,202,589 593 (25,356) -- -- (30,998)
See accompanying notes to supplemental consolidated financial statements.
11
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance,
January 1, 1996 700,362 $7,004 $ 994,814 $1,202,589 $ 593 $(25,356) $ -- $ -- $(30,998)
Hebdo Mag
adjustment 14,203 142 16,705 718 -- 1,612 -- -- --
Issuance of common
stock 70,961 710 1,654,009 (34,137) -- -- -- -- --
Exercise of stock
options by
payment of cash
and common stock 14,010 140 78,161 -- -- -- -- -- (25,620)
Restricted stock
issuance 1,365 13 30,472 -- -- -- (30,485) -- --
Amortization of
restricted stock -- -- -- -- -- -- 2,273 -- --
Tax benefit from
exercise of
stock options -- -- 78,844 -- -- -- -- -- --
Cash dividends
declared -- -- -- (29,402) -- -- -- -- --
Adjustment to
reflect change
in Davidson,
Sierra & Ideon
fiscal years -- -- -- (4,674) -- -- -- -- --
Adjustment to
reflect change
in PHH fiscal
year (67) (1) (634) (2,405) -- 2,380 -- -- --
Conversion of
convertible
notes 3,822 39 18,051 -- -- -- -- -- --
Net unrealized
gain on
marketable
securities -- -- -- -- 3,741 -- -- -- --
Purchase of
common stock -- -- -- -- -- -- -- -- (19,152)
Currency
translation
adjustment -- -- -- -- -- 8,912 -- -- --
Net income -- -- -- 423,611 -- -- -- -- --
------- ------ ---------- ---------- ------ -------- -------- ------- --------
Balance,
December 31, 1996 804,656 $8,047 $2,870,422 $1,556,300 $4,334 $(12,452) $(28,212) $ -- $(75,770)
See accompanying notes to supplemental consolidated financial statements.
12
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
OPERATING ACTIVITIES 1996 1995 1994
----------- ----------- -----------
Net income $ 423,611 $ 302,825 $ 286,590
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 177,725 117,031 103,667
Membership acquisition costs (638,182) (605,058) (508,807)
Amortization of membership costs 641,272 556,548 467,019
Gain on sales of mortgage servicing rights (5,194) (17,400) (28,076)
Deferred income taxes 56,523 22,632 58,387
Increase (decrease) from changes in:
Receivables (162,566) (184,801) (103,688)
Accounts payable, accrued expenses and other current liabilities 149,387 136,595 (33,804)
Deferred income 23,386 83,533 60,220
Other 28,127 (55,027) (100,004)
----------- ----------- -----------
694,089 356,878 201,504
----------- ----------- -----------
Increase (decrease) from changes in assets
under management and mortgage programs:
Depreciation and amortization under management and
mortgage programs 1,021,761 960,913 869,807
Mortgage loans held for sale (73,308) (139,520) 42,562
----------- ----------- -----------
948,453 821,393 912,369
----------- ----------- -----------
Net cash provided by operating activities 1,642,542 1,178,271 1,113,873
----------- ----------- -----------
INVESTING ACTIVITIES
Assets under management and mortgage programs:
Investment in leases and leased vehicles (1,738,426) (2,008,559) (1,703,690)
Payments received on investment in leases and leased vehicles 595,852 576,670 593,155
Proceeds from sales and transfers of leases and
leased vehicles to third parties -- 109,859 105,087
Additions to originated mortgage servicing rights (164,393) (130,135) (41,920)
Proceeds from sales of mortgage servicing rights 7,113 21,742 36,836
Repayment of advances on homes under management 4,348,857 6,070,490 5,059,017
Equity advances on homes under management (4,307,978) (6,238,538) (4,989,953)
----------- ----------- -----------
(1,258,975) (1,598,471) (941,468)
Property and equipment additions (140,626) (108,702) (73,804)
Proceeds from sales of marketable securities 137,277 255,916 136,977
Purchases of marketable securities (125,551) (138,198) (161,585)
Loans and investments (12,721) (33,783) (42,524)
Net assets acquired, exclusive of cash acquired (1,688,294) (145,789) (63,437)
Funding of grantor trusts (89,849) -- --
Other 33,634 (23,821) 27,355
----------- ----------- -----------
Net cash used in investing activities (3,145,105) (1,792,848) (1,118,486)
----------- ----------- -----------
See accompanying notes to supplemental consolidated financial statements.
13
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from borrowings $ 2,150,404 $ 1,858,826 $ 1,413,699
Principal payments on borrowings (1,649,040) (1,282,911) (1,252,979)
Net change in short term borrowings under
management and mortgage programs 231,819 17,419 27,852
Issuance of common stock 1,222,199 100,806 46,401
Purchases of common stock (19,152) (10,083) (25,885)
Redemption of warrants -- 14,877 --
Payment of dividends of pooled entities (27,782) (30,971) (29,199)
Other (81,620) -- (50,043)
----------- ----------- -----------
Net cash provided by financing activities 1,826,828 667,963 129,846
----------- ----------- -----------
Effect of changes in exchange rates
on cash and cash equivalents (46,321) 6,545 2,665
----------- ----------- -----------
Net increase in cash and cash equivalents 277,944 59,931 127,898
Cash and cash equivalents, beginning of period 355,959 296,028 168,130
----------- ----------- -----------
Cash and cash equivalents, end of period $ 633,903 $ 355,959 $ 296,028
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 307,600 $ 285,400 $ 207,900
=========== =========== ===========
Taxes $ 89,400 $ 90,700 $ 87,600
=========== =========== ===========
See accompanying notes to supplemental consolidated financial statements.
14
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Cendant Corporation (formerly CUC International
Inc. ("CUC")), together with its subsidiaries and its joint ventures (the
"Company") is a leading global provider of services to businesses serving
consumer industries. On December 17, 1997, the Company merged with HFS
Incorporated ("HFS"), which has been accounted for as a pooling of
interests. The Company primarily engages in three business segments:
membership services, travel and real estate.
MEMBERSHIP SERVICES SEGMENT BUSINESSES:
o Membership. The Company provides individual, wholesale and discount
program membership services to consumers which are distributed through
various channels, including through financial institutions, credit
unions, charities, other cardholder-based organizations and retail
establishments. These memberships include such components as shopping,
travel, auto, dining, home improvement, lifestyle, credit card and
checking account enhancement packages, financial products and discount
programs. The Company also administers insurance package programs
which are generally combined with discount shopping and travel for
credit union members, distributes welcoming packages which provide new
homeowners with discounts from local merchants, and provides travelers
with value-added tax refunds.
TRAVEL SEGMENT BUSINESSES:
o Lodging franchise. The Company franchises guest lodging facilities and
provides operational and administrative services to its franchisees.
As franchisor, the Company licenses the owners and operators of
independent hotels to use the Company's brand names. Services include
access to a national reservation system, national advertising and
promotional campaigns, co-marketing programs and volume purchasing
discounts.
o Car rental. The Company licenses the Avis trademark to Avis
Rent A Car, Inc. ("ARAC"). In addition, the Company operates the
telecommunications and computer processing system which services ARAC
for reservations, rental agreement processing, accounting and fleet
control for which the Company charges ARAC at cost. The Company also
provides similar franchise services to licensees other than ARAC.
o Timeshare. The Company is a provider of timeshare exchange programs,
publications and other travel related services to the timeshare
industry.
o Fleet management. The Company provides services which primarily
consist of the management, purchasing, leasing, and resale of vehicles
for corporate clients and government agencies. These services also
include fuel, maintenance, safety and accident management programs and
other fee-based services for clients' vehicle fleets.
15
REAL ESTATE SEGMENT BUSINESSES:
o Real estate franchise. The Company franchises residential real estate
brokerage offices and provides operational and administrative services
to its franchisees. As franchisor, the Company licenses the owners and
operators of independent real estate brokerage offices to use the
Company's brand names. The Company provides services designed to
increase franchisee revenue and profitability including national
advertising and promotions, referrals, training and volume purchasing
discounts.
o Relocation. The Company provides relocation services to client
corporations which include the responsibility of selling transferee
residences, providing equity advances on transferee residences for the
purchase of new homes and certain home management services. The
Company also offers fee-based programs such as home marketing
assistance, household goods moves, destination services and property
dispositions for financial institutions and government agencies.
o Mortgage services. The Company provides services which primarily
include the origination, sale and servicing of residential first
mortgage loans. The Company markets a variety of first mortgage
products to consumers through relationships with corporations,
affinity groups, financial institutions, real estate brokerage firms
and other mortgage banks.
OTHER SEGMENT BUSINESSES: The Company develops, publishes and distributes
educational and entertainment software for home and school use and provides
marketing and other services to casino gaming facilities. Also included in
other segment businesses is the equity in the earnings from its investment
in ARAC.
PRINCIPLES OF CONSOLIDATION: The accompanying supplemental consolidated
financial statements include the accounts and transactions of the Company
together with its joint ventures and its wholly owned and majority owned
subsidiaries except for the Company's ownership of ARAC, which is accounted
for under the equity method. The accompanying supplemental consolidated
financial statements have been restated for the business combinations
accounted for as poolings of interests (as discussed in Note 2) as if such
combined companies had operated as one entity since inception. All material
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS: The Company considers highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
FRANCHISE AGREEMENTS: Franchise agreements are recorded at their estimated
fair values upon acquisition and amortized on a straight-line basis over
the estimated period to be benefited, ranging from 12 to 40 years. At
December 31, 1996 and 1995, accumulated amortization amounted to $87.9
million and $65.9 million, respectively.
GOODWILL: Goodwill, which represents the excess of cost over fair value of
net assets acquired is being amortized on a straight-line basis over the
estimated useful lives, ranging from 5 to 40 years. At December
16
31, 1996 and 1995, accumulated amortization amounted to $168.6 million and
$74.1 million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company periodically evaluates the
recoverability of its long-lived assets, comparing the respective carrying
values to the current and expected future cash flows to be generated from
such assets. Property and equipment is evaluated separately within each
business segment. The recoverability of franchise agreements and goodwill
are evaluated on a separate basis for each acquisition and each respective
franchise brand.
MEMBERSHIP ACQUISITION COSTS: Membership acquisition costs are deferred and
charged to operations as membership fees are recognized. These costs, which
relate directly to membership solicitations (direct response advertising
costs), principally include: postage, printing, kits, mailings,
publications (including coupon books) and telemarketing costs.
Substantially all of these costs are incurred for services performed by
outside sources. Such costs are amortized on a straight-line basis as
revenues are realized over the average membership period (generally one to
three years). The membership acquisition costs incurred, applicable to
obtaining a new member, for memberships other than coupon book memberships,
generally approximate the initial membership fee. Initial membership fees
for coupon book memberships generally exceed the membership acquisition
costs incurred applicable to obtaining a new member. However, if membership
acquisitions costs were to exceed the membership fee, an appropriate
adjustment would be made for any significant impairment.
Amortization of membership acquisition costs, including deferred renewal
costs, which consist principally of charges from sponsoring institutions
and publications, amounted to $641.3 million, $556.5 million and $467.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
All advertising costs other than direct response advertising costs are
expensed in the period incurred. Such amounts, exclusive of amounts
recorded as part of marketing and reservation expense, were $273.9 million,
$172.3 million and $133.8 million for the years ended December 31, 1996,
1995 and 1994, respectively.
Membership fees are generally billed through financial institutions and
other cardholder based institutions and are recorded as deferred membership
income upon acceptance of membership, net of estimated cancellations, and
pro-rated over the membership period.
SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE:
Capitalization of software development costs begins upon the establishment
of technological feasibility of the product. Costs meeting this criteria
are insignificant and, therefore, most costs related to designing,
development and testing new software products are charged to operating
expenses as incurred. Software research and development costs aggregated
$66.2 million, $52.9 million and $36.3 million for the years ended December
31, 1996, 1995 and 1994, respectively. Software net revenue included in
other was $375.2 million, $291.9 million and $191.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively. Costs of software
revenue include material costs, manufacturing labor and overhead and
royalties paid to developers and affiliated label publishers. Costs of
software revenue are included in operating expenses and aggregated $109.6
million, $115.3 million and $73.3 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company has a history of working closely with all of its distributors
and retailers with respect to selling consumer software. As a result, the
Company monitors the sales of its consumer software at all of its
significant points of sale on a regular basis. Therefore, the Company has
extensive data on returns by product on an on-going basis and does not have
any significant obligations for future performance. Accordingly, the
Company has the ability to estimate the amount of future returns and
accurately determine the amount of revenue that should be recognized in
accordance with Statement of Position 91-1 "Software Revenue Recognition"
at any point in time.
REVENUE RECOGNITION: Revenue primarily consists of fees for providing
services to businesses in consumer industries.
Membership revenue: Membership fees are generally billed through financial
institutions and other cardholder based institutions and are recorded as
deferred membership income upon acceptance of membership, net of estimated
cancellations. Membership fees are recognized over the average membership
period, generally one to three years. Deferred membership income is
classified as non-current in the supplemental consolidated balance sheet
since working capital will not be required as the deferred income is
recognized over future periods.
Franchise revenue: Franchise revenue principally consists of royalty,
marketing and reservation fees which are based on a percentage of
franchised lodging properties' gross room sales and franchised real estate
17
brokerage offices' gross commissions earned on sales of residential real
estate properties. Royalty, marketing and reservation fees are accrued as
the underlying franchisee revenue is earned. Franchise revenue also
includes initial franchise fees which are recorded as revenue when the
lodging property, car rental location or real estate brokerage office
opens as a franchised unit.
Relocation revenue: Relocation revenue primarily consists of the purchase,
management and resale of homes and fee based home related services for
transferred employees of corporate clients, members of affinity group
clients and government agencies. Although the Company acquires the home of
client employees, the client corporation reimburses the Company for
carrying costs until the home is sold and for home sale losses.
Accordingly, the Company earns a fee for services with minimal real estate
risk. Revenues associated with the resale of a residence are recognized
when services are performed.
Timeshare revenue: Timeshare exchange fees are recognized as revenue when
the exchange request has been confirmed to the subscriber. Timeshare
subscription revenue is deferred upon receipt and recorded as revenue as
the contractual services (delivery of publications) are provided to
subscribers.
Fleet management revenue: Revenues from fleet management services other
than leasing are recognized over the period in which services are provided
and the related expenses are incurred. The Company records the cost of
leased vehicles as "net investment in leases and leased vehicles". Amounts
charged to lessees for interest on the unrecovered investment are credited
to income on a level yield method which approximates the contractual
terms.
Mortgage services revenue: Loan origination fees and direct loan
origination costs are deferred until the loan is sold. Servicing fees are
credited to income when received. Sales of mortgage loans are generally
recorded on the date a loan is delivered to an investor. Sales of mortgage
securities are recorded on the settlement date.
The Company records mortgage servicing rights at the time a loan is sold
by allocating cost based on the relative fair value of assets acquired, as
long as the recorded amount is less than the servicing rights' fair value.
The carrying value of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing income.
Gains or losses on the sale of mortgage servicing rights are recognized
when title and all risks and rewards have irrevocably passed to the buyer
and there are no significant unresolved contingencies.
The Company reviews the recoverability of mortgage servicing rights based
on their fair value, and records impairment to individual strata. For
measuring impairment, the interest rate bands of the underlying loans are
the risk characteristic used to stratify the capitalized servicing
portfolio. To determine the fair value of mortgage servicing rights, the
Company uses market prices for comparable mortgage servicing, when
available, or alternatively uses a valuation model that calculates a
present value for mortgage servicing rights with assumptions that market
participants would use in estimating future net servicing income.
INCOME TAXES: The Company uses the liability method of recording deferred
income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and
income tax purposes as well as differences between the fair value of
assets acquired in business combinations accounted for as purchases and
their respective tax bases. The Company and its subsidiaries file a
consolidated federal income tax return for periods subsequent to each
acquisition.
18
NET INCOME PER SHARE: Net income per share has been computed based upon
the weighted average number of common and common equivalent shares
outstanding during the respective periods after giving effect to the
mergers and acquisitions accounted for in accordance with the pooling of
interests method of accounting (See Note 2) and stock splits (See Note
15). The $240 million 4-3/4% Convertible Senior Notes issued in February
1996 are antidilutive for all respective periods and, accordingly, are not
included in the computations of earnings per share. In addition, the $150
million 4-1/2% Convertible Senior Notes issued in October 1994 are
antidilutive for the year ended December 31, 1994 and, accordingly, are
not included in the computation of earnings per share for 1994.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION: The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" and applies Accounting Principle
Board Opinion ("APB") No. 25 and related interpretations in accounting for
its stock option plans. Under APB No. 25, because the exercise prices of
the Company's employee stock options are equal to the market prices of the
underlying Company stock on the date of grant, no compensation expense is
recognized (See Note 16).
DERIVATIVE FINANCIAL INSTRUMENTS: As a matter of policy, the Company does
not engage in derivatives trading or market-making activities. Rather,
derivative financial instruments including interest rate swaps and forward
exchange contracts are used by the Company principally in the management
of its interest rate exposures and foreign currency exposures on
intercompany borrowings. Additionally, the Company enters into forward
delivery contracts, financial futures programs and options to reduce the
risks of adverse price fluctuation with respect to both mortgage loans
held for sale and anticipated mortgage loan closings arising from
commitments issued.
Amounts to be paid or received under interest rate swap agreements are
accrued as interest rates change and are recognized over the life of the
swap agreements as an adjustment to interest expense. The fair values of
the swap agreements are not recognized in the consolidated financial
statements since they are accounted for as hedges. Market value gains and
losses on the Company's foreign currency transaction hedges are recognized
in income and substantially offset by the related foreign exchange
transaction gains and losses. Market value gains and losses on positions
used as hedges in the mortgage banking services operations are deferred
and considered in the valuation of lower of cost or market value of
mortgage loans held for sale.
TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of foreign
subsidiaries are translated at the exchange rates as of the balance sheet
dates, equity accounts are translated at historical exchange rates and
revenues, expenses and cash flows are translated at the average exchange
rates for the periods presented. Translation gains and losses are included
in shareholders' equity. Gains and losses resulting from the change in
exchange rates realized upon settlement of foreign currency transactions
are substantially offset by gains and losses realized upon settlement of
forward exchange contracts. Therefore, the resulting net income effect of
transaction gains and losses in the years ended December 31, 1996, 1995
and 1994, was not significant.
RECLASSIFICATIONS: Certain reclassifications have been made to the
historical financial statements of the Company and HFS to conform to the
restated presentation.
19
2. BUSINESS COMBINATIONS
In connection with the underlying pooling of interests business
combinations, the accompanying supplemental consolidated financial
statements have been prepared as if the Company and all such pooled
companies had operated as one entity since inception.
1997 POOLINGS
On December 17, 1997, the Company completed a merger with HFS (the
"Cendant Merger") by issuing 440.0 million shares of its common stock in
exchange for all of the outstanding common stock of HFS. Pursuant to the
terms of the agreement and plan of merger, HFS stockholders received
2.4031 shares of Company common stock for each share of HFS common stock.
Upon consummation of the Cendant Merger, the Company changed its name from
CUC International Inc. to Cendant Corporation. In connection with the
Cendant Merger, the Company changed its fiscal year end from January 31 to
December 31. HFS had a calendar year end and, accordingly, the HFS
statements of income for the years ended December 31, 1996, 1995 and 1994
have been combined with the Company's statements of income for the fiscal
years ended January 31, 1997, 1996 and 1995, respectively.
On October 3, 1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag") pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440.0 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information. In connection with
the merger, Hebdo Mag's statement of income for the twelve month period
ended December 31, 1996 has been combined with the Company's statement of
income for the fiscal year ended January 31, 1997.
On April 30, 1997, prior to being merged with and into the Company, HFS
acquired PHH Corporation ("PHH") by merger (the "HFS/PHH Merger") which
was satisfied by the issuance of 72.8 million equivalent shares of Company
common stock in exchange for all of the outstanding common stock of PHH.
PHH is the world's largest provider of corporate relocation services and
also provides mortgage services and fleet management services. Prior to
the HFS/PHH Merger, PHH had an April 30 fiscal year end. In connection
with the HFS/PHH Merger, PHH prepared financial statements for the twelve
month periods ended December 31, 1996, January 31, 1996 and January 31,
1995. To conform to a calendar year end, the PHH statements of income for
the aforementioned twelve month periods have been combined with the HFS
statements of income for the years ended December 31, 1996, 1995 and 1994,
respectively. In combining PHH's twelve month periods to the HFS calendar
years, the supplemental consolidated statement of income for the year
ended December 31, 1996 included one month (January 1996) of PHH's
operating results which was also included in the supplemental consolidated
statement of income for the year ended December 31, 1995. Accordingly, an
adjustment has been made to 1996 retained earnings for the duplication of
net income of $8.3 million and cash dividends declared of $5.9 million for
such one month period.
During February 1997, the Company acquired substantially all of the assets
and assumed specific liabilities of Numa Corporation ("Numa") for $73.5
million. The purchase price was satisfied by the issuance of 3.4 million
shares of Company common stock. Numa publishes personalized heritage
publications and markets
20
and sells personalized merchandise.
1996 POOLINGS
During July 1996, the Company acquired all of the outstanding capital
stock of Davidson & Associates, Inc. ("Davidson") for a purchase price of
approximately $1 billion, which was satisfied by the issuance of 45.1
million shares of Company common stock. Also during July 1996, the Company
acquired all of the outstanding capital stock of Sierra On-Line, Inc.
("Sierra") for a purchase price of $858.0 million, which was satisfied by
the issuance of 38.4 million shares of Company common stock. Davidson and
Sierra develop, publish and distribute educational and entertainment
software for home and school use. During August 1996, the Company acquired
all of the outstanding capital stock of Ideon Group, Inc. ("Ideon"),
principally a provider of credit card enhancement services, for a purchase
price of $393 million, which was satisfied by the issuance of 16.6 million
shares of Company common stock.
During 1995, prior to being merged into the Company, Davidson and Sierra
acquired all of the outstanding capital stock of various companies by
issuing an aggregate of .8 million and 3.9 million equivalent shares of
Company common stock, respectively. During 1994, Davidson acquired all of
the outstanding shares of a company by issuing .8 million equivalent
shares of Company common stock.
Davidson, Sierra and Ideon previously used the fiscal years ended December
31, March 31 and December 31, respectively, for their financial reporting.
To conform to the Company's January 31 former fiscal year end, Davidson's
and Ideon's operating results for January 1996 have been excluded from,
and Sierra's operating results for February and March 1996 have been
duplicated in the Company's year ended January 31, 1997 operating results.
The excluded and duplicated periods have been adjusted by a net $4.7
million charge to retained earnings at December 31, 1996. Effective
January 1, 1995, Ideon changed its fiscal year end from October 31 to
December 31 (the "Ideon Transition Period"). The Ideon Transition Period
has been excluded from the accompanying supplemental consolidated
statements of income. Ideon's revenues and net loss for the Ideon
Transition Period were $34.7 million and $49.9 million, respectively. This
excluded period has been adjusted by a $49.9 million charge to retained
earnings at December 31, 1995. The net loss for the Ideon Transition
Period was principally the result of a $65.5 million one-time, non-cash,
pre-tax charge recorded in connection with a change in amortization
periods for deferred membership acquisition costs. Prior to the change,
membership acquisition costs were generally amortized up to ten years for
single year membership periods and up to twelve years for multi-year
membership periods. These amortization periods represented the estimated
life of the member. At December 31, 1994, the amortization periods were
shortened to one year and three years for single and multi-year membership
periods, respectively (initial membership period without regard for
anticipated renewals).
In 1996, the Company acquired outstanding stock or substantially all of
the assets and liabilities of certain other entities for an aggregate
purchase price of $202.1 million, consisting of 8.3 million shares of
Company common stock.
1995 POOLINGS
During June 1995, the Company acquired all of the outstanding capital
stock of Getko Group, Inc. ("Getko") for a purchase price of $100.0
million, which was satisfied by the issuance of 5.6 million shares of
Company common stock. Getko distributes complimentary welcoming packages
to new homeowners throughout the
21
United States and Canada. During September 1995, the Company acquired all
of the outstanding capital stock of North American Outdoor Group, Inc.
("NAOG") for a purchase price of $52.0 million, which was satisfied by the
issuance of 2.3 million shares of Company common stock. NAOG owns one of
the largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns various other membership
organizations. During January 1996, the Company acquired all of the
outstanding capital stock of Advance Ross Corporation ("Advance Ross") for
a purchase price of $183.0 million, which was satisfied by the issuance of
8.9 million shares of Company common stock. Advance Ross processes
value-added tax refunds for travelers in over 20 European countries.
Getko, NAOG, and Advance Ross previously used the fiscal years ended
November 30, December 31 and December 31, respectively for their financial
reporting. To conform to the Company's January 31 former fiscal year end,
Getko's operating results for December 1993 and January 1994 and NAOG's
operating results for January 1994 have been excluded from the Company's
year ended January 31, 1995 operating results in the supplemental
consolidated financial statements. The excluded periods have been adjusted
by a net $4.1 million charge to retained earnings at December 31, 1994. In
addition, Advance Ross' operating results for January 1995 have been
excluded from the year ended January 31, 1996 operating results in the
supplemental consolidated financial statements. This excluded period has
been adjusted by a $0.1 million charge to retained earnings at December
31, 1995.
The following table presents the historical results of the Company and the
pooled entities for the last complete periods prior to their respective
mergers ($000's):
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED SEPTEMBER 30, ------------------------------------------------
1997 (UNAUDITED) 1996 1995 1994
-------------------- ------------- ------------- -------------
Net revenues
The Company $ 2,002,597 $ 2,347,655 $ 1,401,551 $ 1,044,669
HFS (inclusive of PHH) 1,749,477 1,436,457 1,056,890 892,120
Hebdo Mag 137,941 124,668 - -
1996 Pooled Entities - - 533,681 371,715
1995 Pooled Entities - - - 138,227
------------ ------------- ------------- -------------
$ 3,890,015 $ 3,908,780 $ 2,992,122 $ 2,446,731
============ ============= ============= =============
Net income
The Company $ 252,082 $ 164,099 $ 164,669 $ 117,591
HFS (inclusive of PHH) 142,057 257,241 157,850 122,533
Hebdo Mag 6,555 2,271 - -
1996 Pooled Entities - - (19,694) 39,491
1995 Pooled Entities - - - 6,975
------------ ------------- ------------- -------------
$ 400,694 $ 423,611 $ 302,825 $ 286,590
============ ============= ============= =============
22
The following table shows the historical results of HFS and PHH for the
periods prior to the HFS/PHH Merger ($000's):
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ------------------------------------------------
1997 (UNAUDITED) 1996 1995 1994
------------------ ------------- ------------- -------------
Net revenues
HFS $ 347,962 $ 785,980 $ 411,299 $ 312,081
PHH 178,635 650,477 645,591 580,039
------------ ------------- ------------- -------------
Total $ 526,597 $ 1,436,457 $ 1,056,890 $ 892,120
============ ============= ============= =============
Net income
HFS $ 58,940 $ 169,584 $ 79,730 $ 53,489
PHH 32,164 87,657 78,120 69,044
------------ ------------- ------------- -------------
Total $ 91,104 $ 257,241 $ 157,850 $ 122,533
============ ============= ============= =============
PURCHASE BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting; accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. The operating results of
such acquired companies are reflected in the Company's supplemental
consolidated statements of income since the respective dates of
acquisition.
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the acquisitions described below.
(IN MILLIONS) ACQUIRED IN 1996
-----------------------------------------------------
COLDWELL
RCI AVIS BANKER OTHER
--------- -------- ----------- -----------
Cash paid $ 412.1 $ 367.2 $ 747.8 $ 210.4
Common stock issued 75.0 338.4 - 70.8
Notes issued - 100.9 - 5.0
--------- -------- ----------- -----------
Total consideration 487.1 806.5 747.8 286.2
--------- -------- ----------- -----------
Assets acquired 439.1 783.9 541.7 94.8
Liabilities assumed 429.7 311.4 148.5 50.9
--------- -------- ----------- -----------
Fair value of net assets acquired 9.4 472.5 393.2 43.9
--------- -------- ----------- -----------
Goodwill $ 477.7 $ 334.0 $ 354.6 $ 242.3
========= ======== =========== ===========
Shares issued 2.4 11.1 46.6 2.5
========= ======== =========== ===========
23
(IN MILLIONS) ACQUIRED IN 1995
-------------------------------
CENTURY 21 OTHER
----------- ------------
Cash paid $ 100.2 $ 122.5
Common stock issued 64.8 40.8
Preferred stock issued 80.0 -
----------- ------------
Total consideration 245.0 163.3
----------- ------------
Assets acquired 120.6 67.2
Liabilities assumed 75.3 56.2
----------- ------------
Fair value of net assets acquired 45.3 11.0
----------- ------------
Goodwill $ 199.7 $ 152.3
=========== ============
Shares issued 9.6 6.0
=========== ============
RESORT CONDOMINIUMS INTERNATIONAL, INC.: In November 1996, HFS completed
the acquisition of all the outstanding capital stock of Resort
Condominiums International, Inc. and its affiliates ("RCI") for $487.1
million. The purchase agreement provides for contingent payments of up to
$200.0 million over the next five years which are based on components
which measure RCI's future performance, including EBITDA, net revenues and
number of members, as defined. Any contingent payments made will be
accounted for as additional goodwill.
AVIS: In October 1996, HFS completed the acquisition of all of the
outstanding capital stock of ARAC, initially including payments under
certain employee stock plans of Avis and the redemption of certain series
of preferred stock of Avis for an aggregate $806.5 million. Subsequently,
HFS made contingent cash payments of: (a) during the first quarter of
1997, $17.6 million to General Motors Corporation ("GM"), representing the
amount by which the value attributable under the stock purchase agreement
to HFS common stock received by GM in the Avis acquisition exceeded the
proceeds realized upon the subsequent sale of such Company common stock;
and (b) during the fourth quarter of 1996, $26.0 million of credit
facility termination fees which were not at HFS's discretion since the
facility termination resulted from change of control provisions and the
elimination of the Avis Employee Stock Ownership Plan in connection with
the Avis acquisition.
In September 1997, ARAC completed an IPO resulting in a 72.5% dilution of
HFS's investment in ARAC, the Company that operated the car rental
operations of HFS Car Rental, Inc. Net proceeds approximating $359.3
million retained by ARAC were used to fund its August 20, 1997 acquisition
of The First Gray Line Corporation and repay ARAC indebtedness. See Note
23 for a discussion of HFS's executed business plan and related accounting
treatment regarding Avis.
COLDWELL BANKER CORPORATION: In May 1996, HFS acquired by merger Coldwell
Banker Corporation ("Coldwell Banker"), the largest gross revenue
producing residential real estate company in North America and a leading
provider of corporate relocation services. HFS paid $640.0 million in cash
for all of the outstanding capital stock of Coldwell Banker and repaid
$105.0 million of Coldwell Banker indebtedness. The aggregate purchase
price for the transaction was financed through the May 1996 sale of an
aggregate 46.6 million equivalent shares of Company common stock pursuant
to a public offering. Subsequent to the acquisition of Coldwell Banker,
HFS acquired for $2.8 million a relocation consulting firm which was
merged into the Coldwell Banker relocation business.
24
Immediately following the closing of the Coldwell Banker acquisition, HFS
conveyed Coldwell Banker's 318 owned real estate brokerage offices (the
"Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which HFS has no beneficial interest. HFS recorded a
$5.0 million charge ($3.1 million, net of tax) in the second quarter of
1996 representing the fair value of operations contributed to the Trust.
The charge represents the fair value of the Owned Brokerage Business based
upon a valuation which considered earnings, cash flow, assets and business
prospects to the contributed business.
OTHER: During 1996, the Company and HFS acquired certain entities for an
aggregate purchase price of $286.2 million.
CENTURY 21: In August 1995, a majority owned subsidiary of HFS, C21
Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation
("Century 21"), the world's largest residential real estate brokerage
franchisor. Aggregate consideration for the acquisition consisted of
$245.0 million plus expenses, including an initial cash payment of $70.2
million, 9.6 million equivalent shares of Company common stock valued at
$64.8 million, the assumption of $80.0 million of Century 21 redeemable
preferred stock issued prior to the acquisition (subsequently redeemed in
February 1996) and a $30.0 million contingent payment made in February
1996.
HFS and certain stockholders sold approximately 15.4 million equivalent
shares of Company common stock pursuant to a public offering in September
1995 (the "C21 Offering"). Included in the C21 Offering were 9.6 million
equivalent Company shares issued as partial consideration for the
acquisition of Century 21. In accordance with Century 21 acquisition
agreements, HFS received $28.9 million representing proceeds from the sale
of such shares in excess of $7.28 per equivalent Company share, net of
certain expenses of the C21 Offering. In connection with the C21 Offering,
HFS also received $20.1 million of proceeds, net of certain expenses from
the sale of shares issued upon the exercise of an underwriter
over-allotment option. Net proceeds from the C21 Offering received by HFS
resulted in corresponding increases in stockholders' equity.
In connection with the acquisition, HFS executed an agreement (the
"Subscription and Stockholders' Agreement"), with a management group
pursuant to which the ownership of Century 21 Holding Corp. common stock
would be divided 87.5% to HFS and 12.5% to the management group. In
addition, the management group executives entered into renewable
employment agreements with HFS with initial terms that commenced on
November 1, 1995 and would expire on December 31, 1997. HFS had a call
option to purchase Holding common stock owned by the management group and
the management group had a put option to require HFS to purchase all their
Holding common stock after January 1, 1998 at fair market value. Effective
October 29, 1996 (the "Effective Date"), HFS amended the Subscription and
Stockholders' Agreement to provide that HFS's call option to purchase
Holding common stock at fair value from the management group would be
accelerated to the Effective Date with the fair value determined as of the
Effective Date. Pursuant to such amendment, the employment agreements were
terminated in October 1996 and the put and call options have been
exercised. The 12.5% interest was acquired by HFS for $52.8 million in the
second quarter of 1997.
OTHER: During 1995, the Company and HFS collectively acquired certain
entities for an aggregate purchase price of $163.3 million.
PRO FORMA INFORMATION (UNAUDITED): The following information reflects pro
forma statements of income data for the years ended December 31, 1996 and
1995 assuming the aforementioned completed acquisitions were consummated
on January 1, 1995.
25
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values with appropriate recognition given
to the effect of current interest rates and income taxes. Management does
not expect that the final allocation of the purchase prices for the above
acquisitions will differ materially from the preliminary allocations. The
pro forma results are not necessarily indicative of the operating results
that would have occurred had the transactions been consummated as
indicated nor are they intended to indicate results that may occur in the
future. The underlying pro forma information includes the amortization
expense associated with the assets acquired, the reflection of the
Company's and HFS's financing arrangements, the elimination of redundant
costs and the related income tax effects.
($000's, except per share amounts) YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995
------------- ------------
Net revenue $ 4,475,262 $ 3,809,181
Income before income taxes 797,042 634,898
Net income 473,359 378,577
Net income per share:
Primary $ .57 .48
Fully diluted $ .56 .47
Weighted average shares outstanding:
Primary 844,798 803,548
Fully diluted 851,091 817,628
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
1997 POOLINGS (UNAUDITED)
The Company expects to incur merger and related costs and other unusual
charges in connection with the fourth quarter 1997 mergers with HFS and
Hebdo Mag approximating $825.0 million ($560.0 million, after tax).
HFS recorded a one-time merger and related charge (the "PHH Merger
Charge") of $303.0 million ($227.0 million, after tax) during the second
quarter of 1997 in connection with the HFS/PHH Merger. The PHH Merger
Charge is summarized by type as follows (in millions):
Personnel related $ 142.4
Professional fees 36.8
Business terminations 44.7
Facility related 57.1
Other costs 22.0
-------------
Total $ 303.0
=============
Personnel related charges are comprised of costs incurred in connection
with employee reductions associated with the combination of HFS's
relocation services business and the consolidation of corporate
activities. Personnel related charges include termination benefits such as
severance, medical and other benefits. Also included in personnel related
charges are supplemental retirement benefits resulting from the change of
control. Several grantor trusts were established and funded by HFS to pay
such benefits in accordance with the terms of the PHH merger agreement.
Full implementation of the restructuring plan will result in the
termination of
26
approximately 500 employees, substantially all of whom are located in
North America, of which 369 employees were terminated as of September 30,
1997. Professional fees are primarily comprised of investment banking,
accounting and legal fees incurred in connection with the HFS/PHH Merger.
Business termination charges relate to the exit from certain activities
associated with fleet management, mortgage services and ancillary
operations in accordance with HFS's revised strategic plan. Facility
related expenses include costs associated with contract and lease
terminations, asset disposal and other charges incurred in connection with
the consolidation and closure of excess space.
The Company anticipates that approximately $236.0 million will be paid in
cash in connection with the PHH Merger Charge of which $137.0 million was
paid through September 30, 1997. The remaining cash portion of the PHH
Merger Charge will be financed through cash generated from operations and
borrowings under the Company's revolving credit facilities. Revenue and
operating results from activities that will not be continued are not
material to the results of operations of the Company.
1996 POOLINGS
Principally in connection with the Davidson, Sierra and Ideon mergers, the
Company recorded a charge to operations of approximately $179.9 million
($118.7 million, after-tax) for the year ended December 31, 1996.
The charge is summarized by type, as follows ($000's):
Personnel related $ 18.6
Professional fees and litigation 95.3
Facility related 66.0
---------
$ 179.9
=========
Such costs in connection with the Davidson & Sierra mergers with the
Company (approximately $48.6 million) are non-recurring and are comprised
primarily of transaction costs, other professional fees and exit costs.
Such costs associated with the Company's merger with Ideon (the "Ideon
Merger") (approximately $131.3 million) are non-recurring and include
transaction and exit costs as well as a provision relating to certain
litigation matters giving consideration to the Company's intended approach
to these matters. In determining the amount of the provision related to
these outstanding litigation matters, the Company estimated the cost of
settling these litigation matters. In estimating such cost, the Company
considered potential liabilities related to these matters and the
estimated cost of prosecuting and defending them (including out-of-pocket
costs, such as attorneys' fees, and the cost to the Company of having its
management involved in numerous complex litigation matters). The Company
has since settled certain of these litigation matters while certain of
these matters remain outstanding. Although the Company has attempted to
estimate the amounts that will be required to settle remaining litigation
matters, there can be no assurance that the actual aggregate amount of
such settlements will not exceed the (See Note 13). As of September 30,
1997, such charges amounted to $155.7 million. The Company considered
litigation-related costs and liabilities, as well as exit and transaction
costs, in determining the agreed upon exchange ratio in respect to the
Ideon Merger.
In determining the amount of the provision related to the Company's
proposed consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger
and costs relating to the expected obligations for certain third-party
contracts (e.g., existing leases and vendor agreements) to which Ideon is
a party and which are neither terminable at will nor automatically
terminate upon a change-in-control of Ideon. As a result of the Ideon
Merger, 120 employees were terminated. The Company
27
incurred significant exit costs because Ideon's credit card registration
and enhancement services are substantially similar to the Company's credit
card registration and enhancement services. All of the business activities
related to the operations performed by Ideon's Jacksonville, Florida
office were transferred to the Company's Comp-U- Card Division in
Stamford, Connecticut upon the consummation of the Ideon Merger. The
Company does not expect any loss in revenue as a result of these
consolidation efforts.
COSTS RELATED TO IDEON PRODUCTS ABANDONED AND RESTRUCTURING
During the year ended December 31, 1995, Ideon incurred special charges
totaling $43.8 million, net of recoveries, related to the abandonment of
certain new product developmental efforts and the related impairment of
certain assets and the restructuring of the SafeCard division of Ideon and
the Ideon corporate infrastructure as discussed below. The original charge
of $45.0 million was composed of accrued liabilities of $36.2 million and
asset impairments of $8.8 million. In December 1995, Ideon recovered $1.2
million of costs in the above charges. Also included in costs related to
the Ideon merger and products abandoned are marketing and operational
costs incurred for products abandoned of $53.2 million. During the year
ended December 31, 1996, all remaining amounts that had been previously
accrued were paid.
During 1995, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA
TOUR Partners program that provided various benefits to members and
consumer response rates after the launch were significantly less than
Ideon management's expectations. The product as configured was deemed not
economically viable and a charge of $18 million was incurred. Costs
associated with the abandonment of the product marketing included employee
severance payments (approximately 130 employees), costs to terminate
equipment and facilities leases, costs for contract impairments and
write-downs taken for asset impairments. In September 1995, after a period
of product redesign and test marketing, Ideon discontinued its PGA TOUR
Partners credit card servicing role and recorded a charge of $3.6 million
for costs associated with the abandonment of this role, including employee
severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain
commitments. In April 1995, Ideon launched a nationwide child registration
and missing child search program. Consumer response rates after the launch
were significantly less than Ideon management's expectations and a charge
of $9 million was incurred to cover severance payments (approximately 100
employees), costs to terminate equipment and facilities leases and
write-down taken for asset impairments. As a result of the discontinuance
of these products, Ideon undertook an overall restructuring of its
operations and incurred charges of $7.2 million to terminate operating
leases and write-down assets to realizable value, $3.0 million for
restructuring its SafeCard division and $4.2 million for restructuring its
corporate infrastructure.
During 1994, costs related to products abandoned and restructuring were
incurred when Ideon reorganized its operations and named a new senior
management team, resulting in $7.9 million of charges for various
severance agreements and a lease termination.
PURCHASE BUSINESS COMBINATION LIABILITIES
In connection with the acquisitions of Century 21, Coldwell Banker, RCI
and certain other acquisitions related business plans were developed to
restructure each of the respective companies. Acquisition liabilities were
recorded at the dates of consummation and are included in the respective
purchase price allocations. These liabilities include costs associated
with restructuring activities such as planned involuntary termination and
relocation of employees, the consolidation and closing of certain
facilities and the elimination of duplicative
28
operating and overhead activities. Accrued acquisition obligations related
to each acquired entity are summarized by type as follows ($000's):
COLDWELL
CENTURY 21 BANKER RCI OTHER
---------- ----------- ----------- ----------
Personnel related $ 12,647 $ 4,237 $ 9,845 $ 5,542
Facility related 16,511 5,491 6,929 3,851
Other costs 990 211 7,025 880
---------- ----------- ----------- ----------
Total $ 30,148 $ 9,939 $ 23,799 $ 10,273
========== =========== =========== ==========
Terminated employees 319 87 252 275
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs
include contract and lease terminations, temporary storage and relocation
costs associated with assets to be disposed of, and other charges incurred
in the consolidation and closure of excess space.
During 1995, approximately $14.3 million was paid and charged against the
acquisition liability for restructuring charges related to the Century 21
acquisition. During 1996, approximately $11.3 million, $3.9 million, $0.5
million and $7.7 million was paid and charged against the acquisition
liabilities for restructuring charges related to the Century 21, Coldwell
Banker, RCI and certain other acquisitions, respectively. Additional
restructuring charges were accrued during 1996 for Century 21 of $6.1
million. The adjustment to the restructuring liability represented revised
cost estimates for activities contemplated in management's original
restructuring plans.
The business plans to restructure Century 21, Coldwell Banker, RCI and
certain other acquisitions have been fully executed. Remaining accrued
acquisition obligations related to the restructuring of such acquired
companies pertain primarily to future lease commitments and other
contractual obligations that existed at the respective acquisition dates.
4. OTHER INTANGIBLES - NET
Other intangibles - net consisted of ($000's):
YEAR ENDED
DECEMBER 31,
BENEFIT PERIODS ------------------------------
IN YEARS 1996 1995
------------- ------------- -------------
Avis trademark 40 $ 400,000 $ --
Customer lists 6.5 - 10 113,976 --
Reservation system 10 95,000 --
Contract renewal rights 2 - 16 90,695 90,345
------------- -------------
699,671 90,345
Less accumulated amortization 63,441 51,500
------------- -------------
Other intangibles - net $ 636,230 $ 38,845
============= =============
Other intangibles are recorded at their estimated fair values at the dates
acquired and are amortized on a straight-line basis over the periods to be
benefited.
29
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities consisted
of ($000's):
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
Accounts payable $ 535,978 $ 407,437
Short-term debt 250,930 --
Merger and acquisition obligations 167,238 13,227
Accrued payroll and related 157,032 88,364
Advances from relocation clients 78,761 95,869
Other 475,007 314,160
------------- -----------
Accounts payable, accrued expenses and other
current liabilities $ 1,664,946 $ 919,057
============= ===========
Short-term debt at December 31, 1996 consisted of $150 million of acquired
Avis fleet financing, borrowed on behalf of ARAC, which was repaid upon
settlement of the corresponding intercompany loan due from ARAC prior to
the IPO and a $100.9 million note payable issued to ARAC as partial
consideration for ARAC in connection with the Company's acquisition of
ARAC. The outstanding short-term debt as of December 31, 1996 had a
weighted average interest rate of 6.85%.
6. NET INVESTMENT IN LEASES AND LEASED VEHICLES
The net investment in leases and leased vehicles consisted of ($000's):
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
Vehicles under open-end operating leases $ 2,617,263 $ 2,585,953
Vehicles under closed-end operating leases 443,853 320,894
Direct financing leases 356,699 335,498
Accrued interest on leases 851 891
------------- -------------
Net investments in leases and leased vehicles $ 3,418,666 $ 3,243,236
============= =============
The Company leases vehicles for initial periods of twelve months or more
under either operating or direct financing lease agreements. The Company's
experience indicates that the full term of the leases may vary
considerably due to extensions beyond the minimum lease term. Lessee
repayments of investments in leases and leased vehicles for 1996 and 1995
were $1.6 billion and $1.5 billion, respectively, and the ratio of such
repayments to the average net investment in leases and leased vehicles was
47.19% and 47.96%, respectively.
Vehicles under operating leases are amortized using the straight-line
method over the expected lease term. The Company has two types of
operating leases. Under one type, open-end operating leases, resale of the
vehicles upon termination of the lease is generally for the account of the
lessee except for a minimum residual value which the Company has
guaranteed. The Company's experience has been that vehicles under this
type of lease agreement have consistently been sold for amounts exceeding
the residual value guarantees. Maintenance and repairs of vehicles under
these agreements are the responsibility of the lessee. The original cost
and accumulated depreciation of vehicles under this type of operating
lease was $4.6 billion and $2.0 billion, respectively, at December 31,
1996 and $4.4 billion and $1.8 billion, respectively, at December 31,
1995.
30
Under the other type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease is for the account of
the Company. The lessee generally pays for or provides maintenance,
vehicle licenses and servicing. The original cost and accumulated
depreciation of vehicles under these agreements was $600.6 million and
$156.7 million, respectively at December 31, 1996 and $482.9 million and
$162.0 million, respectively, at December 31, 1995. The Company believes
adequate reserves are maintained in the event of loss on vehicle
disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee.
Maintenance and repairs of these vehicles are the responsibility of the
lessee.
Leasing revenues, which are reflected in fleet leasing on the supplemental
consolidated statements of income consist of ($000's):
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Operating leases $ 1,145,745 $ 1,098,697 $ 982,416
Direct financing leases, primarily interest 43,323 42,375 41,688
------------- ------------- -------------
$ 1,189,068 $ 1,141,072 $ 1,024,104
============= ============= =============
Other managed vehicles are subject to leases serviced by the Company for
others, and neither the vehicles nor the leases are included as assets of
the Company. The Company receives a fee under such agreements which covers
or exceeds its cost of servicing.
The Company has transferred existing managed vehicles and related leases
to unrelated investors and has retained servicing responsibility. Credit
risk for such agreements is retained by the Company to a maximum extent in
one of two forms: excess assets transferred, which were $7.1 million and
$5.9 million at December 31, 1996 and 1995, respectively; or guarantees to
a maximum extent of $0 and $263,000 at December 31, 1996 and 1995,
respectively. All such credit risk has been included in the Company's
consideration of related reserves. The outstanding balances under such
agreements aggregated $158.5 million and $98.4 million at December 31,
1996 and 1995, respectively.
Other managed vehicles with balances aggregating $93.9 million and $114.9
million at December 31, 1996 and 1995, respectively, are included in a
special purpose entity which is not owned by the Company. This entity does
not require consolidation as it is not controlled by the Company and all
risks and rewards rest with the owners. Additionally, managed vehicles
totaling approximately $47.4 million and $48.5 million at December 31,
1996 and 1995, respectively, are owned by special purpose entities which
are owned by the Company. However, such assets and related liabilities
have been netted in the balance sheet since there is a two-party agreement
with determinable accounts, a legal right of setoff exists and the Company
exercises its right of setoff in settlement with client corporations.
7. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are recorded at the lower of cost or market
value on the aggregate loan basis. The Company issues mortgage-backed
certificates insured or guaranteed by various government sponsored
entities and private insurance agencies. Primarily, the insurance or
guaranty is provided on a non-recourse basis to the Company, except where
limited by the Federal Housing Administration and Veterans Administration
and their respective loan program. The valuation reserve was approximately
$10.1 million and $1.9 million at December
31
31, 1996 and 1995, respectively. As of December 31, 1996, mortgage loans
sold with recourse amounted to approximately $83.0 million.
8. MORTGAGE SERVICING RIGHTS AND FEES
Mortgage servicing rights and fees activity was as follows ($000's):
EXCESS PURCHASED ORIGINATED
SERVICING SERVICING SERVICING IMPAIRMENT
FEES RIGHTS RIGHTS ALLOWANCE TOTAL
----------- ----------- ----------- ----------- -----------
Balance, January 1, 1994 $ 75,529 $ 8,808 $ - $ - $ 84,337
Additions 24,679 17,241 - - 41,920
Amortization (13,512) (6,772) - - (20,284)
Sales (8,729) (31) - - (8,760)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 77,967 19,246 - - 97,213
Additions 51,191 17,849 61,095 - 130,135
Amortization (18,609) (5,858) (4,089) - (28,556)
Write-down/provision (1,630) - - (1,386) (3,016)
Sales (1,080) (3,262) - - (4,342)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 107,839 27,975 57,006 (1,386) 191,434
Less: PHH activity for January
1996 to reflect change in
PHH fiscal year (3,623) (170) (10,227) 183 (13,837)
Additions 66,825 - 97,568 - 164,393
Amortization (31,235) (4,763) (15,752) - (51,750)
Write-down/provision - - - 622 622
Sales (1,291) (628) - - (1,919)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 138,515 $ 22,414 $ 128,595 $ (581) $ 288,943
========== ========== ========== =========== ===========
Excess servicing fees represent the present value of the differential
between the actual servicing fees and normal servicing fees which are
capitalized at the time loans are sold with servicing rights retained.
Purchased servicing rights represent the cost of acquiring the rights to
service mortgage loans for others. Originated servicing rights represents
the present value of normal servicing fees which are capitalized at the
time loans are sold with servicing rights retained.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122). This
Statement requires that mortgage servicing rights be recognized when a
mortgage loan is sold and servicing rights are retained. The Company
adopted SFAS No. 122 effective May 1, 1995 and, accordingly, capitalized
originated servicing rights, net of amortization and valuation allowances
of approximately $82.4 million and $55.6 million in the years ended
December 31, 1996 and 1995, respectively.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on the fair value
of the servicing rights' relative to the loan as a whole. To determine the
fair value of mortgage servicing rights, the Company uses market prices
for comparable mortgage servicing, when available, or alternatively uses a
valuation model that calculates the present value of future net servicing
income using assumptions that market participants would use in estimating
future net servicing income.
32
SFAS No. 122 also requires the impairment of originated and purchased
servicing rights to be measured based on the difference between the
carrying amount and current fair value of the servicing rights. In
determining impairment, the Company aggregates all mortgage servicing
rights, excluding those capitalized prior to the adoption of SFAS No. 122,
and stratifies them based on the predominant risk characteristic of
interest rate band. For each risk stratification, a valuation allowance is
maintained for any excess of amortized book value over the current fair
value by a charge or credit to income.
Prior to the adoption of SFAS No. 122, the Company reviewed the
recoverability of purchased servicing rights by discounting anticipated
future cash flows at appropriate discount rates, utilizing externally
published prepayment rates. If the recorded balance exceeded the
discounted anticipated future cash flows, the amortization of the
purchased servicing rights was accelerated on a prospective basis.
9. MARKETING AND RESERVATION ACTIVITIES
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees
related to the Company's lodging brands' franchisees are calculated based
on a specified percentage of gross room sales. Marketing and reservation
fees received from the Company's real estate brands' franchisees are based
on a specified percentage of gross closed commissions earned on the sale
of real estate. As provided in the franchise agreements, at the Company's
discretion, all of these fees are to be expended for marketing purposes
and the operation of a centralized brand-specific reservation system for
the respective franchisees and are controlled by the Company until
disbursement. Membership and service fee revenues included marketing and
reservation fees of $157.6 million, $140.1 million, $130.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Advertising
expenses included in marketing and reservation expense are $55.2 million,
$48.0 million and $43.6 million for the years ended December 31, 1996,
1995 and 1994, respectively.
10. LONG-TERM DEBT
Long-term debt consists of ($000's):
DECEMBER 31,
-----------------------------
1996 1995
------------ -------------
Revolving Credit Facilities $ 330,205 $ 15,400
5-7/8% Senior Notes 149,811 149,715
4-1/2% Convertible Senior Notes 146,678 149,971
4-3/4% Convertible Senior Notes 240,000 --
Other loans and capital lease obligations 148,925 41,140
------------ -------------
1,015,619 356,226
Less current portion 11,035 2,249
------------ -------------
Long-term debt $ 1,004,584 $ 353,977
============ =============
REVOLVING CREDIT FACILITIES: At December 31, 1996, the Company had a
$500.0 million revolving credit facility (the "CUC Credit Facility") with
a variety of different types of loans available thereunder. Interest was
payable, depending on the type of loan utilized by the Company, at a
variety of rates based on the federal funds rate, LIBOR, the prime rate or
rates quoted by participating banks based on an auction process for the
CUC Credit Facility. At December 31, 1996, no borrowings under this
facility were outstanding. The CUC Credit Facility required the Company to
maintain certain financial ratios and contained other restrictive
covenants
33
including, without limitation, financial covenants and restrictions on
certain corporate transactions, and also contained various events of
default provisions including, without limitation, defaults arising from
certain changes in control of the Company.
At December 31, 1996, HFS had $1 billion in revolving credit facilities
consisting of (i) a $500.0 million, five year revolving credit facility
(the "Five Year Revolving Credit Facility") and (ii) a $500.0 million, 364
day revolving credit facility (the "364 Day Revolving Credit Facility" and
collectively with the Five Year Revolving Credit Facility, the "Revolving
Credit Facilities"). At December 31, 1996, there was $205.0 million
outstanding under the Revolving Credit Facilities and there were no
borrowings under such facility at December 31, 1995.
Upon consummation of the Cendant Merger, the CUC Credit Facility was
terminated and the Revolving Credit Facilities were maintained with
commitments aggregating $1.25 billion and $750.0 million under the 364 Day
Revolving Credit Facility and Five Year Revolving Credit Facility,
respectively. The 364 Day Revolving Credit Facility will mature on
September 30, 1998 but may be renewed on an annual basis for an additional
364 days upon receiving lender approval. The Five Year Revolving Credit
Facility will mature on October 1, 2001. The Revolving Credit Facilities,
at the option of the Company, bear interest based on competitive bids of
lenders participating in the facilities, at prime rates or at LIBOR plus a
margin of approximately 22 basis points. The Company is required to pay a
per annum facility fee of .08% and .06% of the average daily availability
of the Five Year Revolving Credit Facility and 364 Revolving Credit
Facility, respectively. The interest rates and facility fees are subject
to change based upon credit ratings on the Company's senior unsecured
long-term debt by nationally recognized statistical rating companies. The
Revolving Credit Facilities contain certain restrictive covenants
including restrictions on indebtedness, mergers, liquidations and sale and
leaseback transactions and requires the maintenance of certain financial
ratios, including a 3:1 minimum interest average ratio and a 3.5:1 maximum
coverage ratio, as defined.
During the year ended December 31, 1996, Wright Express Corporation, a
wholly-owned subsidiary of the Company, entered into a new revolving
credit facility agreement replacing its previous revolving line of credit.
This facility has an available line of $60 million and expires February 8,
1999. Interest on the outstanding borrowings is computed, at the option of
Wright Express Corporation, under various methods. At December 31, 1996,
$31.4 million was outstanding under this facility with an interest rate of
6.04%. Borrowings under the previous arrangement at December 31, 1995
aggregated $15.4 million with interest rates ranging from 6.31% to 7.25%.
In connection with the acquisition of Hebdo Mag, the Company assumed a
$115.2 million revolving credit facility which bears interest at varying
rates ranging from the prime rate plus .25% to 1.5% or LIBOR plus 1.0% to
2.25%, depending upon Hebdo Mag's ratio of total debt to pro forma cash
flow, as defined. At December 31, 1996, $93.8 million was outstanding
under this facility. This facility expires on March 15, 1998 but may be
renewed on an annual basis for successive periods of one year upon
receiving lender approval.
Amounts outstanding under all revolving credit facilities as of December
31, 1996 and 1995 are classified as long-term, based on the Company's
intent and ability to maintain these loans on a long-term basis.
SENIOR NOTES: In December 1993, HFS completed a public offering of $150.0
million, unsecured 5-7/8% Senior Notes due December 15, 1998 (the "Senior
Notes"). Interest is payable semi-annually.
4-1/2% CONVERTIBLE SENIOR NOTES: In October 1994, HFS completed a public
offering of $150.0 million unsecured 4-1/2% Convertible Senior Notes (the
"4-1/2% Notes") due 1999, which were convertible at the
34
option of the holders at any time prior to maturity into 132.425
equivalent shares of Company common stock per $1,000 principal amount of
the 4-1/2% Notes, representing a conversion price of $7.55 per share.
Interest was payable semi-annually commencing April 1995.
On September 22, 1997, HFS exercised its option to redeem the outstanding
4-1/2% Notes effective on October 15, 1997 in accordance with the
provisions of the indenture under which the 4-1/2% Notes were issued.
Prior to the redemption date, all of the outstanding 4-1/2% Notes were
converted. Accordingly, 19.7 million equivalent shares of Company common
stock were issued as a result of the conversion of such notes.
4-3/4% CONVERTIBLE SENIOR NOTES: On February 22, 1996, HFS completed a
public offering of $240 million unsecured 4-3/4% Convertible Senior Notes
(the "4-3/4% Notes") due 2003, which are convertible at the option of the
holder at any time prior to maturity into 36.030 equivalent shares of
Company common stock per $1,000 principal amount of the 4-3/4% Notes,
representing a conversion price of $27.76 per share. The 4- 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time
on or after March 3, 1998 at redemption prices decreasing from 103.393% of
principal at March 3, 1998 to 100% of principal at March 3, 2003. However,
on or after March 3, 1998 and prior to March 3, 2000, the 4-3/4% Notes
will not be redeemable at the option of the Company unless the closing
price of the Company's common stock shall have exceeded $38.86 per share
(subject to adjustment upon the occurrence of certain events) for 20
trading days within a period of 30 consecutive trading days ending within
five days prior to redemption. Interest on the 4- 3/4% Notes is payable
semi-annually commencing September 1, 1996.
OTHER LOANS AND CAPITAL LEASES OBLIGATIONS
Zero Coupon Convertible Notes: The Zero Coupon Convertible Notes issued
in connection with the Company's fiscal 1990 recapitalization were
recorded at their fair value on the date of issuance and were issued in
$100 principal amounts and multiples thereof. Each $100 principal amount
was convertible into 22.78 shares of Company common stock. Virtually all
of the Zero Coupon Convertible Notes were converted into Company common
stock by the maturity date of June 6, 1996. The principal balance
outstanding at December 31, 1995 was $14.4 million.
6-1/2% Convertible Subordinated Notes: On April 12, 1994, Sierra issued
$50.0 million in principal amount of 6-1/2% Convertible Subordinated Notes
due April 1, 2001 (the "6-1/2% Notes"). Interest on the 6-1/2% Notes is
payable semi-annually on April 1 and October 1 of each year. Each $7.62
principal amount of 6-1/2% Notes is convertible into one share of Company
common stock, subject to adjustment under certain conditions. The 6-1/2%
Notes are redeemable after April 2, 1997, at the option of the Company, at
specified redemption prices. The 6-1/2% Notes are subordinated to all
existing and future Senior Indebtedness (as defined in the indenture
governing the 6-1/2% Notes) of Sierra. Issuance costs have been netted
against the principal convertible debt balance and are being amortized on
a straight-line basis over seven years. The principal convertible debt
balance outstanding at December 31, 1996 and 1995 was $23.5 million and
$23.4 million, respectively.
Other: In connection with the acquisition of Hebdo Mag, the Company
assumed long-term debt of $110.5 million consisting of senior and
subordinated notes and other miscellaneous loans which is reflected in the
long-term debt balance at December 31, 1996.
35
Long-term debt payments including obligations under capital leases at
December 31, 1996 are due as follows ($000's):
YEAR AMOUNT
----------- -------------
1997 $ 11,035
1998 167,797
1999 175,447
2000 34,900
2001 261,286
Thereafter 365,154
-------------
Total $ 1,015,619
=============
11. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs,
classified as "Liabilities under management and mortgage programs-debt"
consisted of ($000's):
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
Commercial paper $ 3,090,843 $ 2,348,732
Medium-term notes 1,662,200 2,031,200
Other 336,900 47,940
------------- -------------
Liabilities under management and
mortgage programs - debt $ 5,089,943 $ 4,427,872
============= =============
Commercial paper, all of which matures within 90 days, is supported by
committed revolving credit agreements described below and short-term lines
of credit. The weighted average interest rates on the Company's
outstanding commercial paper was 5.4% and 5.8% at December 31, 1996 and
1995, respectively
Medium-term notes of $1.6 billion represent unsecured loans which mature
in 1997. The weighted average interest rates on such medium-term notes was
5.7% and 5.8% at December 31, 1996 and 1995, respectively. The remaining
$0.1 billion of medium-term notes represents an unsecured obligation
having a fixed interest rate of 6.5% with interest payable semi-annually
and a term of seven years payable in full in 2000.
Other liabilities under management and mortgage programs is principally
comprised of unsecured debt, all of which matures in 1997, which includes
borrowings under short-term lines of credit and other bank facilities. The
weighted average interest rate on unsecured debt was 5.8% and 6.9% at
December 31, 1996 and 1995, respectively.
Interest expense is incurred on indebtedness which is used to finance
vehicle leasing activities, mobility services, and mortgage servicing
activities. Interest incurred on borrowings used to finance vehicle
leasing activities of $161.8 million, $159.7 million and $126.7 million
for the years ended December 31, 1996, 1995, and 1994 respectively, is
included net within fleet leasing revenues in the supplemental
consolidated statements of income. Interest on borrowings used to finance
both equity advances on homes and mortgage servicing activities are
recorded net within service fee revenues in the supplemental consolidated
statements of income. Interest related to equity advances on homes was
$35.0 million, $26.0 million and $20.0 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Interest related to
mortgage servicing activities was $63.4 million, $49.9 million and $32.8
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
36
The Company has a $2.5 billion syndicated unsecured credit facility backed
by a consortium of domestic and foreign banks. The facility is comprised
of $1.25 billion of lines maturing in 364 days and $1.25 billion maturing
in five years. Under the credit facilities, the Company is obligated to
pay annual commitment fees which were $2.4 million and $2.3 million for
the years ended December 31, 1996 and 1995, respectively. The Company had
other unused lines of credit of $301.5 million and $327.9 million at
December 31, 1996 and 1995, respectively with various banks.
Although the period of service for a vehicle is at the lessee's option,
and the period a home is held for resale varies, management estimates, by
using historical information, the rate at which vehicles will be disposed
and the rate at which homes will be resold. Projections of estimated
liquidations of assets under management and mortgage programs and the
related estimated repayment of liabilities under management and mortgage
programs as of December 31, 1996, as set forth in the table below,
indicate that the actual repayments of liabilities under management and
mortgage programs will be different than required by contractual
maturities. ($000's):
ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS
----- ------------------------ ---------------------
1997 $ 2,961,264 $ 2,608,179
1998 1,539,172 1,471,407
1999 673,535 671,623
2000 318,643 217,143
2001 53,843 71,061
2002-2006 182,777 50,530
------------- -------------
$ 5,729,234 $ 5,089,943
============= =============
12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND SERVICING RIGHTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments.
The fair values of the financial instruments presented may not be
indicative of their future values.
Marketable securities: Marketable securities primarily consist of
corporate bonds, tax-free municipal obligations, U.S. Treasury notes,
commercial paper and equity securities. The Company determines the
appropriate classification of marketable securities at the time of
purchase and reevaluates such designation as of each balance sheet date.
All securities at December 31, 1996 and 1995 were classified as
available-for-sale and were reported at fair value with the net unrealized
holding gains and losses, net of tax, reported as a component of
shareholders' equity until realized. Fair value was based upon quoted
market prices or investment adviser estimates. Securities not maturing
within one year are classified as non-current assets. Declines in the
market value of available-for-sale securities deemed to be other than
temporary result in charges to current earnings and the establishment of a
new cost basis. The majority of debt securities had contractual maturities
of less than one year with $4.0 million and $28.7 million having
maturities of greater than one year at December 31, 1996 and 1995,
respectively. Gross unrealized gains and losses of such securities were
not material.
Mortgage loans held for sale: Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and current
dealer commitments to purchase loans. These loans are priced to be sold
with servicing rights retained. Gains (losses) on mortgage-related
positions, used to reduce the risk of adverse price
37
fluctuations, for both mortgage loans held for sale and anticipated
mortgage loan closings arising from commitments issued, are included in
the carrying amount of mortgage loans held for sale.
Mortgage servicing rights and fees: Fair value is estimated by discounting
the expected net cash flow of servicing rights and fees using discount
rates that approximate market rates and externally published prepayment
rates, adjusted, if appropriate, for individual portfolio characteristics.
Long-term debt: The fair values of the Company's Senior Notes, Convertible
Notes and Medium-term Notes are estimated based on quoted market prices or
market comparables.
Interest rate swaps, foreign exchange contracts, forward delivery
commitments, futures contracts and options: The fair value of interest
rate swaps, foreign exchange contracts, forward delivery commitments,
futures contracts and options is estimated, using dealer quotes, as the
amount that the Company would receive or pay to execute a new agreement
with terms identical to those remaining on the current agreement,
considering interest rates at the reporting date.
38
The carrying amounts and fair values of the Company's financial
instruments at December 31, are as follows ($000's):
1996 1995
------------------------------------ -------------------------------------
ESTIMATED ESTIMATED
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ----------- ---------- ------------ ----------- ----------
Assets
Cash and cash equivalents $ - $ 633,903 $ 633,903 $ - $ 355,959 $ 355,959
Marketable securities:
Debt securities - 75,673 75,673 - 110,492 110,492
Equity securities - 22,500 22,500 - 15,353 19,200
Assets under management
and mortgage programs:
Receivables - 1,290,625 1,290,625 - 1,028,976 1,028,976
Relocation receivables - 773,326 773,326 - 736,038 736,038
Mortgage loans held for sale - 1,248,299 1,248,299 - 784,901 784,901
Excess mortgage servicing fees - 138,515 155,033 - 107,839 107,966
Originated mortgage servicing
rights - 128,014 139,776 - 55,620 58,764
Purchased mortgage servicing
rights - 22,414 29,326 - 27,975 33,268
Liabilities
Long-term debt - 1,004,584 1,484,277 - 353,977 543,092
Liabilities under management
and mortgage programs:
Debt - 5,089,943 5,089,943 - 4,427,872 4,427,872
Off balance sheet
Interest rate swaps 1,670,155 - - 2,630,567 - -
In a gain position - - 2,457 - - 4,969
In a loss position - - (10,704) - - (13,828)
Foreign exchange forwards 329,088 - 10,010 118,069 - 6,413
Mortgage-related positions:(a)
Forward delivery commitments 1,703,495 11,425 7,448 1,323,285 5,407 (6,997)
Option contracts to sell 265,000 952 746 330,000 839 69
Option contracts to buy 350,000 1,346 (463) 485,000 3,388 528
Treasury options used to hedge
servicing rights 313,900 1,327 278 - - -
- ---------
(a) Gains (losses) on mortgage-related positions are already included in the
determination of market value of mortgage loans held for sale.
39
13. COMMITMENTS AND CONTINGENCIES
LEASES: The Company has noncancelable operating leases covering various
equipment and facilities, which expire through 2004. Rental expense for
the years ended December 31, 1996, 1995 and 1994 was $84.4 million, $66.9
million and $54.5 million respectively, excluding real estate taxes and
other fees that are also the responsibility of the Company.
Operating lease commitments over the next five years and thereafter are as
follows ($000's):
FOR THE YEAR ENDING DECEMBER 31,
1997 $ 90,066
1998 77,543
1999 58,727
2000 45,335
2001 33,067
Thereafter 76,430
-------------
Total minimum lease payments $ 381,168
=============
The Company has been granted rent abatements for varying periods on
certain of its facilities. Deferred rent relating to those abatements is
being amortized on a straight-line basis over the applicable lease terms.
IDEON: On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Company acquired Ideon in August 1996. The Agreement provides for the
settlement of all of the outstanding litigation matters involving Peter
Halmos, SafeCard and Ideon as set forth below. The Agreement became
effective in July 1997. The Agreement calls for the dismissal with
prejudice of these outstanding litigation matters and the payment to Peter
Halmos, over a six-year period, of $70.5 million. Specifically, the
Agreement requires that the Company pay Peter Halmos one up-front payment
of $13.5 million and six subsequent annual payments of $9.5 million each.
The Agreement also calls for the transfer to the Company of assets related
to SafeCard's CreditLine business, including the transfer by CreditLine
Corporation to the Company of all of the CreditLine Corporation's rights
under a marketing agreement between it and SafeCard dated November 1,
1988.
The following Halmos related cases have been dismissed pursuant to the
Agreement:
1. Halmos Trading & Investing Company v. SafeCard Services, Inc. and
Gerald Cahill v. Peter A. Halmos and Steven J. Halmos and Halmos
Trading & Investment Co., Case No. 93-04354 (06) in the Circuit Court
for the 17th Judicial Circuit in and for Broward County, Florida.
2. SafeCard Services, Inc. v. Peter Halmos, a Florida resident; High
Plains Capital Corporation, a Wyoming Corporation; and CreditLine
Corporation, a Wyoming corporation which is pending in the District
Court, First Judicial District of Laramie County, Wyoming; Case No.
Doc. 134, No. 192.
3. Peter Halmos, CreditLine Corporation and Continuity Marketing
Corporation v. Paul G. Kahn, William T. Bacon, Robert L.
Dilenschneider, Eugene Miller and SafeCard Services, Inc., in the
United States District Court, Southern District of Florida, Case No.
94-6920 CG-NESBITT.
40
4. Peter Halmos v SafeCard Services, Inc., William T. Bacon, Jr., Barry
I. Tillis and Barry Natter, Case No. 95-6325 (AJ) filed in the
Circuit Court, Fifteenth Judicial Circuit, in and for Palm Beach
County Florida.
5. High Plains Capital Corporation f/k/a Halmos & Company, Inc v. Ideon
Group, Inc., SafeCard Services, Inc., Eugene Miller, Robert L.
Dilenschneider, and the Dilenschneider Group, Inc., Palm Beach
County, Florida, Civil Action No. CL 95 8313 AE (Hon. Walter
Colbath).
6. High Plains Capital Corporation v. Ideon Group, Inc., and SafeCard
Services, Inc., Civil Action No. 95 015024, Seventeenth Judicial
Circuit, Broward County, Florida.
The following Halmos related case will also be dismissed pursuant to the
Agreement:
7. Ideon Group, Inc., SafeCard Services, Inc., Paul G. Kahn, William T.
Bacon, Jr., Marshall L. Burman, John Ellis (Jeb) Bush, Robert L.
Dilenschneider, Adam W. Herbert, Eugene Miller, and Thomas F. Petway,
III v. Peter Halmos, Civil Action No. 14600, filed in the Court of
Chancery of New Castle County, Delaware.
On October 22, 1997, the plaintiffs, the Company and all of the Company's
indemnitees, entered into a Memorandum of Understanding and thereafter
filed final settlement agreements in James B. Chambers and Peter A. Halmos
v. SafeCard Services, Inc; Ideon Group, Inc.; Paul G. Kahn; William T.
Bacon, Jr.,; Robert L. Dilenschneider; The Dilenschneider Group; Eugene
Miller; G. Thomas Frankland; Francis J. Marino; John R. Birk; Marshall
Burman; Thomas F. Petway III; John Ellis Bush; Adam W. Herbert, Jr.; Price
Waterhouse LLP; Mahoney Adams & Criser, P.A. and John Does 1 through 25,
United States District Court, Southern District of Florida, Case No.
95-1298-CIV-NESBITT ("Chambers"); Lois Hekker v. Ideon Group, Inc. and
Paul G. Kahn, United States District Court, Middle District of Florida,
Jacksonville Division, Case No. 95-681-CIV-J ("Hekker"); and James L.
Binder, individually, as custodian for Elizabeth Binder, and as custodian
for the James L. Binder, D.D.S., P.C. Profit Sharing Trust; Edward Dubois;
Sheila Ann Dubois, as Personal Representative for The Estate of Winifred
Dubois; G. Neal Goolsby; John E. Masters, individually and as custodian
for Gregory Halmos and Nicholas Halmos; J.B. McKinney; on behalf of
themselves and all others similarly situated, and Peter A. Halmos, as
Trustee for the Peter A. Halmos Revocable Trust Dated January 24, 1990,
and The Halmos Foundation, Inc., individually, v. SafeCard Services, Inc.,
a Delaware corporation; Paul G. Kahn; William T. Bacon, Jr.; Robert L.
Dilenschneider; The Dilenschneider Group, a Delaware corporation; Eugene
Miller; Gerald R. Cahill; Oppenheimer & Co., Inc., a Delaware corporation;
and John Does 1 through 100, inclusive. United States District Court for
the Southern District of Florida, (Miami Division) Case No.
94-2604-CIV-MOORE ("Binder"). The above referenced settlement in the
Chambers and Hekker matters was for payment by the Company to class
members of $15.0 million. The settlement in the Binder litigation calls
for the payment by the Company to class members of $3.0 million. These
settlements must be approved by the court at hearings anticipated during
the first quarter of 1998.
The following actions remain pending, in whole or in part, as described
below:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for SafeCard) in April 1993 in Cook County Circuit Court in
Illinois against SafeCard and one of Ideon's directors, purporting to
state claims aggregating in excess of $100.0 million, principally relating
to alleged rights to "incentive compensation," stock options or their
equivalent, indemnification, wrongful termination and defamation. On
February 7, 1995, the court dismissed with prejudice Peter Halmos' claims
regarding alleged rights to "incentive compensation," stock options or
their equivalent, wrongful termination and defamation. Mr. Halmos has
appealed this ruling. SafeCard has filed an answer to the remaining
indemnification claims. Its obligation to file an answer to the
41
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a declaratory judgment action filed by Ideon in Delaware
Chancery Court. As a result of the Halmos settlement described above, only
the claims of Myron Cherry remain pending.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos,
in the State Circuit Court in Palm Beach County, Florida in April 1995
against Ideon, Family Protection Network, Inc., SafeCard, one of Ideon's
directors and Ideon's Chief Executive Officer purporting to state various
statutory and tort claims. The claims principally relate to the allegation
by these companies that SafeCard's Early Warnings Service and Family
Protection Network were conceived and commercialized by, among others,
Peter Halmos and have been improperly copied. An amended complaint filed
on June 14, 1995 seeking monetary damages adds to the prior claims certain
claims by Nicholas Rubino that principally relate to the allegation that
SafeCard's Pet Registration Product was conceived by Mr. Rubino and has
been improperly copied. The company has filed an appropriate answer. As a
result of the Halmos settlement, all claims of Continuity Marketing
Corporation will be dismissed, leaving pending only the claims related to
Family Protection Network and the Pet Registration Program.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F.
Elcan against Ideon and two of its employees in the United States District
Court for the Southern District of New York. The litigation involves
claims against Ideon, its former CEO and its Vice President of Investor
Relations for alleged material misrepresentations and omissions in
connection with announcements relating to Ideon's expected earnings per
share in 1995 and its new product sales, which included the PGA Tour Card
Program, Family Protection Network and Collections of the Vatican Museums.
On July 15, 1996, Ideon filed a motion to dismiss. The company withdrew
its motion to dismiss and answered the complaint on December 5, 1996.
The Company established a reserve upon the consummation of the merger with
Ideon during the third quarter of 1996 related, in part, to these
litigation matters. Although not anticipated, in the event the foregoing
class action settlements are not approved by the Court, the outcome of the
class action matters described above as well as the other pending Ideon
matters could also exceed the amount accrued. The Company is also involved
in certain other claims and litigation arising in the ordinary course of
business, which are not considered material to the financial position,
operations or cash flows of the Company.
42
14. INCOME TAXES
The income tax provision (benefit) consists of ($000's):
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------ ------------- -------------
Current
Federal $ 149,290 $ 108,767 $ 106,831
State 19,561 22,050 19,738
Foreign 21,254 14,744 11,261
------------- ------------- -------------
190,105 145,561 137,830
------------- ------------- -------------
Deferred
Federal $ 83,308 $ 52,447 $ 36,687
State 15,462 1,299 5,460
Foreign 1,184 1,200 (235)
------------- ------------- -------------
99,954 54,946 41,912
------------- ------------- ------------
Provision for income taxes $ 290,059 $ 200,507 $ 179,742
============= ============= ============
Net deferred income tax assets and liabilities are comprised of the
following ($000's):
DECEMBER 31,
-------------------------
1996 1995
--------- ----------
Provision for doubtful accounts $ 8,100 $ 7,600
Deferred income 46,400 7,800
Acquisition and litigation related reserves 62,700 14,446
Franchise acquisition costs (2,600) (2,400)
Insurance retention refund (11,306) (9,773)
Accrued liabilities and deferred income 37,591 29,915
Other 366 2,975
---------- ----------
Current net deferred tax asset $ 141,251 $ 50,563
========== ==========
Depreciation and amortization $ (173,597) $ (78,742)
Accrued liabilities and deferred income 65,165 22,239
Acquired net operating loss carryforward 85,900 --
Insurance retention refund (11,306) (9,773)
Acquisition and litigation related reserves -- 8,175
Other (12,932) (1,798)
------------ -----------
Noncurrent net deferred tax liability $ (46,770) $ (59,899)
============ ===========
43
DECEMBER 31,
------------------------
1996 1995
---------- ----------
Depreciation $ (245,146) $ (223,337)
Unamortized mortgage servicing rights (51,239) (23,489)
Accrued liabilities and deferred income 1,359 2,101
Alternative minimum tax and net operating loss
carryforwards 13,078 9,807
----------- ----------
Net deferred tax liabilities under management
and mortgage programs $ (281,948) $ (234,918)
=========== ===========
Net operating loss carryforwards at December 31, 1996 acquired in
connection with the acquisition of Avis, Inc. expire as follows: 2001,
$14.8 million; 2002, $89.6 million; 2005, $7.2 million; 2009, $17.7
million; and 2010, $116.0 million.
The Company's effective income tax rate differs from the statutory federal
rate as follows:
FOR THE YEARS ENDING DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 3.0% 3.6% 3.4%
Amortization of non-deductible goodwill 1.2% 1.4% 1.2%
Foreign taxes differential 0.3% 0.1% 0.3%
Tax exempt interest (0.2%) -- (0.6%)
Technology under development -- -- 0.3%
Non consolidated losses -- -- (0.2%)
Merger costs 1.4% -- --
Other (0.1%) (0.3%) (0.7%)
--------- -------- -------
Effective tax rate 40.6% 39.8% 38.7%
========= ======== =======
15. SHAREHOLDERS' EQUITY
A. STOCK SPLITS: On September 26, 1996, the Company's Board of Directors
declared a three-for-two split of the Company's common stock which was
effected in the form of a stock dividend in October 1996. In each of
November 1995 and February 1994, HFS's Board of Directors authorized a
two-for-one split of HFS's common stock which was effected in the form of
a 100% stock dividend in February 1996 and April 1994, respectively. All
equivalent share, per share, stock price and stock award plan information
presented herein has been retroactively adjusted to reflect the stock
splits.
B. AUTHORIZED SHARES: In conjunction with the Cendant Merger effective on
December 17, 1997, the Company's shareholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock and preferred stock to 2 billion shares
and 10 million shares, respectively. The Company has never issued any
shares of preferred stock.
16. STOCK OPTION PLANS
In connection with the Cendant Merger, the Company adopted its 1997 Stock
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the
granting of up to 25 million shares of Company common stock through awards
of stock options (which may include incentive stock options and/or
nonqualified stock options), stock
44
appreciation rights and shares of restricted Company common stock. All
directors, officers and employees of the Company and its affiliates are
eligible to receive awards under the Incentive Plan. Options granted under
the Incentive Plan generally have a ten year term and are exercisable at
20% per year commencing one year from the date of grant. During 1997, the
Company also adopted two other stock plans: the 1997 Employee Stock Plan
(the "1997 Employee Plan") and the 1997 Stock Option Plan (the "1997
SOP"). The 1997 Employee Plan authorizes the granting of up to 25 million
shares of Company common stock through awards of nonqualified stock
options, stock appreciation rights and shares of restricted Company common
stock to employees of the Company and its affiliates. The 1997 SOP
provides for the granting of up to 10 million shares of Company common
stock to key employees (including employees who are directors and
officers) of the Company and its subsidiaries through awards of incentive
and/or nonqualified stock options. Options granted under the 1997 Employee
Plan and the 1997 SOP generally have ten year terms and are exercisable
at 20% per year commencing one year from the date of grant.
The Company also grants options to employees pursuant to three additional
stock option plans: the 1992 Employee Stock Option Plan (the "1992 Plan"),
the 1992 Bonus and Salary Replacement Stock Option Plan (the "Replacement
Plan") and the 1987 Stock Option Plan (the "1987 Plan"). Under these
plans, the Company may grant options to purchase in the aggregate up to
90.8 million shares of Company common stock. At December 31, 1996, there
were outstanding in the aggregate options to purchase 35.5 million shares
of Company common stock pursuant to the 1992 Plan, the Replacement Plan
and the 1987 Plan. Options granted under the 1992 Plan generally are
exercisable at 20% per year commencing one year from the date of grant.
Options granted under the Replacement Plan generally are exercisable at
33% per year commencing one year from the date of grant. Options granted
under the 1987 Plan generally are exercisable at 25% per year commencing
one year from the date of grant. Options granted under these stock option
plans generally have 10-year terms. All options outstanding under these
plans are non-qualified stock options. These stock option plans include
options acquired by the Company in connection with its various
acquisitions accounted for in accordance with the pooling of interests
method of accounting (See Note 2).
The Company has granted options to its non-employee directors pursuant to
its 1994 Directors Stock Option Plan (the "1994 Directors Plan"). The 1994
Directors Plan provides that options to acquire an aggregate of up to .3
million shares of Company common stock shall be granted to non-employee
directors of the Company in office on each of November 23, 1994, 1995,
1996 and 1997. Options under the 1994 Directors Plan are exercisable in
full on the date of grant. At January 31, 1997, there also were
outstanding grants made to non-employee directors of the Company under the
Company's 1990 Directors Stock Option Plan (the "1990 Directors Plan") and
1992 Directors Stock Option Plan (the "1992 Directors Plan"), under which
the Company is no longer granting options.
The Company has certain other stock option plans pursuant to which it no
longer makes any new option grants, but pursuant to which there continues
to exist outstanding options to purchase shares of Company common stock.
These options generally expire ten years after their grant dates. Under
these plans, there are outstanding both non-qualified stock options and
incentive stock options to purchase 3.8 million shares of Company common
stock in the aggregate at January 31, 1997. These stock option plans
include plans assumed by the Company in connection with its acquisitions
of Sierra and Knowledge Adventure, Inc. during fiscal 1997.
Prior to the Cendant Merger, HFS had two stock option plans: the 1992
Stock Option Plan and the Amended and Restated 1993 Stock Option Plan.
These plans provided for the granting of options to certain directors,
officers, employees and independent contractors of HFS's common stock at
prices not less than the fair market values at the date of grant.
Generally, such stock options have a ten-year term and vest within five
years from the date
45
of grant On December 17, 1997, in connection with the Cendant Merger, all
obligations under HFS's stock option plans were assumed by the Company.
Following the Cendant Merger, no further grants will be made under these
plans.
Prior to the HFS/PHH Merger, PHH had stock option plans for its key
employees and outside directors. The plans allowed for the purchase of
common stock at prices not less than fair market value on the date of
grant. Either incentive stock options or non-statutory stock options were
granted under the plans. Options became exercisable after one year from
date of grant on a vesting schedule provided by the plans and expired ten
years after the date of the grant. On April 30, 1997, in connection with
the HFS/PHH Merger, all unexercised PHH stock options were canceled and
converted to 1,770,852 equivalent shares of Company common stock. The
table below summarizes the annual activity of the Company's pooled stock
option plans (shares in 000's):
WEIGHTED
OPTIONS AVG. EXERCISE
OUTSTANDING PRICE
----------- ---------
BALANCE AT JANUARY 1, 1994 77,579 $ 4.86
Granted 23,878 9.90
Canceled (2,079) 6.36
Exercised (7,731) 3.93
Distribution of Chartwell Leisure Inc. 1,091 4.44
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 92,738 $ 6.20
Granted 21,098 10.74
Canceled (2,726) 8.48
Exercised (12,434) 5.39
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 98,676 $ 7.21
Granted 36,116 22.14
Canceled (2,838) 18.48
Exercised (14,010) 5.77
Less: PHH activity for January 1996
to reflect change in PHH fiscal year 48 8.78
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 117,992 $ 11.68
----------------------------------------------------------------------
46
The Company adopted the disclosure-only provisions of SFAS No. 123 and
accordingly, no compensation cost was recognized in connection with its
stock option plans. Had the Company elected to recognize compensation cost
for its stock option plans based on the calculated fair value at the grant
dates for awards under such plans, consistent with the method prescribed
by SFAS No. 123, net income per share would have reflected the pro forma
amounts indicated below ($000's, except per share data):
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995
------------- -------------
Net income:
as reported $ 423,611 $ 302,825
pro forma 338,769 297,547
-------------------------------------------------------------------
Net income per share:
Primary as reported $ 0.53 $ 0.42
pro forma 0.43 0.41
Fully diluted as reported 0.52 0.41
pro forma 0.43 0.41
-------------------------------------------------------------------
The fair values of the stock options are estimated on the dates of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted in 1996 and 1995:
THE COMPANY PLANS HFS PLANS PHH PLANS
--------------------- ---------------------- ----------------------
1996 1995 1996 1995 1996 1995
-------- -------- --------- -------- --------- ----------
Dividend yield 0% 0% 0% 0% 2.8% 3.5%
Expected volatility 28.0% 26.0% 37.5% 37.5% 21.5% 19.8%
Risk-free interest rate 6.3% 5.3% 6.4% 6.4% 6.5% 6.9%
Expected holding period 5 years 5 years 9.1 years 9.1 years 7.5 years 7.5 years
The weighted average fair values of stock options granted during the years
ended December 31, 1996 and 1995 were $7.51 and $6.69, respectively for
the Company plans. The weighted average fair values of stock options
granted during the years ended December 31, 1996 and 1995 for the HFS
plans (inclusive of PHH Plans) were $10.96 and $4.79, respectively.
The effect of applying SFAS No. 123 on the pro forma net income per share
disclosures is not indicative of future amounts because it does not take
into consideration option grants made prior to 1995 or in future years.
47
The tables below summarize information regarding pooled stock options
outstanding and exercisable of the Company as of December 31, 1996 (shares
in 000's):
THE COMPANY/HFS OPTIONS OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ---------------------------------------------- ----------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
---------------------- --------- --------------- ----------- ----------- -------------
$ .01 to $ 10.00 56,548 6.3 $ 4.19 43,460 $ 3.71
$ 10.01 to $ 20.00 31,597 8.2 14.50 8,781 15.04
$ 20.01 to $ 30.00 16,809 9.4 23.97 1,055 25.77
$ 30.01 to $ 40.00 6,331 9.6 31.78 226 31.37
--------- -----------
Total 111,285 7.5 11.67 53,522 6.12
========= ===========
PHH OPTIONS
Less than $6.87 3,489 4.5 $ 5.74 3,489 $ 5.74
Greater than $6.87 3,218 8.7 8.82 1,055 6.90
--------- -----------
Total 6,707 6.5 7.22 4,544 6.01
========= ===========
Shares exercisable and available for grant were as follows (000's):
THE COMPANY OPTIONS HFS OPTIONS PHH OPTIONS
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
--------------------- -------------------- ---------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- ------- ------
Shares exercisable 11,819 12,193 41,703 17,012 4,544 5,890
Shares available for grant 8,358 10,013 3,958 84 1,182 3,316
The Company has reserved 11,390,625 shares of Company common stock for
issuance in connection with its 1989 Restricted Stock Plan. As of December
31, 1996, 10,494,423 shares of restricted common stock had been granted
under this plan. During fiscal 1997, 720,000 shares of restricted common
stock were granted under the plan and 645,000 shares of restricted common
stock were granted other than under the plan. The aggregate fair value on
the date of grant of such restricted common stock was $30.5 million, which
amount was deducted from shareholders' equity and is being amortized over
the vesting period of 10 years.
The Company has reserved 1,125,000 shares of Company common stock in
connection with its 1994 Employee Stock Purchase Plan, which enables
employees to purchase shares of common stock from the Company at 90% of
the fair market value on the fifteenth day following the last day of each
calendar quarter, in an amount up to 25% of the employees' year-to-date
earnings.
17. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate
funds for their retirement. The Company matches the contributions of
participating employees on the basis of the percentages specified in the
plans. During 1996, a Deferred Compensation Plan (the "Plan") was
implemented providing senior executives with the opportunity to
participate in a funded, deferred compensation program. The assets of the
Plan are held in an irrevocable rabbi
48
trust. Under the Plan, participants may defer up to 80% of their base
compensation and up to 98% of bonuses earned. The Company contributes
$0.50 for each $1.00 contributed by a participant, regardless of length of
service, up to a maximum of six percent of the employee's compensation.
The Plan is not qualified under Section 401 of the Internal Revenue Code.
The Company's matching contributions relating to the above plans were not
material to the supplemental consolidated financial statements for all
periods presented.
PENSION AND SUPPLEMENTAL RETIREMENT PLANS
The Company's PHH subsidiary has a non-contributory defined benefit
pension plan covering substantially all US employees of PHH and its
subsidiaries. PHH's subsidiary located in the UK has a contributory
defined benefit pension plan, with participation at the employee's option.
Under both the US and UK plans, benefits are based on an employee's years
of credited service and a percentage of final average compensation. The
policy for both plans is to contribute amounts sufficient to meet the
minimum requirements plus other amounts as the Company deems appropriate
from time to time. The projected benefit obligations of the funded plans
were $97.1 million and 85.6 million and funded assets, at fair value
(primarily common stock and bond mutual funds) were $88.4 million and
$74.3 million at December 31, 1996 and 1995, respectively. The net pension
cost and the recorded liability were not material to the accompanying
supplemental consolidated financial statements.
The Company also sponsors two unfunded supplemental retirement plans to
provide certain key executives with benefits in excess of limits under the
federal tax law and to include annual incentive payments in benefit
calculations. The projected benefit obligation, net pension cost and
recorded liability related to the unfunded plans were not material to the
accompanying supplemental consolidated financial statements for all
periods presented.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company's PHH subsidiary provides health care and life insurance
benefits for certain retired employees up to the age of 65. The net
periodic postretirement benefit costs and the recorded liability were not
material to the accompanying supplemental consolidated financial
statements for all periods presented.
18. SALE OF THE IMAGINATION NETWORK - SIERRA
The operating activities of The ImagiNation Network, Inc. ("INN") were
consolidated with those of Sierra through July 26, 1993. On July 27, 1993
Sierra sold 42% of INN's voting stock and reduced its ownership interest
to 58% and reduced its voting control such that Sierra recorded its
liquidation preference in excess of recorded book value as shareholders'
equity.
In December 1994, Sierra sold its remaining equity interest in INN to AT&T
and recorded a gain of $19.7 million for the year ended December 31, 1994.
Sierra also entered into a multi-year publishing agreement with AT&T to
provide content for INN. The publishing agreement provides for AT&T to
fund up to $4.0 million of Sierra's development expenditures under an
existing publishing agreement and up to $23.0 million of Sierra's
development expenditures, subject to certain limitations, through
non-refundable royalty advances. The non-refundable royalty advances are
reflected net of research and development expense.
19. FRANCHISING ACTIVITIES
49
Revenue from franchising activities includes initial fees charged to
lodging properties and real estate brokerage offices upon execution of a
franchise contract based on the number of rooms at the lodging property
and estimated real estate brokerage offices gross closed commissions.
Initial franchise fees amounted to $24.2 million, $15.7 million and $13.8
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Franchising activity for the years ended December 31, 1996, 1995 and 1994
is as follows:
LODGING REAL ESTATE
----------------------------------- ---------------------------
1996 1995 1994 1996 1995
---------- --------- ---------- ---------- ----------
FRANCHISES IN OPERATION
Units at end of year 5,397 4,603 4,229 11,349 5,990
EXECUTED BUT NOT OPENED
Acquired 24 31 - 110 104
New agreements 1,142 983 870 829 248
Backlog, end of year 786 682 594 275 176
20. DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs interest rate swap agreements to match effectively the
fixed or floating rate nature of liabilities to the assets funded. A key
assumption in the following information is that rates remain constant at
December 31, 1996 levels. To the extent that rates change, both the
maturity and variable interest rate information will change. However, the
net rate the Company pays remains matched with the assets funded.
50
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps employed at December 31, 1996. These
characteristics are effectively offset within the portfolio of assets
funded by the Company ($000's):
MATURITIES
---------------------------------------------------------------
TOTAL 1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------- ---------
UNITED STATES
Commercial Paper:
Pay fixed/receive floating:
Notional value $427,181 $199,528 $136,176 $ 59,346 $ 20,531 $ 4,625 $ 6,975
Weighted average receive rate 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Weighted average pay rate 6.21% 6.33% 6.47% 6.37% 6.51% 6.60%
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 336,000 250,000 86,000
Weighted average receive rate 6.59% 6.50%
Weighted average pay rate 5.95% 5.86%
Pay floating/receive floating:
Notional value 357,200 357,200
Weighted average receive rate 5.51%
Weighted average pay rate 5.90%
CANADA
Commercial Paper:
Pay fixed/receive floating:
Notional value 68,255 32,631 22,849 10,585 2,190
Weighted average receive rate 3.11% 3.11% 3.11% 3.11%
Weighted average pay rate 6.25% 5.89% 5.63% 4.58%
Pay floating/receive floating:
Notional value 52,730 28,010 14,961 4,342 2,853 2,564
Weighted average receive rate 7.21% 7.09% 6.93% 7.61% 7.61%
Weighted average pay rate 3.38% 3.38% 3.38% 3.38% 3.38%
Pay floating/receive fixed:
Notional value 36,481 36,481
Weighted average receive rate 4.92%
Weighted average pay rate 3.07%
UK
Commercial Paper:
Pay floating/receive fixed:
Notional value 379,308 37,708 93,070 138,834 109,696
Weighted average receive rate 6.56% 6.56% 6.56% 6.56%
Weighted average pay rate 6.17% 7.85% 6.96% 7.10%
GERMANY
Commercial Paper:
Pay fixed/receive fixed:
Notional value 13,000 1,950 2,925 (6,825) 3,575 11,375
Weighted average receive rate 3.25% 3.25% 3.25% 3.25% 3.25%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34% 5.34%
--------- -------- -------- -------- -------- ---------
Total $1,670,155 $943,508 $269,981 $292,282 $138,845 $ 18,564 $ 6,975
========== ======== ======== ======== ======== ========= =========
51
For the years ended December 31, 1996 and 1995, the Company's hedging
activities increased interest expense $4.1 million and $2.0 million,
respectively, and had no effect on its weighted average borrowing rate.
For the same period in the year ended December 31, 1994, hedging
activities increased interest expense $8.4 million and increased the
weighted average borrowing rate 0.2%.
The Company enters into foreign exchange contracts as hedges against
currency fluctuations on certain intercompany loans. Such contracts
effectively offset the currency risk applicable to approximately $329.1
million and $118.1 million of obligations at December 31, 1996 and 1995,
respectively.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to certain derivative financial
instruments. The Company manages such risk by periodically evaluating the
financial position of counterparties and spreading its positions among
multiple counterparties. The Company presently does not expect
non-performance by any of the counterparties.
52
21. INDUSTRY SEGMENT INFORMATION
The Company is principally in the business of providing services to
businesses that serve consumer industry customers. The Company's major
business segments are reflective of the industries in which it serves. See
Note 1 for a more detailed description of each of the Company's industry
segments. Operating profit consists of revenues less operating expenses
excluding interest income, net and includes merger and related charges of
$131.3 million and $48.6 million allocated to the membership and other
segments respectively, for the year ended December 31, 1996 (See Note 3).
Membership services operating profit for the year ended December 31, 1995
includes $97.0 million of costs related to Ideon products abandoned and
restructuring. Membership Services operating profit for the year ended
December 31, 1994 includes $7.9 million of costs related to Ideon products
abandoned and restructuring and a $17.7 million net gain on the sale of
INN. The following table presents industry segment data of the Company for
the years ended December 31, 1996, 1995 and 1994.
53
Operations by segment ($000's):
Year Ended December 31, 1996
REAL ESTATE
------------------------------------------
REAL ESTATE MORTGAGE
CONSOLIDATED MEMBERSHIP FRANCHISE RELOCATION SERVICES
------------- ----------- ----------- ------------- -----------
Net revenues $ 3,908,780 $ 2,097,098 $ 233,469 $ 344,865 $ 127,729
Operating income 739,115 266,314 110,535 54,302 41,302
Identifiable assets 13,588,368 2,517,600 1,295,501 1,086,374 1,742,409
Depreciation and amortization 167,907 60,888 27,317 11,168 4,442
Capital expenditures 140,626 48,678 9,932 9,112 9,859
TRAVEL
-----------------------------------------------------------
CAR
LODGING RENTAL TIMESHARE FLEET OTHER
----------- ----------- ----------- ------------- -----------
Net revenues $ 385,920 $ 10,014 $ 30,723 $ 255,866 $ 423,096
Operating income 145,798 537 3,319 76,218 40,790
Identifiable assets 954,649 882,397 772,585 3,868,472 468,381
Depreciation and amortization 30,852 3,439 2,559 13,214 14,028
Capital expenditures 19,302 -- 1,473 9,999 32,271
Year Ended December 31, 1995
REAL ESTATE
------------------------------------------
REAL ESTATE MORTGAGE
CONSOLIDATED MEMBERSHIP FRANCHISE RELOCATION SERVICES
------------- ----------- ----------- ------------- -----------
Net revenues $ 2,992,122 $ 1,643,242 $ 47,965 $ 301,667 $ 93,251
Operating income 516,596 184,699 19,277 41,718 41,744
Identifiable assets 8,994,384 1,800,952 195,157 1,023,860 1,142,272
Depreciation and amortization 112,914 40,358 2,997 10,385 3,099
Capital expenditures 108,702 53,048 2,034 8,678 2,987
TRAVEL
------------------------------------------
LODGING FLEET OTHER
----------- ----------- -----------
Net revenues $ 335,402 $ 258,877 $ 311,718
Operating income 120,606 56,918 51,634
Identifiable assets 724,673 3,649,654 457,816
Depreciation and amortization 26,058 18,837 11,180
Capital expenditures 5,059 9,872 27,024
54
Year Ended December 31, 1994
REAL ESTATE
----------------------------
MORTGAGE
CONSOLIDATED MEMBERSHIP RELOCATION SERVICES
------------ ----------- ----------- -------------
Net revenues $ 2,446,731 $ 1,363,561 $ 255,974 $ 74,494
Operating income 474,885 218,145 34,534 30,172
Identifiable assets 7,437,042 1,566,186 794,372 849,131
Depreciation and amortization 97,175 27,683 9,280 2,944
Capital expenditures 73,804 29,809 11,541 2,471
TRAVEL
------------------------------------------
LODGING FLEET OTHER
----------- ----------- -----------
Net revenues $ 300,694 $ 249,571 $ 202,437
Operating income 102,487 52,323 37,224
Identifiable assets 738,543 3,247,320 241,490
Depreciation and amortization 21,921 17,765 17,582
Capital expenditures 9,378 8,854 11,751
The Company's operations outside of North America principally include
fleet management and relocation segment operations in Europe. Geographic
operations of the Company are as follows ($000's):
NORTH EUROPE
YEAR ENDED DECEMBER 31, 1996 AMERICA & OTHER CONSOLIDATED
---------------------------- -------------- ----------- -------------
Net revenues $ 3,529,563 $ 379,217 $ 3,908,780
Income before income taxes 650,030 63,640 713,670
Identifiable assets 12,519,616 1,068,752 13,588,368
YEAR ENDED DECEMBER 31, 1995
Net revenues 2,774,201 217,921 2,992,122
Income before income taxes 464,393 38,939 503,332
Identifiable assets 8,230,792 763,592 8,994,384
YEAR ENDED DECEMBER 31, 1994
Net revenues $ 2,296,067 $ 150,664 $ 2,446,731
Income before income taxes 439,390 24,942 464,332
Identifiable assets 6,857,565 579,477 7,437,042
55
22. SELECTED QUARTERLY FINANCIAL DATA - (UNAUDITED)
($000's, except per share data)
1996 FIRST SECOND (1) THIRD (2) FOURTH (3) TOTAL YEAR
---- ----------- ----------- ----------- ----------- -----------
Net revenues $ 821,411 $ 935,639 $ 1,042,901 $ 1,108,829 $ 3,908,780
Income before income taxes 158,300 179,430 112,569 263,371 713,670
Net income 95,974 101,064 68,466 158,107 423,611
Net income per share:
Primary $ .13 $ .13 $ .08 $ .20 $ .53
Fully diluted $ .13 $ .13 $ .08 $ .19 $ .52
1995 FIRST (4) SECOND (4) THIRD (4) FOURTH (4, 5) TOTAL YEAR
---- ----------- ----------- ----------- ------------- -------------
Net revenues $ 661,280 $ 722,571 $ 787,150 $ 821,121 $ 2,992,122
Income before income taxes 117,865 64,211 151,646 169,610 503,332
Net income 71,139 36,116 90,082 105,488 302,825
Net income per share:
Primary $ .10 $ .05 $ .12 $ .14 $ .42
Fully diluted $ .10 $ .05 $ .12 $ .14 $ .41
(1) Includes merger cost of $28.6 million ($25.1 million, after tax or
$0.03 per share) recorded in connection with the mergers of Davidson
& Associates, Inc. and Sierra On-Line, Inc.
(2) Includes merger costs of $147.2 million ($89.6 million, after tax or
$0.11 per share) principally related to the completion of the Ideon
Group, Inc. acquisition.
(3) Includes costs of $4.1 million principally related to investment
banking fees incurred in connection with other Company acquisitions.
(4) The first, second, third and fourth quarters include $8.1 million
($5.2 million, net of tax or $.01 per share), $73.1 million ($46.8
million net of tax or $.07 per share), $16.4 million ($10.5 million
net of tax or $.01 per share) and ($.6 million), respectively of
Ideon's costs related to products abandoned and restructuring.
(5) Includes merger costs of $5.2 million ($4.2 million, net of tax or
$.06 per share) related to the acquisition of Advance Ross.
23. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc. in
July 1996, HFS announced its strategy to dilute its interest in ARAC's car
rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. In September 1997, ARAC completed the IPO, which diluted
HFS's equity interest to approximately 27.5%.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. In
addition, the Company operates the telecommunications and computer
processing system which services ARAC for reservations, rental agreement
processing, accounting and fleet control for which the Company charges
ARAC at cost. Summarized financial information of ARAC is as follows
($000's):
56
AVIS RENT A CAR, INC.
SEPTEMBER 30,
1997 DECEMBER 31,
Balance sheet data: (UNAUDITED) 1996
----------------- --------------
Vehicles $ 3,364,660 $ 2,243,492
Total assets 4,717,107 3,131,357
Debt 3,285,548 2,295,474
Total liabilities 4,263,001 3,054,817
Shareholders' equity 454,106 76,540
NINE MONTHS ENDED OCTOBER 17, 1996
SEPTEMBER 30, 1997 (DATE OF ACQUISITION)
(UNAUDITED) TO DECEMBER 31, 1996
------------------ --------------------
Statement of income data:
Revenues $ 1,525,696 $ 362,844
Income before provision
for income taxes 49,313 2,261
Net income 26,974 1,221
24. SUBSEQUENT EVENTS - (PRIOR TO THE CENDANT MERGER DATE OF DECEMBER 17, 1997)
PROVIDIAN ACQUISITION
On December 9, 1997, HFS executed a definitive agreement to acquire
Providian Auto and Home Insurance Company and its subsidiaries from an
AEGON N.V. subsidiary for approximately $219.0 million in cash. Closing is
subject to receipt of required regulatory approval and other customary
conditions and is anticipated in the spring of 1998. Providian sells
automobile insurance to consumers through direct response marketing in 45
states and the District of Columbia.
DIVESTITURE
As directed by the Federal Trade Commission ("FTC") as a condition
terminating the waiting period under the Hart Scott Rodino Antitrust
Improvements Act in connection with the Cendant Merger, on December 17,
1997, the Company sold its wholly-owned subsidiary, Interval International
Inc. and certain related entities ("Interval"), for approximately $200.0
million, subject to certain adjustments. The agreement contemplates that
the Company will continue to provide certain existing services to
Interval's developers and members.
INVESTMENT IN NRT
During the third quarter of 1997, HFS acquired $182.0 million of preferred
stock of NRT Incorporated ("NRT"), a newly formed corporation created to
acquire residential real estate brokerage firms. HFS acquired $216.1
million of certain intangible assets including trademarks associated with
real estate brokerage firms acquired by NRT in 1997. The Company, at its
discretion, may acquire up to $81.3 million of additional NRT preferred
stock and may also purchase up to $229.9 million of certain intangible
assets of real estate brokerage firms acquired by NRT.
In September 1997, NRT acquired the real estate brokerage business and
operations of the Trust, and two other regional real estate brokerage
businesses. The Trust is an independent trust to which HFS contributed the
brokerage offices formerly owned by Coldwell Banker in connection with
HFS's acquisitions of Coldwell Banker. NRT is the largest residential
brokerage firm in the United States.
ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550 million in principal amount
of 3% Convertible Subordinated Notes (the "3% Notes") due February 15,
2002. Interest on the 3% Notes is payable semi-annually. Each $1,000
principal amount of 3% Notes is convertible into 32.6531 shares of Company
common stock subject to adjustment in certain events. The 3% Notes may be
redeemed at the option of the Company at any time on or after February 15,
2000, in whole or in part, at the appropriate redemption prices (as
defined in the indenture governing the 3% Notes) plus accrued interest to
the redemption date. The 3% Notes will be subordinated in right of payment
to all existing and future Senior Debt (as defined in the indenture
governing the 3% Notes) of the Company. Issuance costs are being amortized
on a straight-line basis over five years.
57
- -------------------------------------------------------------------------------
SUBSEQUENT EVENTS - (POST CENDANT MERGER DATE OF DECEMBER 17, 1997) -
UNAUDITED
PROPOSED ACQUISITION
On January 27, 1998, the Company proposed to acquire American Bankers
Insurance Group Inc. ("American Bankers") for $58 per share in cash and
stock, for an aggregate purchase price approximating $2.7 billion. On
January 28, 1998, the Company commenced a tender offer to purchase
approximately 23.5 million shares of American Bankers' common stock at a
price of $58 per share in cash, which together with shares owned by the
Company on the announcement date, approximate 51% of the fully diluted
shares of American Bankers. The Company proposed to exchange, on a tax
free basis, shares of its common stock with a fixed value of $58 per share
for the balance of American Bankers' common stock. The tender offer is
subject to certain customary conditions and there can be no assurance that
the Company will be successful in its proposal to acquire American
Bankers. The Company received a commitment from a bank to provide funds
necessary to finance the proposed acquisition.
HARPUR GROUP LTD. ACQUISITION
On January 20, 1998, the Company completed its acquisition of The Harpur
Group Ltd. ("Harpur"), a leading fuel card and vehicle management company
in the United Kingdom, from privately held H-G Holdings, Inc. for
approximately $186.0 million in cash plus future contingent payments of up
to $20.0 million over the next two years.
JACKSON HEWITT INC. MERGER
On January 7, 1998, the Company completed the acquisition of Jackson
Hewitt Inc. (" Jackson Hewitt"), for approximately $480.0 million in cash
or $68 per share of common stock of Jackson Hewitt. Jackson Hewitt is the
second largest tax preparation service system in the United States with
locations in 41 states.
Jackson Hewitt franchises a system of approximately 2,050 offices that
specialize in computerized prepartion of federal and state individual
income tax returns.
58
59
EXHIBIT 99.2
RESTATEMENT OF QUARTERLY PERIODS
ENDED MARCH 31, 1997 AND 1996
60
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 842,041 $ 633,903
Marketable securities 347,451 94,200
Receivables, net 1,258,317 1,290,625
Other current assets 526,211 510,865
------------- ------------
Total current assets 2,974,020 2,529,593
------------- ------------
Deferred membership acquisition costs 392,493 401,564
Franchise agreements, net 956,012 995,947
Goodwill, net 1,820,234 2,302,226
Other intangibles, net 1,160,589 636,230
Other assets 1,077,175 993,574
------------- ------------
Total assets exclusive of assets under programs 8,380,523 7,859,134
------------- ------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,484,445 3,418,666
Relocation receivables 684,207 773,326
Mortgage loans held for sale 1,215,422 1,248,299
Mortgage servicing rights and fees 244,904 288,943
------------- ------------
5,628,978 5,729,234
------------- ------------
TOTAL ASSETS $ 14,009,501 $ 13,588,368
============= ============
See accompanying notes to supplemental consolidated financial statements
61
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other
current liabilities $ 1,542,668 $ 1,664,946
-------------- --------------
Deferred income 1,104,850 1,099,393
Long-term debt 1,757,205 1,004,584
Other noncurrent liabilities 127,207 124,885
-------------- --------------
Total liabilities exclusive of liabilities under programs 4,531,930 3,893,808
-------------- --------------
Liabilities under management and mortgage programs
Debt 4,952,815 5,089,943
Deferred income taxes 244,800 281,948
-------------- --------------
5,197,615 5,371,891
-------------- --------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized
10 million shares; none issued and outstanding -- --
Common stock, $.01 par value - authorized
2 billion shares; issued 812,949,119
and 804,655,850 shares, respectively 8,129 8,047
Additional paid-in capital 2,918,776 2,870,422
Retained earnings 1,655,573 1,556,300
Net unrealized gain on marketable securities -- 4,334
Currency translation adjustment (25,681) (12,452)
Restricted stock, deferred compensation (28,935) (28,212)
Treasury stock, at cost (13,587,712 and
6,911,757 shares, respectively) (247,906) (75,770)
--------------- ---------------
Total shareholders' equity 4,279,956 4,322,669
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,009,501 $ 13,588,368
============== ==============
See accompanying notes to supplemental consolidated financial statements
62
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1997 1996
------------ -------------
REVENUES
Membership and service fees, net $ 1,036,011 $ 663,003
Fleet leasing (net of depreciation and interest costs of
$286,075 and $283,123, respectively) 15,319 70,948
Other 112,776 87,460
------------- -------------
Net revenues 1,164,106 821,411
------------- -------------
EXPENSES
Operating 420,725 306,519
Marketing and reservation 286,693 239,335
General and administrative 105,232 77,531
Depreciation and amortization 54,272 32,224
Interest, net 19,066 7,502
------------- -------------
Total expenses 885,988 663,111
------------- -------------
Income before income taxes 278,118 158,300
Provision for income taxes 112,250 62,326
------------- -------------
Net income $ 165,868 $ 95,974
============= =============
PER SHARE INFORMATION:
Net income per share
Primary $ 0.19 $ 0.13
============= =============
Fully diluted $ 0.19 $ 0.13
============= =============
Weighted average common and common equivalent shares outstanding
Primary 871,488 768,918
Fully diluted 874,573 778,279
See accompanying notes to supplemental consolidated financial statements
63
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net income $ 165,868 $ 95,974
Depreciation and amortization 52,648 26,021
Increase (decrease) from changes in
assets under management programs:
Depreciation and amortization under management
and mortgage programs 281,412 254,058
Mortgage loans held for sale 32,876 (544,731)
Other (116,795) (5,101)
------------- -------------
Net cash provided by (used in) operating activities 416,009 (173,779)
------------- -------------
INVESTING ACTIVITIES:
Assets under management and mortgage programs:
Investment in leases and leased vehicles (626,731) (570,257)
Payments received on investment in leases and leased vehicles 290,134 197,577
Equity advances on homes under management (900,583) (590,175)
Repayment of advances on homes under management 962,122 667,146
Additions to originated mortgage servicing rights (41,691) (34,068)
Proceeds from sales of mortgage servicing rights -- 4,589
Property and equipment additions (32,305) (26,458)
Loans and investments (24,803) (10,000)
Proceeds from sale of assets 21,750 --
Proceeds from sales of marketable securities 42,570 46,922
Purchases of marketable securities (314,348) (28,832)
Due to Avis Rent A Car, Inc. (16,192) --
Net assets acquired, exclusive of cash acquired (84,744) (103,067)
Other 1,519 35,346
------------ ------------
Net cash used in investing activities (723,302) (411,277)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 560,907 968,972
Principal payments on borrowings (911,151) (453,585)
Net proceeds from issuance of convertible notes 542,655 --
Redemption of series A preferred stock -- (80,000)
Net change in short-term borrowings under management and mortgage programs 422,622 235,053
Issuance of common stock, net 36,215 15,201
Purchases of common stock (171,318) --
Stock option plan transactions 5,366 3,113
Payments of dividends of pooled entities (6,644) (5,860)
------------- -------------
Net cash provided by financing activities 478,652 682,894
------------ ------------
Effect of changes in exchange rates on cash and cash equivalents 36,779 6,512
------------ ------------
Net increase in cash and cash equivalents 208,138 104,350
Cash and cash equivalents, beginning of period 633,903 355,959
------------ ------------
Cash and cash equivalents, end of period $ 842,041 $ 460,309
============ ============
See accompanying notes to supplemental consolidated financial statements
64
CENDANT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The supplemental consolidated balance sheet of Cendant Corporation and
subsidiaries, formerly CUC International Inc. (the "Company"), as of March
31, 1997 and supplemental consolidated statements of income and cash
flows, for the three months ended March 31, 1997 and 1996 are unaudited.
In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements are included. There were no
adjustments of an unusual nature recorded during the three months ended
March 31, 1997 and 1996.
The accompanying supplemental consolidated financial statements
include the accounts and transactions of the Company and all wholly-owned
and majority owned subsidiaries and joint ventures except for the
Company's ownership of Avis Rent A Car, Inc. ("ARAC"), which is accounted
for under the equity method (See Note 5). The accompanying supplemental
consolidated financial statements have been restated for the business
combinations accounted for as poolings of interests (See Note 2) as if
such combined companies had operated as one entity since inception. All
material intercompany balances and transactions have been eliminated in
consolidation. These supplemental consolidated financial statements will
become the Company's primary historical financial statements for the
periods presented.
The accompanying supplemental consolidated financial statements and
notes thereto are presented in accordance with interim financial reporting
requirements as required by Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. The December 31, 1996 supplemental
consolidated balance sheet was derived from the Company's audited
supplemental consolidated financial statements. For further information,
refer to the audited supplemental consolidated financial statements and
notes thereto included as Exhibit 99.1 in this Form 8-K. Interim results
are not indicative of results for a full year.
Certain reclassifications have been made to the historical financial
statements of the pooled companies to conform to the restated
presentation.
2. BUSINESS COMBINATIONS
1997 POOLINGS
On December 17, 1997, the Company completed a merger with HFS
Incorporated ("HFS") (the "Cendant Merger") by issuing 440.0 million
shares of its common stock in exchange for all of the outstanding common
stock of HFS. Pursuant to the terms of the agreement and plan of merger,
HFS stockholders received 2.4031 shares of Company common stock for each
share of HFS common stock. Upon consummation of the Cendant Merger, the
Company changed its name from CUC International Inc. to Cendant
Corporation.
65
In connection with the Cendant Merger, the Company changed its fiscal
year end from January 31 to December 31. HFS has a calendar year end and
the Company has only recalendarized its 1997 results. Accordingly, the HFS
statements of income for the periods ended March 31, 1997 and 1996 have
been combined with the Company's statements of income for the three month
periods ended March 31, 1997 and April 30, 1996, respectively.
On October 3, 1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag") pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information.
On April 30, 1997, prior to being merged with and into the Company,
HFS acquired PHH Corporation ("PHH") by merger (the "HFS/PHH Merger")
which was satisfied by the issuance of 72.8 million equivalent shares of
Company common stock in exchange for all of the outstanding common stock
of PHH. PHH is the world's largest provider of corporate relocation
services and also provides mortgage services and fleet management
services. In connection with the HFS/PHH Merger, PHH changed its fiscal
year end from April 30 to December 31.
During February 1997, the Company acquired substantially all of the
assets and assumed specific liabilities of Numa Corporation ("Numa") for
$73.5 million. The purchase price was satisfied by the issuance of 3.4
million shares of Company common stock. Numa publishes personalized
heritage publications and markets and sells personalized merchandise.
Upon entering into a definitive merger agreement to acquire Avis, Inc.
in July 1996, HFS announced its strategy to dilute its interest in ARAC's
car rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method.
The following table presents the historical results of the Company and
the respective pooled entities for the last complete periods prior to
their respective mergers ($000's):
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1996
------------------ ------------------
Net revenues
The Company $ 598,944 $ 515,479
HFS (inclusive of PHH) 525,885 277,727
Hebdo Mag 39,277 28,205
------------------ ------------------
$ 1,164,106 $ 821,411
================== ==================
66
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1996
------------------ ------------------
Net income
The Company $ 73,624 $ 52,121
HFS (inclusive of PHH) 91,104 43,678
Hebdo Mag 1,140 175
------------------ ------------------
$ 165,868 $ 95,974
================== ==================
The following table presents the historical results of HFS and PHH for
the periods prior to the HFS/PHH Merger ($000's):
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1996
------------------ ------------------
Net revenues
HFS $ 347,962 $ 124,545
PHH 177,923 153,182
------------------ ------------------
$ 525,885 $ 277,727
================== ==================
Net income
HFS $ 58,940 $ 22,818
PHH 32,164 20,860
------------------ ------------------
$ 91,104 $ 43,678
================== ==================
PURCHASE BUSINESS COMBINATIONS
During the quarter ended March 31, 1997, the Company acquired certain
entities for an aggregate purchase price of $48.3 million, satisfied by
the payment of $10.5 million in cash and the issuance of 1.5 million
shares of Company common stock. The goodwill resulting from these
acquisitions aggregated $68.4 million. These acquisitions were accounted
for in accordance with the purchase method of accounting and, accordingly,
the results of operations have been included in the consolidated results
of operations from the respective dates of acquisitions. The results of
operations for the periods prior to the respective dates of acquisition
were not significant to the Company's operations.
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
In connection with the Company's 1996 acquisitions of Davidson &
Associates Inc., Sierra On-Line, Inc. and Ideon Group, Inc., accounted for
as poolings of interests, the Company recorded a non-recurring charge of
approximately $179.9 million ($118.7 million, after tax) for the year
ended December 31, 1996. Such charge is comprised of transaction costs,
exit costs and a provision relating to certain litigation matters giving
consideration to the Company's intended approach to these matters. As of
March 31, 1997, such charges amounted to $96.0 million.
67
4. PRO FORMA INFORMATION
The following table reflects the unaudited operating results of the
Company for the three months ended March 31, 1996 on a pro forma basis,
which gives effect to HFS's 1996 acquisitions, accounted for under the
purchase method of accounting as if they had occurred on January 1, 1996:
Net revenue $ 973,490
Net income 115,339
Net income per share (fully diluted) $ 0.14
5. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc.
in July 1996, HFS announced its strategy to dilute its interest in ARAC's
car rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. Summarized financial information of ARAC is as follows
($000's):
AVIS RENT A CAR, INC.
DECEMBER 31,
Balance sheet data: MARCH 31, 1997 1996
---------------- --------------
Vehicles $ 2,159,684 $ 2,243,492
Total assets 3,001,275 3,131,357
Debt 2,175,357 2,295,474
Total liabilities 2,921,177 3,054,817
Shareholders' equity 80,098 76,540
THREE MONTHS
ENDED MARCH 31
Statement of income data: 1997
----------------
Revenues $ 456,014
Income before provision
for income taxes 6,983
Net income 4,205
6. SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses
and aggregated $23.1 million and $14.9 million for the three months ended
March 31, 1997 and 1996, respectively. Software net revenue included in
Other was $94.1 million and $60.5 million for the three months ended March
31, 1997 and 1996, respectively. Costs of software revenue are included in
operating expenses and aggregated $27.1 million and $24.8 million for the
three months ended March 31, 1997 and 1996, respectively.
68
7. ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550.0 million in principal
amount of 3% Convertible Subordinated Notes (the "3% Notes") due February
15, 2002. Interest on the 3% Notes is payable semi-annually. Each $1,000
principal amount of 3% Notes is convertible into 32.6531 shares of Company
common stock subject to adjustment in certain events. The 3% Notes may be
redeemed at the option of the Company at any time on or after February 15,
2000, in whole or in part, at the appropriate redemption prices (as
defined in the indenture governing the 3% Notes) plus accrued interest to
the redemption date. The 3% Notes will be subordinated in right of payment
to all existing and future Senior Debt (as defined in the indenture
governing the 3% Notes) of the Company. Issuance costs are being amortized
on a straight-line basis over five years.
8. SHAREHOLDERS' EQUITY
A. AUTHORIZED SHARES
In conjunction with the Cendant Merger, effective on December 17,
1997, the Company's shareholders approved an amendment to the Company's
restated certificate of incorporation to increase the number of authorized
shares of common stock and preferred stock to 2 billion shares and 10
million shares, respectively. The Company has never issued shares of
preferred stock.
B. TREASURY PURCHASES
In January 1997, HFS's Board of Directors authorized the purchase of
6.2 million equivalent shares of Company common stock to satisfy stock
option exercises and conversions of convertible debt securities and to
fund future acquisitions. The Company acquired approximately 6.2 million
equivalent treasury shares in January and February 1997 for $179.4 million
with revolving credit borrowings.
9. CONTINGENCIES - IDEON
On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Company acquired Ideon in August 1996. The Agreement provides for the
settlement of all of the outstanding litigation matters involving Peter
Halmos, SafeCard and Ideon as set forth below. The Agreement became
effective in July 1997. The Agreement calls for the dismissal with
prejudice of these outstanding litigation matters and the payment to Peter
Halmos, over a six-year period, of $70.5 million. Specifically, the
Agreement requires that the Company pay Peter Halmos one up-front payment
of $13.5 million and six subsequent annual payments of $9.5 million each.
The Agreement also calls for the transfer to the Company of assets related
to SafeCard's CreditLine business, including the transfer by CreditLine
Corporation to the Company of all of the CreditLine Corporation's rights
under a marketing agreement between it and SafeCard dated November 1,
1988.
The following Halmos related cases have been dismissed pursuant to the
Agreement:
1. Halmos Trading & Investing Company v. SafeCard Services, Inc. and
Gerald Cahill v. Peter A. Halmos and Steven J. Halmos and Halmos
Trading & Investment Co., Case No. 93-04354 (06) in the Circuit Court
for the 17th Judicial Circuit in and for Broward County, Florida.
2. SafeCard Services, Inc. v. Peter Halmos, a Florida resident; High
Plains Capital Corporation, a Wyoming Corporation; and CreditLine
Corporation, a Wyoming corporation which is pending in the District
Court, First Judicial District of Laramie County, Wyoming; Case No.
Doc. 134, No. 192.
3. Peter Halmos, CreditLine Corporation and Continuity Marketing
Corporation v. Paul G. Kahn, William T. Bacon, Robert L.
Dilenschneider, Eugene Miller and SafeCard Services, Inc., in the
United States District Court, Southern District of Florida, Case No.
94-6920 CG-NESBITT.
4. Peter Halmos v SafeCard Services, Inc., William T. Bacon, Jr., Barry
I. Tillis and Barry Natter, Case No. 95-6325 (AJ) filed in the
Circuit Court, Fifteenth Judicial Circuit, in and for Palm Beach
County Florida.
5. High Plains Capital Corporation f/k/a Halmos & Company, Inc v. Ideon
Group, Inc., SafeCard Services, Inc., Eugene Miller, Robert L.
Dilenschneider, and the Dilenschneider Group, Inc., Palm Beach
County, Florida, Civil Action No. CL 95 8313 AE (Hon. Walter
Colbath).
6. High Plains Capital Corporation v. Ideon Group, Inc., and SafeCard
Services, Inc., Civil Action No. 95 015024, Seventeenth Judicial
Circuit, Broward County, Florida.
The following Halmos related case will also be dismissed pursuant to the
Agreement:
7. Ideon Group, Inc., SafeCard Services, Inc., Paul G. Kahn, William T.
Bacon, Jr., Marshall L. Burman, John Ellis (Jeb) Bush, Robert L.
Dilenschneider, Adam W. Herbert, Eugene Miller, and Thomas F. Petway,
III v. Peter Halmos, Civil Action No. 14600, filed in the Court of
Chancery of New Castle County, Delaware.
On October 22, 1997, the plaintiffs, the Company and all of the Company's
indemnitees, entered into a Memorandum of Understanding and thereafter
filed final settlement agreements in James B. Chambers and Peter A. Halmos
v. SafeCard Services, Inc; Ideon Group, Inc.; Paul G. Kahn; William T.
Bacon, Jr.,; Robert L. Dilenschneider; The Dilenschneider Group; Eugene
Miller; G. Thomas Frankland; Francis J. Marino; John R. Birk; Marshall
Burman; Thomas F. Petway III; John Ellis Bush; Adam W. Herbert, Jr.; Price
Waterhouse LLP; Mahoney Adams & Criser, P.A. and John Does 1 through 25,
United States District Court, Southern District of Florida, Case No.
95-1298-CIV-NESBITT ("Chambers"); Lois Hekker v. Ideon Group, Inc. and
Paul G. Kahn, United States District Court, Middle District of Florida,
Jacksonville Division, Case No. 95-681-CIV-J ("Hekker"); and James L.
Binder, individually, as custodian for Elizabeth Binder, and as custodian
for the James L. Binder, D.D.S., P.C. Profit Sharing Trust; Edward Dubois;
Sheila Ann Dubois, as Personal Representative for The Estate of Winifred
Dubois; G. Neal Goolsby; John E. Masters, individually and as custodian
for Gregory Halmos and Nicholas Halmos; J.B. McKinney; on behalf of
themselves and all others similarly situated, and Peter A. Halmos, as
Trustee for the Peter A. Halmos Revocable Trust Dated January 24, 1990,
and The Halmos Foundation, Inc., individually, v. SafeCard Services, Inc.,
a Delaware corporation; Paul G. Kahn; William T. Bacon, Jr.; Robert L.
Dilenschneider; The Dilenschneider Group, a Delaware corporation; Eugene
Miller; Gerald R. Cahill; Oppenheimer & Co., Inc., a Delaware corporation;
and John Does 1 through 100, inclusive. United States District Court for
the Southern District of Florida, (Miami Division) Case No.
94-2604-CIV-MOORE ("Binder"). The above referenced settlement in the
Chambers and Hekker matters was for payment by the Company to class
members of $15.0 million. The settlement in the Binder litigation calls
for the payment by the Company to class members of $3.0 million. These
settlements must be approved by the court at hearings anticipated during
the first quarter of 1998.
The following actions remain pending, in whole or in part, as described
below:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for SafeCard) in April 1993 in Cook County Circuit Court in
Illinois against SafeCard and one of Ideon's directors, purporting to
state claims aggregating in excess of $100.0 million, principally relating
to alleged rights to "incentive compensation," stock options or their
equivalent, indemnification, wrongful termination and defamation. On
February 7, 1995, the court dismissed with prejudice Peter Halmos' claims
regarding alleged rights to "incentive compensation," stock options or
their equivalent, wrongful termination and defamation. Mr. Halmos has
appealed this ruling. SafeCard has filed an answer to the remaining
indemnification claims. Its obligation to file an answer to the
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a declaratory judgment action filed by Ideon in Delaware
Chancery Court. As a result of the Halmos settlement described above, only
the claims of Myron Cherry remain pending.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos,
in the State Circuit Court in Palm Beach County, Florida in April 1995
against Ideon, Family Protection Network, Inc., SafeCard, one of Ideon's
directors and Ideon's Chief Executive Officer purporting to state various
statutory and tort claims. The claims principally relate to the allegation
by these companies that SafeCard's Early Warnings Service and Family
Protection Network were conceived and commercialized by, among others,
Peter Halmos and have been improperly copied. An amended complaint filed
on June 14, 1995 seeking monetary damages adds to the prior claims certain
claims by Nicholas Rubino that principally relate to the allegation that
SafeCard's Pet Registration Product was conceived by Mr. Rubino and has
been improperly copied. The company has filed an appropriate answer. As a
result of the Halmos settlement, all claims of Continuity Marketing
Corporation will be dismissed, leaving pending only the claims related to
Family Protection Network and the Pet Registration Program.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F.
Elcan against Ideon and two of its employees in the United States District
Court for the Southern District of New York. The litigation involves
claims against Ideon, its former CEO and its Vice President of Investor
Relations for alleged material misrepresentations and omissions in
connection with announcements relating to Ideon's expected earnings per
share in 1995 and its new product sales, which included the PGA Tour Card
Program, Family Protection Network and Collections of the Vatican Museums.
On July 15, 1996, Ideon filed a motion to dismiss. The company withdrew
its motion to dismiss and answered the complaint on December 5, 1996.
The Company established a reserve upon the consummation of the merger with
Ideon during the third quarter of 1996 related, in part, to these
litigation matters. Although not anticipated, in the event the foregoing
class action settlements are not approved by the Court, the outcome of the
class action matters described above as well as the other pending Ideon
matters could also exceed the amount accrued. The Company is also involved
in certain other claims and litigation arising in the ordinary course of
business, which are not considered material to the financial position,
operations or cash flows of the Company.
69
70
EXHIBIT 99.2
RESTATEMENT OF QUARTERLY PERIODS
ENDED JUNE 30, 1997 AND 1996
71
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 791,001 $ 633,903
Marketable securities 473,501 94,200
Receivables, net 1,409,026 1,290,625
Other current assets 581,973 510,865
--------------- ---------------
Total current assets 3,255,501 2,529,593
--------------- ---------------
Deferred membership acquisition costs 382,081 401,564
Franchise agreements, net 948,753 995,947
Goodwill, net 1,868,438 2,302,226
Other intangibles, net 1,192,028 636,230
Other assets 1,180,159 993,574
--------------- ---------------
Total assets exclusive of assets under programs 8,826,960 7,859,134
--------------- ---------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,643,601 3,418,666
Relocation receivables 579,575 773,326
Mortgage loans held for sale 820,615 1,248,299
Mortgage servicing rights and fees 272,042 288,943
--------------- ---------------
5,315,833 5,729,234
--------------- ---------------
TOTAL ASSETS $ 14,142,793 $ 13,588,368
=============== ===============
See accompanying notes to supplemental consolidated financial statements.
72
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
---------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other
current liabilities $ 1,768,450 $ 1,664,946
--------------- ---------------
Deferred income 944,149 1,099,393
Long-term debt 1,928,394 1,004,584
Other noncurrent liabilities 131,684 124,885
--------------- ---------------
Total liabilities exclusive of liabilities under programs 4,772,677 3,893,808
--------------- ---------------
Liabilities under management and mortgage programs
Debt 4,776,153 5,089,943
Deferred income taxes 301,200 281,948
--------------- ---------------
5,077,353 5,371,891
--------------- ---------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized 10 million shares;
none issued and outstanding -- --
Common stock, $.01 par value - authorized 2 billion shares;
issued 818,401,590 and 804,655,850 shares, respectively 8,184 8,047
Additional paid-in capital 2,939,075 2,870,422
Retained earnings 1,642,188 1,556,300
Net unrealized gain on marketable securities -- 4,334
Currency translation adjustment (21,064) (12,452)
Restricted stock, deferred compensation (27,714) (28,212)
Treasury stock, at cost (13,587,712 and 6,911,757 shares, respectively) (247,906) (75,770)
---------------- -----------------
Total shareholders' equity 4,292,763 4,322,669
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,142,793 $ 13,588,368
=============== ===============
See accompanying notes to supplemental consolidated financial statements.
73
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1997 1996 1997 1996
-------------- ----------- ------------- -------------
REVENUES
Membership and service fees, net $ 1,084,475 $ 764,972 $ 2,015,473 $ 1,427,975
Fleet leasing (net of depreciation and
interest costs of $298,200, $272,871,
$584,275 and $555,994, respectively) 65,786 62,822 146,581 133,770
Other 150,252 107,845 296,657 195,305
------------ ------------- ------------- -----------
Net revenues 1,300,513 935,639 2,458,711 1,757,050
------------ ------------- ------------- -----------
EXPENSES
Operating 438,541 334,446 853,356 640,965
Marketing and reservation 315,756 254,044 602,449 493,379
General and administrative 112,984 94,423 218,217 171,954
Merger and related costs and other
unusual charges 303,000 28,635 303,000 28,635
Depreciation and amortization 59,422 37,402 120,359 69,626
Interest, net 15,957 7,259 28,358 14,761
------------ ------------- ------------- -----------
Total expenses 1,245,660 756,209 2,125,739 1,419,320
------------ ------------- ------------- -----------
Income before income taxes 54,853 179,430 332,972 337,730
Provision for income taxes 68,290 78,366 180,540 140,692
------------ ------------- ------------- -------------
Net income (loss) $ (13,437) $ 101,064 $ 152,432 $ 197,038
============== ============= ============= =============
PER SHARE INFORMATION
Net income (loss) per share
Primary $ (0.02) $ 0.13 $ 0.18 $ 0.25
============== ============= ============= ===========
Fully diluted $ (0.02) $ 0.13 $ 0.18 $ 0.25
============== ============= ============= ===========
Weighted average common and common
equivalent shares outstanding
Primary 804,246 797,678 875,496 784,106
Fully diluted 804,246 803,484 878,391 792,694
See accompanying notes to supplemental consolidated financial statements.
74
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1997 1996
------------- -------------
OPERATING ACTIVITIES:
Net income $ 152,432 $ 197,038
Merger related charge 303,000 --
Merger related payments (132,500) --
Depreciation and amortization 107,033 53,219
Increase (decrease) from changes in
assets under management programs:
Depreciation and amortization under management
and mortgage programs 531,646 483,578
Mortgage loans held for sale 427,684 (351,657)
Other (224,306) 39,407
------------- ------------
Net cash provided by operating activities 1,164,989 421,585
------------- ------------
INVESTING ACTIVITIES:
Assets under management and mortgage programs:
Investment in leases and leased vehicles (1,179,905) (936,225)
Payments received on investment in leases and leased vehicles 437,239 339,680
Equity advances on homes under management (2,136,739) (1,415,655)
Repayment of advances on homes under management 2,203,671 1,498,277
Additions to originated mortgage servicing rights (85,995) (89,872)
Proceeds from sales of mortgage servicing rights 29,134 7,113
Property and equipment additions (61,676) (51,087)
Loans and investments (16,325) (10,000)
Proceeds from sales of marketable securities 60,260 75,460
Purchases of marketable securities (458,088) (66,947)
Due to Avis Rent A Car, Inc. (47,285) --
Net assets acquired, exclusive of cash acquired (344,030) (1,004,137)
Other 40,199 35,099
---------- ------------
Net cash used in investing activities (1,559,540) (1,618,294)
----------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,284,196 1,073,675
Principal payments on borrowings (1,174,217) (612,144)
Net proceeds from issuance of convertible notes 566,083 --
Redemption of series A preferred stock -- (80,000)
Net change in short-term borrowings under management and mortgage programs (54,948) 78,958
Issuance of common stock, net 66,778 1,182,454
Purchases of common stock (171,318) --
Stock option plan transactions 22,014 7,074
Payment of dividends of pooled entities (6,644) (14,556)
----------- -------------
Net cash provided by financing activities 531,944 1,635,461
----------- -----------
Effect of changes in exchange rates on cash and cash equivalents 19,705 (3,003)
----------- ------------
Net increase in cash and cash equivalents 157,098 435,749
Cash and cash equivalents, beginning of period 633,903 355,959
----------- ------------
Cash and cash equivalents, end of period $ 791,001 $ 791,708
=========== ============
See accompanying notes to supplemental consolidated financial statements.
75
CENDANT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The supplemental consolidated balance sheet of Cendant Corporation and
subsidiaries, formerly CUC International Inc. (the "Company"), as of June
30, 1997, the supplemental consolidated statements of income for the three
and six months ended June 30, 1997 and 1996, and the supplemental
consolidated statements of cash flows for the six months ended June 30,
1997 and 1996, are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements
are included. There were no adjustments of an unusual nature recorded
during the three and six months ended June 30, 1997 and 1996, except for a
one-time charge of $303.0 million ($227.0 million after tax), recorded in
the second quarter of 1997 representing merger and related costs incurred
in connection with the merger of HFS Incorporated ("HFS") with PHH
Corporation ("PHH") and a non-recurring charge of $28.6 million ($25.1
million after tax), recorded in the second quarter of 1996, representing
merger and related costs incurred in connection with the 1996 mergers of
the Company with Davidson & Associates, Inc. ("Davidson") and
Sierra-On-Line, Inc. ("Sierra") (See Note 3) and a $5.0 million
restructuring charge recorded in June 1996, related primarily to the
contribution of owned Coldwell Banker brokerage offices to an independent
trust.
The accompanying supplemental consolidated financial statements include
the accounts and transactions of the Company and all wholly-owned and
majority owned subsidiaries and joint ventures, except for the Company's
ownership of Avis Rent A Car, Inc. ("ARAC"), which is accounted for under
the equity method (See Note 5). The accompanying supplemental consolidated
financial statements have been restated for the business combinations
accounted for as poolings of interests (See Note 2) as if such combined
companies had operated as one entity since inception. All material
intercompany balances and transactions have been eliminated in
consolidation. These supplemental consolidated financial statements will
become the Company's primary historical financial statements for the
periods presented.
The accompanying supplemental consolidated financial statements and
notes thereto are presented in accordance with interim financial reporting
requirements as required by Form 10-Q and do not include all of the
information and the notes required by generally accepted accounting
principles for complete financial statements. The December 31, 1996
supplemental consolidated balance sheet was derived from the Company's
audited supplemental consolidated financial statements. For further
information, refer to the audited supplemental consolidated financial
statements and notes thereto included herein as Exhibit 99.1 in this Form
8-K. Interim results are not necessarily indicative of results for a full
year.
Certain reclassifications have been made to the historical financial
statements of the pooled companies to conform to the restated
presentation.
2. BUSINESS COMBINATIONS
1997 POOLINGS
On December 17, 1997, the Company completed a merger with HFS
Incorporated ("HFS") (the "Cendant Merger") by issuing 440.0 million
shares of its common stock in exchange for all of the
76
outstanding common stock of HFS. Pursuant to the terms of the agreement
and plan of merger, HFS stockholders received 2.4031 shares of Company
common stock for each share of HFS common stock. Upon consummation of the
Cendant Merger, the Company changed its name from CUC International Inc.
to Cendant Corporation.
In connection with the Cendant Merger, the Company changed its fiscal
year end from January 31 to December 31. HFS has a calendar year end and
the Company has only recalendarized its 1997 results. Accordingly, the HFS
statements of income for the three and six months ended June 30, 1997 and
1996 have been combined with the Company's statements of income for the
three and six months ended June 30, 1997 and July 31, 1996, respectively.
On October 3,1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag") pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440.0 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information.
On April 30, 1997, prior to being merged with and into the Company, HFS
acquired PHH by merger (the "HFS/PHH Merger") which was satisfied by the
issuance of 72.8 million equivalent shares of Company common stock in
exchange for all of the outstanding common stock of PHH. PHH is the
world's largest provider of corporate relocation services and also
provides mortgage services and fleet management services. In connection
with the HFS/PHH Merger, PHH changed its fiscal year end from April 30 to
December 30.
During February 1997, the Company acquired substantially all of the
assets and assumed specific liabilities of Numa Corporation ("Numa") for
$73.5 million. The purchase price was satisfied by the issuance of 3.4
million shares of Company common stock. Numa publishes personalized
heritage publications and markets and sells personalized merchandise.
The following table presents the historical results of the Company and
the respective pooled entities for the last complete periods prior to
their respective mergers ($000's):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net revenues
The Company $ 666,586 $ 555,744 $ 1,265,530 $ 1,071,223
HFS (inclusive of PHH) 579,620 345,317 1,099,597 623,044
Hebdo Mag 54,307 34,578 93,584 62,783
------------- ------------- ------------- -------------
$ 1,300,513 $ 935,639 $ 2,458,711 $ 1,757,050
============= ============= ============= =============
77
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net income (loss)
The Company $ 90,905 $ 40,461 $ 164,529 $ 92,582
HFS (inclusive of PHH) (106,449) 59,939 (15,344) 103,617
Hebdo Mag 2,107 664 3,247 839
------------- ------------- ------------- -------------
$ (13,437) $ 101,064 $ 152,432 $ 197,038
============= ============= ============= =============
The following table presents the historical results of HFS and PHH for
the periods prior to the HFS/PHH Merger ($000's):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1997 JUNE 30, 1996
-------------------- ---------------------
Net revenues
HFS $ 347,962 $ 300,403
PHH 177,923 322,641
------------- -------------
Total $ 525,885 $ 623,044
============= =============
Net income
HFS $ 58,940 $ 61,619
PHH 32,164 41,998
------------- -------------
Total $ 91,104 $ 103,617
============= =============
PURCHASE BUSINESS COMBINATIONS
During the six months ended June 30, 1997, the Company acquired certain
entities for an aggregate purchase price of $49.0 million, satisfied by
the payment of $11.2 million in cash and the issuance of 1.5 million
shares of Company common stock. The goodwill resulting from these
acquisitions aggregated $68.8 million. These acquisitions were accounted
for in accordance with the purchase method of accounting and, accordingly,
the results of operations have been included in the consolidated results
of operations from the respective dates of acquisitions. The results of
operations for the periods prior to the respective dates of acquisition
were not significant to the Company's operations.
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
PHH MERGER CHARGE
HFS recorded a one-time merger and related charge (the "PHH Merger
Charge") of $303.0 million ($227.0 million, after tax) during the second
quarter of 1997 in connection with the HFS/PHH Merger. Excluding the PHH
Merger Charge, net income was $213.6 million and $379.4 million for the
three and six months ended June 30, 1997, respectively. The PHH Merger
Charge is summarized by type as follows (in millions):
78
Personnel related $ 142.4
Professional fees 36.8
Business terminations 44.7
Facility related 57.1
Other costs 22.0
-----------
Total $ 303.0
===========
Personnel related charges are comprised of costs incurred in connection
with employee reductions associated with the combination of HFS's
relocation service business and the consolidation of corporate activities.
Personnel related charges include termination benefits such as severance,
medical and other benefits. Also included in personnel related charges are
supplemental retirement benefits resulting from the change of control.
Several grantor trusts were established and funded by HFS to pay such
benefits in accordance with the terms of the HFS/PHH merger agreement.
Full implementation of the restructuring plan will result in the
termination of approximately 500 employees substantially all of whom are
located in North America, of which 126 employees were terminated as of
June 30, 1997. Professional fees are primarily comprised of investment
banking, accounting and legal fees incurred in connection with the HFS/PHH
Merger. Business termination charges relate to the exit from certain
activities associated with fleet management, mortgage services and
ancillary operations. Facility related expenses include costs associated
with contract and lease terminations, asset disposals and other charges
incurred in connection with the consolidation and closure of excess space.
The Company anticipates that approximately $236.0 million will be paid
in cash in connection with the PHH Merger Charge of which $132.5 million
was paid through June 30, 1997. The remaining cash portion of the PHH
Merger Charge will be financed through cash generated from operations and
borrowings under the Company's revolving credit facilities. It is
currently anticipated that the restructuring plan will be completed during
the first quarter of 1998. Revenue and operating results from activities
that will not be continued are not material to the results of operations
of the Company.
1996 POOLINGS
Principally in connection with the Company's 1996 acquisitions of
Davidson, Sierra and Ideon Group, Inc. ("Ideon"), which were accounted for
as poolings of interests, the Company recorded a non-recurring charge of
approximately $179.9 million ($118.7 million, after tax) for the year
ended December 31, 1996. Such charge is comprised of transaction costs,
exit costs and a provision relating to certain litigation matters giving
consideration to the Company's intended approach to these matters. As of
June 30, 1997, such charges amounted to $125.9 million.
4. PRO FORMA INFORMATION
The following table reflects the unaudited operating results of the
Company for the six months ended June 30, 1996 on a pro forma basis, which
gives effect to HFS's 1996 acquisitions, accounted for under the purchase
method of accounting as if they occurred on January 1, 1996.
Net revenues $ 2,097,948
Net income 262,690
Net income per share (fully diluted) $ 0.31
79
5. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc.
in July 1996, HFS announced its strategy to dilute its interest in ARAC's
car rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. Summarized financial information for ARAC is as follows
($000's):
AVIS RENT A CAR, INC.
Balance sheet data: JUNE 30, 1997 DECEMBER 31, 1996
-------------- -----------------
Vehicles $ 2,312,109 $ 2,243,492
Total assets 3,029,073 3,131,357
Debt 2,183,769 2,295,474
Total liabilities 2,941,987 3,054,817
Shareholders' equity 87,086 76,540
THREE MONTHS SIX MONTHS
ENDED ENDED
Statement of income data: JUNE 30, 1997 JUNE 30, 1997
-------------- -------------
Revenues $ 489,633 $ 945,647
Income before provision
for income taxes 17,374 24,360
Net income 9,733 13,106
6. SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses
and aggregated $26.6 million and $15.3 million for the three months ended
June 30, 1997 and 1996, respectively, and $49.7 million and $30.2 million
for the six months ended June 30, 1997 and 1996, respectively. Software
net revenue included in Other was $174.0 million and $129.1 million for
the six months ended June 30, 1997 and 1996, respectively. Costs of
software revenue are included in operating expenses and aggregated $28.3
million and $21.1 million for the three months ended June 30, 1997 and
1996, respectively, and $55.4 million and $45.9 million for the six months
ended June 30, 1997 and 1996, respectively.
7. ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550.0 million in principal
amount of 3% Convertible Subordinated Notes (the "3% Notes") due February
15, 2002. Interest on the 3% Notes is payable semi-annually. Each $1,000
principal amount of 3% Notes is convertible into 32.6531 shares of Company
common stock subject to adjustment in certain events. The 3% Notes may be
redeemed at the option of the Company at any time on or after February 15,
2000, in whole or in part, at the appropriate redemption prices (as
defined in the indenture governing the 3% Notes) plus accrued interest to
the redemption date. The 3% Notes will be subordinated in right of payment
to all existing and future Senior Debt (as defined in the indenture
governing the 3% Notes) of the Company. Issuance costs are being amortized
on a straight-line basis over five years.
80
8. SHAREHOLDERS' EQUITY
A. AUTHORIZED SHARES
In conjunction with the Cendant Merger effective on December 17, 1997,
the Company's shareholders approved an amendment to the Company's restated
certificate of incorporation to increase the number of authorized shares
of common stock and preferred stock to 2 billion shares and 10 million
shares, respectively. The Company has never issued shares of preferred
stock.
B. TREASURY PURCHASES
In January 1997, HFS's Board of Directors authorized the purchase of
6.2 million equivalent shares of Company common stock to satisfy stock
option exercises and conversions of convertible debt securities and to
fund future acquisitions. The Company acquired approximately 6.2 million
equivalent treasury shares in January and February 1997 for $179.4 million
with revolving credit borrowings.
9. CONTINGENCIES - IDEON
On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Agreement calls for the dismissal with prejudice of certain outstanding
litigation matters between Peter Halmos and certain of the Company's
subsidiaries and the payment to Peter Halmos, over a six-year period, of
$70.5 million. Specifically, the Agreement requires that the Company pay
Peter Halmos one up-front payment of $13.5 million and six subsequent
annual payments of $9.5 million each. For additional disclosure, see
Footnote 13 --Commitments and Contingencies to Exhibit 99.1 -- Supplemental
Consolidated Financial Statements.
81
82
EXHIBIT 99.2
RESTATEMENT OF QUARTERLY PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
83
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 902,777 $ 633,903
Marketable securities 308,947 94,200
Receivables, net 1,538,415 1,290,625
Other current assets 630,657 510,865
--------------- --------------
Total current assets 3,380,796 2,529,593
--------------- --------------
Deferred membership acquisition costs 389,870 401,564
Franchise agreements, net 942,780 995,947
Goodwill, net 1,913,478 2,302,226
Other intangibles, net 1,438,537 636,230
Other assets 1,329,370 993,574
--------------- --------------
Total assets exclusive of assets under programs 9,394,831 7,859,134
--------------- --------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,547,217 3,418,666
Relocation receivables 587,310 773,326
Mortgage loans held for sale 1,162,220 1,248,299
Mortgage servicing rights and fees 305,428 288,943
--------------- --------------
5,602,175 5,729,234
--------------- --------------
TOTAL ASSETS $ 14,997,006 $ 13,588,368
=============== ==============
See accompanying notes to supplemental consolidated financial statements.
84
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and
other current liabilities $ 1,358,767 $ 1,664,946
--------------- --------------
Deferred income 1,091,649 1,099,393
Long-term debt 2,422,524 1,004,584
Other noncurrent liabilities 262,407 124,885
--------------- --------------
Total liabilities exclusive of liabilities under programs 5,135,347 3,893,808
--------------- --------------
Liabilities under management and mortgage programs
Debt 4,952,083 5,089,943
Deferred income taxes 300,683 281,948
--------------- --------------
5,252,766 5,371,891
--------------- --------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized 10 million shares;
none issued and outstanding -- --
Common stock, $.01 par value - authorized 2 billion shares;
issued 824,544,641 and 804,655,850 shares, respectively 8,245 8,047
Additional paid-in capital 3,017,461 2,870,422
Retained earnings 1,890,452 1,556,300
Net unrealized gain on marketable securities -- 4,334
Currency translation adjustment (27,024) (12,452)
Restricted stock, deferred compensation (28,664) (28,212)
Treasury stock, at cost (13,964,693 and 6,911,757 shares, respectively) (251,577) (75,770)
---------------- --------------
Total shareholders' equity 4,608,893 4,322,669
---------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,997,006 $ 13,588,368
================ ==============
See accompanying notes to supplemental consolidated financial statements.
85
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------- ------------- -------------
REVENUES
Membership and service fees, net $ 1,288,092 $ 924,246 $ 3,502,423 $ 2,513,994
Fleet leasing (net of depreciation and
interest costs of $307,908, $283,086,
$892,186 and $839,080, respectively) 13,148 14,297 42,905 41,016
Other 130,064 104,358 344,687 244,941
------------ ------------- ------------- -----------
Net revenues 1,431,304 1,042,901 3,890,015 2,799,951
------------ ------------- ------------- -----------
EXPENSES
Operating 464,483 363,426 1,317,841 1,004,391
Marketing and reservation 360,900 283,529 963,349 776,908
General and administrative 105,859 83,811 324,076 255,765
Merger and related costs and other
unusual charges - 147,200 303,000 175,835
Depreciation and amortization 70,240 49,903 190,599 119,529
Interest, net 15,562 2,463 43,920 17,224
------------ ------------- ------------- -----------
Total expenses 1,017,044 930,332 3,142,785 2,349,652
------------ ------------- ------------- -----------
Income before income taxes 414,260 112,569 747,230 450,299
Provision for income taxes 165,996 44,103 346,536 184,795
------------ ------------- ------------- -------------
Net income $ 248,264 $ 68,466 $ 400,694 $ 265,504
============ ============= ============= =============
PER SHARE INFORMATION
Net income per share
Primary $ 0.29 $ 0.08 $ 0.47 $ 0.34
============ ============= ============= ===========
Fully diluted $ 0.28 $ 0.08 $ 0.47 $ 0.33
============ ============= ============= ===========
Weighted average common and common
equivalent shares outstanding
Primary 888,061 834,441 874,379 800,716
Fully diluted 899,447 838,483 877,419 807,607
See accompanying notes to supplemental consolidated financial statements.
86
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1996
------------ --------------
OPERATING ACTIVITIES:
Net income $ 400,694 $ 265,504
Merger related charge 303,000 --
Merger related payments (137,000) --
Depreciation and amortization 168,083 93,606
Increase (decrease) from changes in
assets under management programs
Depreciation and amortization under management
and mortgage programs 812,309 764,173
Mortgage loans held for sale 86,079 (318,767)
Other (314,955) 61,310
------------- --------------
Net cash provided by operating activities 1,318,210 865,826
------------- --------------
INVESTING ACTIVITIES:
Assets under management and mortgage programs
Investment in leases and leased vehicles (1,565,857) (1,217,700)
Payments received on investment in leases and leased vehicles 615,153 470,193
Equity advances on homes under management (4,185,486) (2,347,351)
Repayment of advances on homes under management 4,341,295 2,377,103
Additions to originated mortgage servicing rights (147,608) (115,219)
Proceeds from sales of mortgage servicing rights 48,974 7,113
Property and equipment additions (112,608) (93,381)
Proceeds from sales of marketable securities 233,902 108,071
Purchases of marketable securities (467,176) (96,517)
Investment in preferred stock (181,191) --
Due from Avis Rent A Car, Inc. (124,440) --
Net assets acquired, exclusive of cash acquired (567,438) (990,668)
Other (6,789) 19,853
------------ --------------
Net cash used in investing activities (2,119,269) (1,878,503)
------------ ---------------
FINANCING ACTIVITIES:
Proceeds from borrowings 3,046,657 1,538,130
Principal payments on borrowings (1,767,264) (1,212,446)
Net proceeds from issuance of convertible notes 542,830 --
Redemption of series A preferred stock -- (80,000)
Net change in short term borrowings under management and mortgage programs (693,891) 114,518
Issuance of common stock, net 119,977 1,218,689
Purchases of common stock (171,318) (8,025)
Payment of dividends of pooled entities (6,644) (21,154)
------------ ---------------
Net cash provided by financing activities 1,070,347 1,549,712
----------- -------------
Effect of changes in exchange rates on cash and cash equivalents (414) (17,104)
------------ --------------
Net increase in cash and cash equivalents 268,874 519,931
Cash and cash equivalents, beginning of period 633,903 355,959
----------- --------------
Cash and cash equivalents, end of period $ 902,777 $ 875,890
=========== ==============
See accompanying notes to supplemental consolidated financial statements.
87
CENDANT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The supplemental consolidated balance sheet of Cendant Corporation and
subsidiaries, formerly CUC International Inc. (the "Company"), as of
September 30, 1997, the supplemental consolidated statements of income for
the three and nine months ended September 30, 1997 and 1996, and the
supplemental consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996, are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such
financial statements are included. There were no adjustments of an unusual
nature recorded during the three and nine months ended September 30, 1997
and 1996 except for (i) a one-time charge of $303.0 million ($227.0
million after tax), recorded in the second quarter of 1997 representing
merger and related costs incurred in connection with the merger of HFS
Incorporated ("HFS") with PHH Corporation ("PHH"); (ii) non-recurring
charges of $147.2 ($89.6 million, after tax) and $28.6 million ($25.1
million, after tax) recorded in the third and second quarters of 1996,
respectively, representing merger and related costs incurred in connection
with the 1996 mergers of the Company with Davidson & Associates, Inc.
("Davidson"), Sierra On-Line, Inc. ("Sierra") and Ideon Group, Inc.
("Ideon") and (iii) a $5.0 million restructuring charge recorded in June
1996, related to the contribution of owned Coldwell Banker brokerage
offices to an independent trust.
The supplemental consolidated financial statements include the accounts
and transactions of the Company and all wholly-owned and majority owned
subsidiaries and joint ventures except for the Company's ownership of Avis
Rent A Car Inc. ("ARAC"), which is accounted for under the equity method
(See Note 5). The accompanying supplemental consolidated financial
statements have been restated for the business combinations accounted for
as poolings of interest (See Note 2) as if such combined companies had
operated as one entity since inception. All material intercompany balances
and transactions have been eliminated in consolidation. These supplemental
consolidated financial statements will become the Company's primary
historical financial statements for the periods presented. Interim results
are not necessarily indicative of results for a full year.
The accompanying supplemental consolidated financial statements and
notes thereto are presented in accordance with interim financial reporting
requirements as required by Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. The December 31, 1996 supplemental
consolidated balance sheet was derived from the Company's audited
supplemental consolidated financial statements. For further information,
refer to the supplemental consolidated financial statements and notes
thereto included herein as Exhibit 99.1 in this Form 8-K.
Certain reclassifications have been made to the historical financial
statements of the pooled companies to conform to the restated
presentation.
88
2. BUSINESS COMBINATIONS
1997 POOLINGS
On December 17, 1997, the Company completed a merger with HFS (the
"Cendant Merger") by issuing 440.0 million shares of its common stock in
exchange for all of the outstanding common stock of HFS. Pursuant to the
terms of the agreement and plan of merger, HFS stockholders received
2.4031 shares of Company common stock for each share of HFS common stock.
Upon consummation of the Cendant Merger, the Company changed its name from
CUC International Inc. to Cendant Corporation.
In connection with the Cendant Merger, the Company changed its fiscal
year end from January 31 to December 31. HFS has a calendar year end and
the Company has only recalendarized its 1997 results. Accordingly, the HFS
statements of income for the three and nine months ended September 30,
1997 and September 30, 1996 have been combined with the Company's
statements of income for the three and nine months ended September 30,
1997 and October 31, 1996, respectively.
On October 3, 1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag"), pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440.0 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information.
On April 30, 1997, prior to being merged with and into the Company, HFS
acquired PHH by merger (the "HFS/PHH Merger") which was satisfied by the
issuance of 72.8 million equivalent shares of Company common stock in
exchange for all of the outstanding common stock of PHH. PHH is the
world's largest provider of corporate relocation services and also
provides mortgage services and fleet management services. In connection
with the merger, PHH changed its fiscal year end from April 30 to December
31.
During February 1997, the Company acquired substantially all of the
assets and assumed specific liabilities of Numa Corporation ("Numa") for
$73.5 million. The purchase price was satisfied by the issuance of 3.4
million shares of Company common stock. Numa publishes personalized
heritage publications and markets and sells personalized merchandise.
The following table presents the historical results of the Company and
the respective pooled entities for the last complete periods prior to
their respective mergers ($000's):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net revenues
The Company $ 737,067 $ 602,203 $ 2,002,597 $ 1,673,426
HFS (inclusive of PHH) 649,880 409,571 1,749,477 1,032,615
Hebdo Mag 44,357 31,127 137,941 93,910
------------- ------------- ------------- -------------
$ 1,431,304 $ 1,042,901 $ 3,890,015 $ 2,799,951
============= ============= ============= =============
89
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net income
The Company $ 87,553 $ (18,009) $ 252,082 $ 74,573
HFS (inclusive of PHH) 157,403 84,874 142,057 188,491
Hebdo Mag 3,308 1,601 6,555 2,440
------------- ------------- ------------- -------------
$ 248,264 $ 68,466 $ 400,694 $ 265,504
============= ============= ============= =============
The following table presents the historical results of HFS and PHH for
the periods prior to the HFS/PHH Merger ($000's):
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, 1997 SEPTEMBER 30, 1996
--------------- ------------------
Net revenues
HFS $ 347,962 $ 550,010
PHH 177,923 482,605
--------------- -------------------
$ 525,885 $ 1,032,615
=============== ===================
Net income
HFS $ 58,940 $ 130,960
PHH 32,164 57,531
--------------- -------------------
$ 91,104 $ 188,491
=============== ===================
PURCHASE BUSINESS COMBINATIONS
During the nine months ended September 30, 1997, the Company acquired
certain entities for an aggregate purchase price of $63.3 million,
satisfied by the payment of $27.5 million in cash and the issuance of 1.5
million shares of Company common stock. The goodwill resulting from these
acquisitions aggregated $89.9 million. These acquisitions were accounted
for in accordance with the purchase method of accounting and, accordingly,
the results of operations have been included in the consolidated results
of operations from the respective dates of acquisitions. The results of
operations for the periods prior to the respective dates of acquisition
were not significant to the Company's operations.
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
PHH MERGER CHARGE
HFS recorded a one-time merger and restructuring charge (the "PHH
Merger Charge") of $303.0 million ($227.0 million, after tax) during the
second quarter of 1997 in connection with the HFS/PHH Merger. Excluding
the PHH Merger Charge, net income was $627.7 million for the nine months
ended September 30, 1997. The PHH Merger Charge is summarized by type as
follows (in millions):
90
Personnel related $ 142.4
Professional fees 36.8
Business terminations 44.7
Facility related 57.1
Other costs 22.0
-----------
Total $ 303.0
===========
Personnel related charges are comprised of costs incurred in connection
with employee reductions associated with the combination of HFS's
relocation service businesses and the consolidation of corporate
activities. Personnel related charges include termination benefits such as
severance, medical and other benefits. Also included in personnel related
charges are supplemental retirement benefits resulting from the change of
control. Several grantor trusts were established and funded by HFS to pay
such benefits in accordance with the terms of the HFS/PHH Merger
agreement. Full implementation of the restructuring plan will result in
the termination of approximately 500 employees substantially all of whom
are located in North America, of which 369 employees were terminated as of
September 30, 1997. Professional fees are primarily comprised of
investment banking, accounting and legal fees incurred in connection with
the HFS/PHH Merger. Business termination charges relate to the exit from
certain activities associated with fleet management, mortgage services and
ancillary operations. Facility related expenses include costs associated
with contract and lease terminations, asset disposals and other charges
incurred in connection with the consolidation and closure of excess space.
The Company anticipates that approximately $236.0 million will be paid
in cash in connection with the PHH Merger Charge of which $137.0 million
was paid through September 30, 1997. The remaining cash portion of the PHH
Restructuring Charge will be financed through cash generated from
operations and borrowings under the Company's revolving credit facilities.
It is currently anticipated that the restructuring plan will be completed
during the first quarter of 1998. Revenue and operating results from
activities that will not be continued are not material to the results of
operations of the Company.
1996 POOLINGS
In connection with the Company's 1996 acquisitions of Davidson, Sierra and
Ideon, which were accounted for as poolings of interests, the Company
recorded a non-recurring charge of approximately $179.9 million ($118.7
million, after tax) for the year ended December 31, 1996. Such charge is
comprised of transaction costs, exit costs and a provision relating to
certain litigation matters giving consideration to the Company's intended
approach to these matters. As of September 30, 1997, such charges amounted
to $155.7 million.
4. PRO FORMA INFORMATION
The following table reflects the unaudited operating results of the
Company for the nine months ended September 30, 1996 on a pro forma basis,
which gives effect to HFS's 1996 acquisitions, accounted for under the
purchase method of accounting as if they had occurred on January 1, 1996:
Net revenues $ 3,284,158
Net income 319,439
Net income per share (fully diluted) $ 0.38
91
5. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc.
in July 1996, HFS announced its strategy to dilute its interest in ARAC's
car rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. In September 1997, ARAC completed an initial public
offering ("IPO") of a subsidiary that operated the car rental operations
of HFS Car Rental Inc., which diluted HFS's equity interest in such
subsidiary to approximately 27.5%. Net proceeds from the IPO approximating
$359.3 million retained by ARAC were used to fund its August 20, 1997
acquisition of The First Gray Line Corporation and repay ARAC
indebtedness.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. In
addition, the Company operates the telecommunications and computer
processing system which services ARAC for reservations, rental agreement
processing, accounting and fleet control for which the Company charges
ARAC at cost. Summarized financial information of ARAC is as follows
($000's):
AVIS RENT A CAR, INC.
Balance sheet data: SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- -----------------
Vehicles $ 3,364,660 $ 2,243,492
Total assets 4,717,107 3,131,357
Debt 3,285,548 2,295,474
Total liabilities 4,263,001 3,054,817
Shareholders' equity 454,106 76,540
THREE MONTHS ENDED NINE MONTHS ENDED
Statement of income data: SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------- ------------------
Revenues $ 580,049 $ 1,525,696
Income before provision for income taxes 24,953 49,313
Net income 13,868 26,974
6. SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses
and aggregated $30.0 million and $15.9 million for the three months ended
September 30, 1997 and 1996, respectively, and $79.7 million and $46.1
million for the nine months ended September 30, 1997 and 1996,
respectively. Software revenue included in Other was $265.2 million and
$228.1 million for the nine months ended September 30, 1997 and 1996,
respectively. Costs of software revenue are included in operating expenses
and aggregated $26.7 million and $24.0 million for the three months ended
September 30, 1997 and 1996, respectively, and $82.1 million and $69.9
million for the nine months ended September 30, 1997 and 1996,
respectively.
92
7. REDEMPTION OF 4-1/2% NOTES
On September 22, 1997, HFS exercised its option to redeem the
outstanding 4-1/2% Convertible Senior Notes ("4-1/2% Notes") effective on
October 15, 1997 in accordance with the provisions of the indenture under
which the 4-1/2% Notes were issued. Prior to the redemption date, all of
the outstanding 4-1/2% Notes were converted. Accordingly, 19.7 million
equivalent shares of Company common stock were issued (0.2 million shares
as of September 30, 1997) as a result of the conversion of such notes.
8. ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550.0 million in principal
amount of 3% Convertible Subordinated Notes (the "3% Notes") due February
15, 2002. Interest on the 3% Notes is payable semi-annually. Each $1,000
principal amount of 3% Notes is convertible into 32.6531 shares of Company
common stock subject to adjustment in certain events. The 3% Notes may be
redeemed at the option of the Company at any time on or after February 15,
2000, in whole or in part, at the appropriate redemption prices (as
defined in the indenture governing the 3% Notes) plus accrued interest to
the redemption date. The 3% Notes will be subordinated in right of payment
to all existing and future Senior Debt (as defined in the indenture
governing the 3% Notes) of the Company. Issuance costs are being amortized
on a straight-line basis over five years.
9. INVESTMENT IN NRT
During the third quarter of 1997, HFS acquired $182.0 million of
preferred stock (included in other assets) of NRT Incorporated ("NRT"), a
newly formed corporation created to acquire residential real estate
brokerage firms. HFS acquired $216.1 million of certain intangible assets
including trademarks associated with real estate brokerage firms acquired
by NRT in 1997. HFS, at its discretion, may acquire up to $81.3 million
of additional NRT preferred stock and may also purchase up to $229.9
million of certain intangible assets of real estate brokerage firms
acquired by NRT.
In September 1997, NRT, acquired the real estate brokerage business and
operations of National Realty Trust (the "Trust"), and two other regional
real estate brokerage businesses. The Trust is an independent trust to
which HFS contributed the brokerage offices formerly owned by Coldwell
Banker Corporation in connection with HFS's acquisition of Coldwell Banker
Corporation. NRT is the largest residential brokerage firm in the United
States.
10. SHAREHOLDERS' EQUITY
A. AUTHORIZED SHARES
In conjunction with the Cendant Merger effective on December 17, 1997,
the Company's shareholders approved an amendment to the Company's
restated certificate of incorporation to increase the number of
authorized shares of common stock and preferred stock to 2 billion
shares and 10 million shares, respectively. The Company has never issued
shares of preferred stock.
93
B. TREASURY PURCHASES
In January 1997, HFS's Board of Directors authorized the purchase of 6.2
million equivalent shares of Company common stock to satisfy stock option
exercises and conversions of convertible debt securities and to fund
future acquisitions. The Company acquired approximately 6.2 million
equivalent treasury shares in January and February 1997 for $179.4 million
with revolving credit borrowings.
11. CONTINGENCIES - IDEON
On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Agreement calls for the dismissal with prejudice of certain outstanding
litigation matters between Peter Halmos and certain of the Company's
subsidiaries and the payment to Peter Halmos, over a six-year period, of
$70.5 million. Specifically, the Agreement requires that the Company pay
Peter Halmos one up-front payment of $13.5 million of six subsequent
annual payments of $9.5 million each. For additional disclosure, see
Footnote 13 --Commitments and Contingencies to Exhibit 99.1 -- Supplemental
Consolidated Financial Statements.
94
95
EXHIBIT 99.3
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
96
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
On December 17, 1997 CUC International Inc. ("CUC" or the "Company")
merged with HFS Incorporated ("HFS") and was renamed Cendant Corporation in a
transaction which has been accounted for as a pooling of interests.
Accordingly, financial statements have been restated for all periods presented
as if CUC and HFS had operated as one entity since inception. The Company is a
leading global provider of services to businesses serving consumer industries.
The Company provides fee-based services to consumers within the
Membership, Travel and Real Estate business segments. The Company generally
does not own the assets or share the risks associated with the underlying
businesses of its customers. In the Membership Services segment, the Company is
a technology-driven leading provider of membership-based consumer services. In
the Travel segment, the Company is the world's largest franchisor of lodging
facilities and rental car agencies, the leading provider of vacation timeshare
exchange services and a leading provider of international fleet management
services. In the Real Estate segment, the Company is the world's largest
franchisor of residential real estate brokerage offices, the world's largest
provider of corporate relocation services and operates a leading mortgage
lending business in the United States. The combination of CUC and HFS provides
the Company's membership businesses access to HFS's more than 100 million
consumer contacts, while providing HFS businesses with the technology-driven,
direct marketing expertise necessary to successfully cross-market within its
existing business units.
SEGMENT DISCUSSION
Certain of the underlying business segments are comprised of businesses
acquired which were accounted for as poolings of interest (See "Liquidity and
Capital Resources - 1997 Poolings, 1996 Poolings and 1995 Poolings").
Accordingly, all financial information has been restated as if all of the
pooled companies operated as one entity since inception. Certain of the
underlying segments are comprised of businesses which were acquired in 1996 and
1995 and accounted for by the purchase method of accounting. (See " Liquidity
and Capital Resources - 1996 Purchase Acquisitions and 1995 Purchase
Acquisitions"). Accordingly, the results of operations of such acquired
companies were included in the consolidated operating results of the Company
from the respective dates of acquisition. In the underlying results of
operations discussions, operating expenses include total expenses excluding
interest expense and income taxes.
RESULTS OF OPERATIONS DISCUSSION
YEAR ENDED DECEMBER 31, 1996 VS YEAR ENDED DECEMBER 31, 1995
Net income increased $120.8 million (40%) despite non-recurring merger and
related charges approximating $179.9 million ($118.7 million, after tax) (the
"Davidson, Sierra and Ideon Merger Charge") in 1996 in connection with the
mergers with Davidson & Associates, Inc. ("Davidson"), Sierra On-Line, Inc.
("Sierra") and Ideon Group, Inc. ("Ideon"). In connection with such charge,
$131.3 million was allocated to the operations of the "Membership" segment.
97
The increase in net income primarily resulted from a $222.5 million (43%)
increase in operating income.
The financial summary of the Company for the years ended December 31, 1996
and 1995 is as follows ($000's):
1996 1995 VARIANCE
------------- -------------- ---------
Net revenue $ 3,908,780 $ 2,992,122 31%
Operating expenses 3,169,665 2,475,526 28%
------------- --------------
Operating income $ 739,115 $ 516,596 43%
============= ==============
Net income $ 423,611 $ 302,825 40%
============= ==============
MEMBERSHIP SEGMENT
The Company provides its consumers, representing approximately 73 million
memberships at September 30, 1997, access to a variety of goods and services
including shopping, travel, auto, dining, home improvement,
lifestyle, credit card and checking account enhancement packages, financial
products and discount programs. The Company also administers insurance package
programs which are generally combined with discount shopping and travel for
credit union members and distributes welcoming packages which provide new
homeowners with discounts for local merchants. Revenue is derived from
membership fees which vary depending on the particular membership program. The
Company provides individual, wholesale and discount program membership services
to consumers, which are distributed through various channels including
financial institutions, credit unions, charities, other cardholder-based
organizations and retail establishments. Individual memberships consist of
members that pay directly for the services and the Company pays for the
marketing costs to solicit the members primarily using direct marketing
techniques. Wholesale memberships include members that pay directly for the
services to their sponsor and the Company does not pay for the marketing costs
to solicit the members. Discount program memberships are generally marketed
through a direct sales force, participating merchants or general advertising
and the related fees are either paid directly by the member or the local
retailer. All of these categories share various aspects of the Company's
marketing and operating resources. The Company maintains a flexible marketing
plan so that it is not dependent on any one service for the future growth of
the total membership base.
YEAR ENDED DECEMBER 31,
---------------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ------------- ------------- --------
Net revenue $ 2,097,098 $ 1,643,242 28%
Operating expenses 1,830,784 1,458,543 26%
------------- -------------
Operating income $ 266,314 $ 184,699 44%
============= =============
Operating income increased $81.6 million (44%) despite $34.3 million of
incremental non-recurring merger and related costs and other unusual charges in
1996 compared to 1995. Operating income increased $115.9 million (41%)
excluding such charges.
The Company's overall membership base continues to grow at a rapid rate
(from 59.7 million members at December 31, 1995 to 66.3 million members at
December 31, 1996), which is the largest contributing factor to the 28%
increase in membership revenues (from $1.6 billion in 1995 to $2.1 billion in
1996). While the
98
overall membership base increased by 6.6 million members, or 11% during the
year, the average annual fee charged for the Company's membership services
increased by approximately 4%.
In 1996, individual (before giving effect to Ideon acquired members),
wholesale and discount program memberships grew by 14%, 23% and 12%,
respectively. Wholesale memberships have grown in part due to the success of
the Company's international business in Europe. For the year ended December 31,
1996, individual, wholesale and discount program memberships represented 68%,
13% and 19% of membership revenues, respectively. The Company completed a
number of acquisitions accounted for under the purchase method of accounting
during 1996. Total revenue contributed by these acquisitions is not material to
the Company's total reported membership revenue.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impact profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $401
million in 1996, compared to $376 million in 1995. This represents 17% and 19%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations
has increased due to the increased level of marketing efforts, but has
decreased as a percentage of the total number of members.
The major components of the Company's membership operating costs continue
to be personnel, telephone, computer processing and participant insurance
premiums (the cost of obtaining insurance coverage for members). Historically,
the Company has seen a direct correlation between providing a high level of
service to its members and improved retention. Marketing costs remained
constant as a percentage of revenues, which is primarily due to maintained per
member acquisitions costs and an increase in renewing members. The Company
routinely reviews all membership renewal rates and has not seen any material
change in the average renewal rate in 1996 compared to 1995. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members eligible for renewal.
TRAVEL SEGMENT
LODGING
The Company operates eight nationally recognized brands with approximately
5,700 lodging properties under franchise contracts of up to 20 years in
duration. The Company provides central reservation system services and national
marketing programs, which are completely funded by its franchisees from a
designated portion of the franchise fees. The Company charges royalty fees
based on a percentage of franchisee gross room sales to fund all expenses not
covered by marketing and reservation fees, such as quality inspections and
franchise sales and service functions. The significant revenue drivers of the
Company are the number of royalty-paying franchise units and the average rate
at which they pay. Other relevant drivers are the average daily rates and
occupancy percentages of the underlying lodging properties.
99
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 385,920 $ 335,402 15%
Operating expenses 240,122 214,796 12%
----------- -----------
Operating income $ 145,798 $ 120,606 21%
=========== ===========
Operating income increased 21% and net revenue increased 15% as a result
of a 13% increase in royalty fees and a 41% increase in revenue from preferred
alliances seeking access to the Company's franchisees and their underlying
consumer base. Results for 1996 demonstrated that room growth is the most
significant outcome driver for franchisee royalty, as the Company added 55,253
net rooms in 1996, representing a 133% increase from 1995 results. The Company
added 94,506 rooms in 1996 (including 30,274 rooms added by the acquisition of
Travelodge franchise contracts) and terminated 39,253 rooms in 1996 (including
6,053 Park Inn International rooms, comprising the franchise system sold in
September 1996 for $2.2 million). In 1995, the Company added 63,280 rooms
(including 9,780 rooms added by the acquisition of Knights Inn franchise
contracts) and terminated 39,603 rooms (including 22,151 related to a special
year-end removal of properties as a result of the repositioning and tightening
of quality standards of the Company's brands). Total U.S. system revenue per
available room ("REVPAR") increased 1.3% primarily due to a 1.9% increase in
the average daily rates ("ADR") charged at franchised lodging facilities,
however, REVPAR for comparable properties in 1996 and 1995 ("same store basis")
increased 3.3% as a result of increases in ADR. The 12% ($25.3 million)
increase in operating expenses included an 18% increase ($4.7 million) in
depreciation and amortization, primarily related to the excess of cost over net
assets acquired ("goodwill") associated with the acquisitions of the Travelodge
and Knights Inn franchise systems in January 1996 and August 1995,
respectively. In addition, operating expenses increased as a result of a 13%
($17.8 million) increase in marketing and reservation expenses associated with
funds administered by the Company on a pass-through basis (corresponding
franchisee contribution included in revenue).
CAR RENTAL
HFS acquired HFS Car Rental, Inc. (formerly Avis, Inc.) in October 1996.
In September 1997, Avis Rent A Car, Inc. ("ARAC") then a subsidiary of HFS Car
Rental Inc., which operated the rental car operations of HFS Car Rental Inc.,
completed an initial public offering ("IPO") which diluted HFS's equity
interest in ARAC from 100% to 27.5%. HFS retained the assets that are
consistent with its service provider business profile, including the
trademarks, franchise agreements, reservation system and information technology
system assets. The Company licenses the Avis trademark to ARAC pursuant to a
50-year master license agreement and receives royalty fees based upon 4% of
ARAC revenue, escalating to 4.5% of ARAC revenue over a 5-year period. In
addition, the Company operates the telecommunications and computer processing
system which services ARAC for reservations, rental agreement processing,
accounting and fleet control for which the Company charges ARAC at cost.
FOR THE PERIOD
OCTOBER 17, 1996 TO
OPERATING INCOME ($000'S) DECEMBER 31, 1996
------------------------- -------------------
Net revenue $ 10,014
Operating expenses 9,477
-----------
Operating income $ 537
===========
100
Net revenue consisted primarily of fees for information technology
services provided to ARAC from the October 17, 1996 acquisition date. Operating
expenses consisted of $3.4 million of depreciation and amortization expenses
primarily associated with the Avis trademark and goodwill and $6.0 million of
technology related expenses for services provided to ARAC and other rental car
companies.
TIMESHARE
HFS acquired Resort Condominiums International ("RCI") in November 1996
for $487.1 million plus up to $200 million of contingent consideration. RCI
sells subscription memberships to owners of vacation timeshare resorts which
allow members to exchange their timeshare accommodations for timeshare
accommodations owned by other members at participating affiliated resorts
worldwide. In addition to membership fees, RCI earns fees for exchanges
processed by its call center. The key timeshare revenue drivers include the
number of fee paying members and exchanges as well as each corresponding
average fee.
FOR THE PERIOD
NOVEMBER 12, 1996 TO
OPERATING INCOME ($000'S) DECEMBER 31, 1996
------------------------- --------------------
Net revenue $ 30,723
Operating expenses 27,404
-----------
Operating income $ 3,319
===========
Net revenue primarily consisted of $11.3 million of member fees and $12.1
million of exchange fees. Operating expenses consisted primarily of $17.9
million of staff and communication costs associated with member services (call
centers). Assuming Company ownership of RCI since January 1, 1995, pro forma
annual membership and exchange fee revenue increased 12% to $102.0 million and
$11% to $157.6 million, respectively and total members and exchanges for
calendar year 1996 increased 8% to 2.2 million and 9% to 1.7 million,
respectively compared to 1995.
101
FLEET MANAGEMENT SERVICES
Fleet management services are offered to corporate clients and government
agencies to assist them in effectively managing their vehicle fleet costs,
reducing in-house administrative costs and enhancing driver productivity.
Services consist of leasing (which generally requires an investment by the
Company in the vehicle and includes new vehicle purchasing, open and closed-end
operating leasing, direct finance leasing and used vehicle marketing) as well
as a variety of fee-based services including fuel purchasing, maintenance
management programs, expense reporting, fuel management programs, accident and
safety programs and other driver services for managing clients' vehicle fleets.
The Company has experienced minimal losses associated with its investment in
vehicles due to the overall creditworthiness of its corporate clients.
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- ---------
Net revenue $ 255,866 $ 258,877 (1%)
Operating expenses 179,648 201,959 (11%)
----------- -----------
Operating income $ 76,218 $ 56,918 34%
=========== ===========
Operating income increased $19.3 million (34%) to $76.2 million, primarily
as a result of an increase in fee-based services and an $11.7 million gain on
the sale of the Company's truck fuel management business ("NTS") which was sold
in January 1996. The net revenue generated in 1996 included the increase in
fee- based services but was offset by the absence of approximately $21.8
million of revenue from the sold NTS business. The $22.3 million (11%) decrease
in operating expenses was primarily associated with $19.1 million of expenses
associated with the sold NTS business.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
The Company licenses brand names to independently owned brokerage offices
associated with three of the four largest franchise systems in the world. The
Company acquired the world's largest franchise system, the CENTURY 21(R)
franchise system, in August 1995, the ERA(R) franchise system in February 1996
and the Coldwell Banker(R)franchise system in May 1996. The most significant
revenue driver for real estate franchise is the number of transactions for
which the broker receives commission revenue. Royalties are calculated based on
a percentage of such franchisee commission revenue. Marketing fees are
collected by the Company and are used to fund national advertising expenditures
and other marketing activities.
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- -----------
Net revenue $ 233,469 $ 47,965 387%
Operating expenses 122,934 28,688 329%
----------- -----------
Operating income $ 110,535 $ 19,277 473%
=========== ===========
The increases in net revenue and operating income are due to the CENTURY
21 franchise system's first full year contribution to operating results and
partial year contributions from the acquired Coldwell Banker and ERA franchise
systems. These franchises systems licensed their trademarks to approximately
184,000 sales associates at December 31, 1996. The royalty portion of revenue
increased $162.8 million (361%) and revenue from preferred affiliates grew from
$0.2 million to $13.4 million, net of the Company's $11.0 million
102
fourth quarter 1996 write-off of revenue associated with the license of the
CENTURY 21 trademark to Amre, Inc., which filed for bankruptcy protection in
February 1997.
Operating expenses increased 329% ($94.2 million) as a result of
incremental expenses associated with acquired franchise systems. Operating
expenses also included a $5.0 million restructuring charge associated with the
second quarter 1996 contribution of Coldwell Banker's former owned brokerage
business to National Realty Trust (the "Trust"), an independent entity governed
by independent trustees.
RELOCATION
Relocation primarily consist of the purchase, management and resale of
homes and fee-based home- related services for transferred employees of
corporate clients, members of affinity group clients and government agencies.
Although the Company acquires the homes of client employees, the client
corporations reimburse the Company for carrying costs until the home is sold
and for home sale losses. Accordingly, the Company earns a fee for services
with minimal real estate risk. Operating expenses primarily consist of staffing
and related costs for sales and service functions. Operating results include
contributions from PHH Relocation for all periods shown, from Coldwell Banker
Relocation Services, Inc. ("CBRS") since the May 31, 1996 acquisition date and
from Worldwide Relocation Management, Inc. ("WRM") since the August 1, 1995
acquisition date.
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 344,865 $ 301,667 14%
Operating expenses 290,563 259,949 12%
----------- -----------
Operating income $ 54,302 $ 41,718 30%
=========== ===========
Acquired CBRS and WRM operations generated $19.2 million of operating
income and PHH Relocation operating income decreased $6.6 million (18%). PHH
Relocation net revenue increased $23.7 million due to an expansion of services
provided to corporate clients while revenue from home sale assistance was flat
compared to 1995. The revenue increase was offset by $30.3 million of increased
expenses associated with the development of the expanded full service
infrastructure.
MORTGAGE SERVICES
Mortgage services primarily consist of the origination, sale and servicing
of residential first mortgage loans. The Company packages its originated loans
for sale in secondary markets, generally within 45 days of origination, and
retains servicing rights. The Company markets a variety of first mortgage
products to consumers through relationships with corporations, affinity groups,
government agencies, financial institutions, real estate brokerage firms and
mortgage banks by a combination of retail teleservices delivery and wholesale
correspondent lending arrangements.
YEAR ENDED DECEMBER 31,
--------------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ------------ --------
Net revenue $ 127,729 $ 93,251 37%
Operating expenses 86,427 51,507 68%
----------- ------------
Operating income $ 41,302 $ 41,744 (1%)
=========== ============
103
The increase in net revenue resulted from a 149% increase in loan
origination revenue offset by a 28% decrease in loan servicing fees. The volume
of loan closings increased 33% from $6.3 billion to $8.4 billion and the
average fee increased from 54 to 100 basis points. Whereas the portfolio of
loans serviced increased 16% from $19.4 billion to $22.5 billion, the average
fee decreased 38% from 30.8 to 19.2 basis points. The increase in origination
fees and decrease in servicing fees results from the implementation of
Statement of Financial Accounting Standards ("SFAS") No. 122 "Accounting for
Mortgage Servicing Rights" in 1995, which had the effect of reallocating
revenue from servicing fees to origination fees. A reduction in gains recorded
from the sale of a portion of the loan servicing portfolio also contributed to
the decrease in service fees. The gain on the sale of servicing amounted to
$17.4 million in 1995 compared to $1.5 million in 1996. Operating expenses
increased as a result of higher closing volume experienced in expanded retail
teleservices delivery arrangements in 1996.
OTHER SEGMENT
Other business operations primarily consist of the development and sale of
high-quality educational, entertainment and personal productivity interactive
multimedia products for home and school use ("Software"), casino credit
information and marketing services, the equity in earnings from the Company's
investment in ARAC (net of information technology fees charged to ARAC) and
other operations or transactions which are not included in the Company's
primary business segments.
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ------------ --------
Net revenue $ 423,096 $ 311,718 36%
Operating expenses 382,306 260,084 47%
----------- ------------
Operating income $ 40,790 $ 51,634 (21%)
=========== ============
Operating income decreased $10.9 million (21%) as a result of $48.6
million of incremental merger and related charges associated with the
acquisitions of Davidson and Sierra. Excluding such merger and related charges,
operating income increased $37.8 million (73%) primarily as a result of a $27.1
million increase from Software operations and $9.5 million in consideration
received for the termination of a corporate services agreement with Chartwell
Leisure Inc. Software revenue increased 28% to $375.2 million in 1996 and
excluding the merger and related costs, software profit margins increased from
14% in 1995 to 19% in 1996. Distribution revenue, which consists principally of
third-party software and typically has low operating margins, was down from
$64.8 million in 1995 to $46.9 million in 1996. The Company's Software
operations continue to grow by focusing on selling titles through retailers.
Excluding distribution revenue, core software revenue grew by 44%. Contributing
to the Software revenue growth in 1996 is the availability of a larger number
of titles as well as a significant increase in the installed base of CD-ROM
personal computers.
104
YEAR ENDED DECEMBER 31, 1995 VS YEAR ENDED DECEMBER 31, 1994
Net income increased $41.7 million (9%) despite $89.1 million of incremental
non-recurring merger charges and costs associated with Ideon products
abandoned. Net income excluding such charges increased $72.1 million (25%). The
increase in net income was a result of a $41.7 million increase in operating
income partially offset by a $2.7 million increase in net interest expense
associated with financing the CENTURY 21 acquisition, and a general rise in
interest rates in 1995 compared to 1994. Despite average LIBOR rate increases
approximating 84 basis points, the Company's average borrowing rate increased
only 40 basis points to 6.0%, principally as a result of favorable fixed rate
debt securities issued in 1994 and 1993.
The financial summary of the Company for the years ended December 31, 1995 and
1994 is as follows ($000's):
1995 1994 VARIANCE
------------- ------------- ---------
Net revenue $ 2,992,122 $ 2,446,731 22%
Operating expenses 2,475,526 1,971,846 26%
------------- -------------
Operating income $ 516,596 $ 474,885 9%
============= =============
Net income $ 302,825 $ 286,590 6%
============= =============
MEMBERSHIP SEGMENT
YEAR ENDED DECEMBER 31,
-------------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ------------- ------------- --------
Net revenue $ 1,643,242 $ 1,363,561 21%
Operating expenses 1,458,543 1,145,416 27%
------------- -------------
Operating income $ 184,699 $ 218,145 (15%)
============= =============
Operating income decreased $33.4 million (15%) as a result of $89.1
million of incremental non-recurring merger charges and costs related to Ideon
products abandoned. Excluding such costs, operating income increased $55.7
million (26%) in 1995 compared to 1994.
The Company's overall membership base grew at a rapid rate (from 46.9
million members at December 31, 1994 to 59.7 million members at December 31,
1995), which is the largest contributing factor to the 21% increase in
membership revenues (from $1.4 billion in 1994 to $1.6 billion in 1995). While
the overall membership base increased by 12.8 million members, or 27%, (of
which approximately 8.0 million members came from acquisitions during the year
("Acquired Members")), the average annual fee charged for the Company's
membership services increased by 3%.
In 1995, individual (before giving effect to Ideon acquired members),
wholesale and discount program memberships grew by 14%, 19% and 11%,
respectively, in addition to the increase due to Acquired Members. For the year
ended December 31, 1995, individual, wholesale and discount program memberships
represented 68%, 12% and 20% of membership revenues, respectively. Discount
program memberships incurred the largest increase from Acquired Members.
Welcome Wagon International, Inc., Getko Group Inc. and Advance Ross
Corporation, all acquired in 1995, are classified in this membership category
as their businesses provide local discounts to consumers. The Company maintains
a flexible marketing plan so that it is not dependent on any one service for
the future growth of the total membership base. The Company completed
105
a number of acquisitions during 1995 which were accounted for under the
purchase method of accounting. The total revenues contributed by these
acquisitions are not material to the Company's total reported revenues.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $376
million in 1995 compared to $354 million in 1994. This represents 19% and 21%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations
has increased due to the increased level of marketing efforts, but has
decreased as a percentage of the total number of members.
The major components of the Company's membership operating costs are
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). Marketing costs
decreased as a percentage of revenues which is primarily due to improved per
member acquisition costs and an increase in renewing members. The Company
routinely reviews all membership renewal rates and has not seen any material
change in the average renewal rate in 1996 compared to 1995.
TRAVEL SEGMENT
LODGING
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 335,402 $ 300,694 12%
Operating expenses 214,796 198,207 8%
----------- -----------
Operating income $ 120,606 $ 102,487 18%
=========== ===========
Net revenue increased 12% as a result of a $20.7 million (16%) increase in
royalty fees and a $6.8 million (49%) increase in revenue from preferred
alliances seeking access to franchisees and their customers. Room growth
represented the most significant revenue outcome driver contributing to the
revenue increase. The Company added 63,280 rooms during 1995, representing an
18.8% increase, but also terminated 39,603 rooms including 22,151 rooms in a
special year-end removal of properties as a result of the repositioning and
tightening of quality standards of the Company's brands. Total REVPAR increased
3.0% primarily due to a 2.6% increase in the average daily rates charged at
franchisee hotels and a 1.8% increase in average royalty rates.
Demonstrating the Company's ability to translate revenue into earnings,
operating income increased $18.1 million (18%) while operating expenses
increased only $16.6 million (8%). The increase in operating expenses included
$4.6 million of franchise sales and bad debt expenses associated with system
growth as well as $1.5 million of scheduled Ramada license fee increases.
Depreciation expense also increased $4.1 million in part from a full year's
expense in 1995 related to the newly developed reservation system for Days Inn
which was implemented in October 1994. The increase was also attributable to
goodwill amortization associated with the issuance of Company common stock in
December 1994 and September 1995, pursuant to an earnout agreement entered into
with Bryanston Group, Inc., an affiliate of the sellers of the Days Inn
franchise system.
106
FLEET MANAGEMENT SERVICES
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 258,877 $ 249,571 4%
Operating expenses 201,959 197,248 2%
----------- -----------
Operating income $ 56,918 $ 52,323 9%
=========== ===========
The revenue increase primarily resulted from an increase in service fees
generated by growth in fuel and maintenance management programs. Such growth
reflects increased market penetration in the United States and United Kingdom.
Operating expenses increased only 2% reflecting a cost reduction program
implemented in 1995 net of certain expenses that vary with revenue growth.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
The CENTURY 21 franchise system contributed $48.0 million of net revenue
and $19.3 million of operating income for the five months following HFS's
August 1, 1995 acquisition. Franchise fees paid by the approximately 6,000
CENTURY 21 franchised brokerage offices approximated $42.1 million and
accounted for the significant portion of real estate franchise net revenue.
Operating expenses included $21.5 million of SG&A, including franchise sales,
service and training expenses and $3.0 million of depreciation and amortization
associated with goodwill and franchise agreements acquired in the CENTURY 21
acquisition.
RELOCATION
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 301,667 $ 255,974 18%
Operating expenses 259,949 221,440 17%
----------- -----------
Operating income $ 41,718 $ 34,534 21%
=========== ===========
The 18% increase in net revenue resulted primarily from an expansion of
full service products offered to corporate clients and a 7% ($7.8 million)
increase in home sale assistance fees. 1995 also included revenue and expense
contributions from WRM which was acquired on August 1, 1995 in connection with
the acquisition of CENTURY 21. The operating expense increase resulted from
growth in the infrastructure necessary to match competition for fee-based
services other than home sale assistance and system related expenses associated
with U.S. and Canadian asset management businesses.
MORTGAGE SERVICES
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 93,251 $ 74,494 25%
Operating expenses 51,507 44,322 16%
----------- -----------
Operating income $ 41,744 $ 30,172 38%
=========== ===========
107
The increase in net revenue was primarily a result of the capitalization
of $55.6 million of net revenue associated with the capitalization of
originated mortgage servicing rights partially offset by a $10.7 million
reduction in the gain on sale of servicing rights and a 32% increase in total
loan closings from 1994 to 1995. In addition, operating expenses increased as
the Company responded to the increase in loan production volume and the
increased servicing portfolio.
Mortgage loan closings increased from $3.4 billion in 1994 to $6.3 billion
in 1995. These increases resulted from increased consumer demand and the
Company's increased market share due primarily to expanded relationships with
affinity groups which represented 29% of the total increase, and with financial
institutions which represented 24% of the total increase. Servicing net revenue
increased 13% as a result of an increase in the average servicing portfolio
partially offset by increased amortization of servicing rights.
The Company adopted SFAS No. 122, effective May 1, 1995. This statement
requires that originated mortgage servicing rights be recognized as income when
the loan is sold and servicing is retained. The effect of this change in
accounting was partially offset by a decrease in margins realized on loans
sold. This decline in margins reflects the price competition in the industry
intended to capture market share during a period of low demand for mortgages
which was created by changes in interest rates during 1995.
OTHER SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 311,718 $ 202,437 54%
Operating expenses 260,084 165,213 57%
----------- -----------
Operating income $ 51,634 $ 37,224 39%
=========== ===========
Operating income increased $14.4 million (39%) as a result of $27.8
million from software operations and incremental profits from Central Credit
Inc., which conducts a casino credit information business and was acquired in
May 1995. Operating income in 1994 included a $19.7 million gain on the sale of
the ImagiNation Network.
Software revenues increased 53% ($100.9 million) to $292.0 million in
1995. Contributing to the strong Software growth in 1995 was the release of 63
new titles and an additional 18 titles which were acquired, as compared to 34
new products released in 1994. Also contributing to the Software revenue growth
is the significant increase in the installed base of CD-ROM personal computers
as well as increases in affiliated label and distribution revenues.
108
THREE MONTHS ENDED MARCH 31, 1997 VS THREE MONTHS ENDED MARCH 31, 1996
Consolidated revenue increased 42% ($342.7 million) to $1.2 billion and
consolidated net income increased 73% ($69.9 million) to $165.9 million in 1997
while fully diluted earnings per share ("EPS") increased 46% ($.06) to $.19.
Operating income (revenue less expenses excluding interest and income taxes)
increased 79% ($131.4 million) to $297.2 million.
Net interest expense increased 154% ($11.6 million) primarily resulting from
borrowings under revolving credit facilities which financed the RCI acquisition
and 1997 treasury stock purchases, while the weighted average effective
interest rate decreased from 6.83% to 6.39% as a result of increased fixed rate
borrowings at lower interest rates.
Operating expenses consist of total expenses excluding interest expense and
income taxes. Results for the Company's segments are as follows:
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 1,164,106 $ 821,411 42%
Operating expenses 866,922 655,609 32%
------------- ------------
Operating income $ 297,184 $ 165,802 79%
============= ============
MEMBERSHIP SEGMENT
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 544,080 $ 483,211 13%
Operating expenses 426,804 393,066 9%
------------- ------------
Operating income $ 117,276 $ 90,145 30%
============= ============
The Company's overall membership base continues to grow at a rapid rate
(from 60.9 million members at March 31, 1996 to 68.6 million members at March
31, 1997), which is the largest contributing factor to the 13% increase in
membership revenues (from $483.2 million for the quarter ended March 31, 1996
to $544.1 million for the quarter ended March 31, 1997). While the overall
membership base increased by approximately 2.2 million members during the
quarter, the average annual fee collected for the Company's membership services
increased by approximately 3%.
Compared to the previous year's first quarter, individual, wholesale and
discount program memberships grew by 10%, 24% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended March 31, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for
109
new members also favorably impacts profit margins. Individual membership usage
continues to increase, which contributes to additional service fees and
indirectly contributes to the Company's strong renewal rates. Historically, an
increase in overall membership usage has had a favorable impact on renewal
rates. Included in net revenue for the quarter ended March 31, 1997, are
revenues resulting from acquisitions which were completed during the quarter.
However, net revenue contributed from these acquisitions is not material to the
Company's total reported net revenue. The Company routinely reviews all
membership renewal rates and has not seen any material change over the last
year in the average renewal rate.
TRAVEL SEGMENT
LODGING
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 89,843 $ 81,290 11%
Operating expenses 53,843 53,341 1%
----------- -----------
Operating income $ 36,000 $ 27,949 29%
=========== ===========
Operating income increased 29% as a result of a 11% increase in net revenue.
The net revenue increase resulted from a 7% increase in royalty fees and an 83%
increase in revenue from preferred alliances seeking access to the Company's
franchisees and their underlying consumer base. Total royalty paying rooms grew
7% from the same period in 1996 and total system REVPAR increased 2% primarily
due to a 3% increase in the ADR charged at franchised lodging facilities.
CAR RENTAL
THREE MONTHS
ENDED MARCH 31,
OPERATING INCOME ($000'S) 1997
------------------------- --------------
Net revenue $ 58,834
Operating expenses 38,624
--------------
Operating income $ 20,210
==============
The Company acquired HFS Car Rental Inc. in October 1996. Assuming Company
ownership since January 1, 1996, total net revenue increased $10.1 million
(20%) to $58.8 million compared to pro forma 1996 net revenue. The increase
resulted from a $2.0 million (11%) increase in royalty fees (including a $1.2
million increase in fees from ARAC) and a $6.1 million (34%) increase in
information technology fees earned primarily from customers other than ARAC.
Operating expenses increased $5.7 million (17%) compared to 1996 pro forma
operating expenses. Operating expenses consisted primarily of $11.0 million and
$15.2 million of reservation and information technology expenses as well as
$9.3 million of depreciation and amortization expenses associated with the Avis
trademark and goodwill.
TIMESHARE
THREE MONTHS ENDED
OPERATING INCOME ($000'S) MARCH 31, 1997
------------------------- ------------------
Net revenue $ 100,925
Operating expenses 80,199
-------------
Operating income $ 20,726
=============
110
Net revenue primarily consists of $30.8 million of membership fees and $49.9
million of exchange fees. The Company acquired RCI in November, 1996. Assuming
Company ownership of timeshare operations since January 1, 1996, pro forma
first quarter membership and exchange fee revenue increased 27% and 4%,
respectively. Total members and exchanges increased 8% to 2.0 million and 3% to
0.5 million compared to 1996, respectively.
FLEET MANAGEMENT
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 80,795 $ 70,948 14%
Operating expenses 48,631 44,749 9%
------------- -----------
Operating income $ 32,164 $ 26,199 23%
============= ===========
Operating income increased 23% ($6.0 million) to $32.2 million, primarily as
a result of a $6.4 million (23%) increase in fee-based services. The $3.9
million (9%) increase in operating expenses was primarily attributable to
expenses associated with a truck fuel management business which was sold in
January 1996.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 55,397 $ 26,492 109%
Operating expenses 35,701 18,128 97%
------------- -----------
Operating income $ 19,696 $ 8,364 135%
============= ===========
The Company acquired the CENTURY 21 franchise system in August 1995, the
ERA franchise system in February 1996 and Coldwell Banker franchise system in
May 1996. The royalty portion of revenue increased $28.5 million (144%) to
$48.3 million primarily attributable to acquired Coldwell Banker franchise
system operations. Pro forma royalty revenue, which gives effect to the
acquisitions of Coldwell Banker Corporation ("Coldwell Banker") and ERA as if
these acquisitions were consummated on January 1, 1996, increased $2.3 million
(5%) on the strength of a 2% increase in sales transactions and a 4% increase
in the average price of homes sold. The percentage increase in sales
transactions outperformed comparative industry results for the first quarter of
1997. Operating expenses increased as a result of incremental expenses
associated with acquired franchise systems.
MORTGAGE SERVICES
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 33,632 $ 19,885 69%
Operating expenses 20,840 17,456 19%
------------- -----------
Operating income $ 12,792 $ 2,429 427%
============= ===========
The increase in net revenue resulted from a 44% increase in loan origination
revenue offset by a 16% decrease in loan servicing fees. The volume of loan
closings increased 9% from $2.3 billion to $2.5 billion
111
and the average origination fee increased from 91 to 124 basis points. The
increase in the average fee was due to an increase in profitability achieved in
the sale of loans in the secondary market and an increase in volume from retail
teleservices delivery. The portfolio of loans serviced increased 16% from $22.0
billion to $25.6 billion, the average servicing fee decreased 28% from 6.4 to
4.6 basis points. The decrease in the average fee earned is due to the impact
of SFAS No. 122 which became effective in 1995. Operating expenses increased as
a result of the larger servicing portfolio and increased recruiting and staff
training expenses.
RELOCATION
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 85,245 $ 67,374 27%
Operating expenses 71,283 60,014 19%
------------ -----------
Operating income $ 13,962 $ 7,360 90%
============ ===========
The $6.6 million (90%) increase in operating income is primarily
attributable to acquired CBRS operations.
OTHER SEGMENT
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenues $ 115,355 $ 72,211 60%
Operating expenses 90,997 68,855 32%
------------ ------------
Operating income $ 24,358 $ 3,356 626%
============ ============
The increase in net revenues is in large part attributable to the continued
focus on selling software titles through retailers and the availability of a
larger number of titles as well as the significant increase in the installed
base of CD-ROM personal computers. Operating income increased $21.0 million
primarily as a result of $12.5 million from Software operations and a $5.8
million gain on the sale of an investment. As a result of the Company
recalendarizing only its 1997 results, software operations for calendar 1997
are compared against the fiscal period ended April 30, 1996. Assuming a
comparable quarter, software operating income increased $3.2 million from 1996
to 1997.
112
THREE MONTHS ENDED JUNE 30, 1997 VS THREE MONTHS ENDED JUNE 30, 1996
HFS recorded an anticipated $303.0 million one-time merger and related
charge ($227.0 million, after tax) (the "PHH Merger Charge") during the second
quarter of 1997 in connection with the merger of PHH Corporation ("PHH") with
and into HFS (the "HFS/PHH Merger"). In connection with such charge, $40.4
million and $50.4 million of costs were allocated to the operations of the
fleet management and relocation business segments, respectively. The remaining
merger and related costs did not directly apply to the Company's operating
segments and were therefore included as operating expenses within the Company's
"Other" segment.
The Company recorded a $28.6 million merger and related charge ($25.1
million after tax) (the "Second Quarter 1996 Davidson and Sierra Merger
Charge") in connection with the Davidson and Sierra Mergers. Such charge
pertained to the Company's software operations which is included in the
Company's "Other" segment.
The financial summary for the three months ended June 30, 1997 and 1996,
INCLUDING THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA
MERGER CHARGE IS AS FOLLOWS ($000'S):
THREE MONTHS ENDED JUNE 30,
-------------------------------
1997 1996 VARIANCE
------------ ----------- --------
Net revenue $ 1,300,513 $ 935,639 39%
Operating expenses 1,229,703 748,950 64%
------------ -----------
Operating income $ 70,810 $ 186,689 (62%)
============ ===========
Net income (loss) $ (13,437) $ 101,064 (113%)
============ ===========
Net income (loss) per share
(fully diluted) $ (0.02) $ 0.13 (115%)
============ ===========
The financial summary for the three months ended June 30, 1997 and 1996,
EXCLUDING THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA
MERGER CHARGE IS AS FOLLOWS ($000'S):
THREE MONTHS ENDED JUNE 30,
-------------------------------
1997 1996 VARIANCE
------------ ----------- --------
Net revenue $ 1,300,513 $ 935,639 39%
Operating expenses 926,703 720,315 29%
------------ -----------
Operating income $ 373,810 $ 215,324 74%
============ ===========
Net income $ 213,563 $ 126,164 69%
============ ===========
Net income per share
(fully diluted) $ 0.25 $ 0.16 56%
============ ===========
Net interest expense increased $8.7 million primarily resulting from
borrowings under revolving credit facilities which financed 1997 treasury stock
purchases, merger expenditures, the acquisition of RCI and other acquisition
related expenditures. The weighted average effective interest rate decreased
from 7.20% to 5.80% as a result of increased fixed rate borrowings at lower
interest rates.
113
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND
DISCUSSIONS EXCLUDE THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON
AND SIERRA MERGER CHARGE.
MEMBERSHIP SEGMENT
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 641,047 $ 521,742 23%
Operating expenses 483,413 418,928 15%
-------------- -----------
Operating income $ 157,634 $ 102,814 53%
============== ===========
The Company's overall membership base continues to grow at a rapid rate
(from 62.3 million members at June 30, 1996 to 70.7 million members at June 30,
1997), which is the largest contributing factor to the 23% increase in
membership revenues (from $521.7 million for the quarter ended June 30, 1996 to
$641.0 million for the quarter ended June 30, 1997). While the overall
membership base increased by approximately 2.1 million members during the
quarter, the average annual fee collected for the Company's membership services
increased by approximately 1%.
Compared to the previous year's second quarter, individual, wholesale and
discount program memberships grew by 11%, 22% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended June 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Included in net revenue for the quarter
ended June 30, 1997, are revenues resulting from acquisitions which were
completed during the six months ended June 30, 1997. However, net revenue
contributed from these acquisition is not material to the Company's total
reported net revenue. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 108,111 $ 98,933 9%
Operating expenses 63,910 61,683 4%
----------- -----------
Operating income $ 44,201 $ 37,250 19%
=========== ===========
The net revenue increase resulted from a 6% increase in royalty fees and a
55% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. Total royalty paying
rooms grew 5% from the same period in 1996 and total system REVPAR increased 2%
114
primarily due to a 2% increase in ADR charged at franchised lodging facilities.
The 4% increase in operating expenses resulted primarily from an increase in
marketing and reservation expenses.
CAR RENTAL
THREE MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ---------------
Net revenue $ 60,036
Operating expenses 37,669
-------------
Operating income $ 22,367
=============
The Company acquired HFS Car Rental Inc. in October 1996. Net revenue
consisted primarily of $46.9 million of franchise fees and $11.6 million of
information technology fees from third party clients. Operating expenses
consisted primarily of $11.5 million and $15.1 million of reservation and
information technology expenses as well as $9.2 million of depreciation and
amortization expenses associated with the Avis trademark and goodwill.
TIMESHARE
THREE MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ------------------
Net revenue $ 89,261
Operating expenses 70,416
Operating income $ 18,845
The Company acquired RCI in November 1996. Net revenue primarily consists of
$30.8 million of member fees and $43.0 million of exchange fees. Assuming
Company ownership of timeshare operations since January 1, 1996, pro forma
member and exchange fee revenue increased 20% and 16%, respectively. Total
members and exchanges increased 8% to 2.0 million and 11% to 0.4 million
compared to 1996, respectively.
FLEET MANAGEMENT
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 65,786 $ 62,822 5%
Operating expenses 40,756 46,150 (12%)
----------- -----------
Operating income $ 25,030 $ 16,672 50%
=========== ===========
Operating income increased $8.4 million (50%) to $25.0 million, primarily as
a result of a $6.4 million (23%) increase in fee-based services. The $5.4
million (12%) decrease in operating expenses was primarily attributable to
expenses associated with a truck fuel management business which was sold in
January 1996 and operational efficiencies realized as part of the second
quarter 1997 restructuring of certain fleet management operations.
115
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 83,671 $ 56,575 48%
Operating expenses 36,190 33,124 9%
----------- -----------
Operating income $ 47,481 $ 23,451 102%
=========== ===========
The Company acquired the ERA franchise system in February 1996 and the
Coldwell Banker franchise system in May 1996. The royalty portion of revenue
increased $23.9 million (47%) to $74.6 million, primarily attributable to
acquired Coldwell Banker franchise system operations. Pro forma royalty
revenue, which gives effect to the acquisitions of the Coldwell Banker and ERA
franchise systems as if these acquisitions were consummated on January 1, 1996,
would have increased $4.4 million (6%) on the strength of a 10% increase in the
average price of homes sold. Operating expenses increased 9% as a result of
incremental expenses associated with acquired franchise systems net of a $5.0
million charge associated with the second quarter 1996 contribution of Coldwell
Banker's former owned brokerage business to the Trust.
MORTGAGE SERVICES
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 42,497 $ 35,269 20%
Operating expenses 23,829 21,631 10%
----------- -----------
Operating income $ 18,668 $ 13,638 37%
=========== ===========
The increase in net revenue resulted from a 44% increase in loan origination
revenue offset by a 16% decrease in loan servicing fees. The volume of loan
closings increased 9% from $2.3 billion to $2.5 billion and the average
origination fee increased from 91 to 124 basis points. The increase in the
average fee was due to an increase in profitability achieved in the sale of
loans in the secondary market and an increase in volume from retail
teleservices delivery. The portfolio of loans serviced increased 16% from $22.0
billion to $25.6 billion, the average servicing fee decreased 28% from 6.4 to
4.6 basis points. The decrease in the average fee earned is due to the impact
of SFAS No. 122 which became effective in 1995. Operating expenses increased as
a result of the larger servicing portfolio and increased recruiting and staff
training expenses.
RELOCATION
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 103,448 $ 83,741 24%
Operating expenses 78,158 72,871 7%
----------- -----------
Operating income $ 25,290 $ 10,870 133%
=========== ===========
The increase in net revenue was primarily attributable to $8.3 million of
incremental revenue generated by acquired CBRS operations. The $5.3 million
increase in operating expenses included expenses associated with the acquired
operations net of $2.4 million of restructuring related savings in 1997.
Assuming company
116
ownership of CBRS since January 1, 1996, pro forma revenue increased $6.1
million (6%) from 1996 primarily as a result of an increase in referral fees.
OTHER SEGMENT
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 106,656 $ 76,557 39%
Operating expenses 92,362 65,928 40%
----------- -----------
Operating income $ 14,294 $ 10,629 34%
=========== ===========
Operating income increased $3.7 million (34%) primarily as a result of
$20.8 million of equity in earnings in ARAC, partially offset by a decrease of
$12.0 million from Software operations and the absence of fees associated with
the license of the Century 21 trademark to Amre Inc. As a result of the Company
only recalendarizing its 1997 results, software operations for calendar 1997
are compared against the fiscal period ended July 31, 1996. Assuming a
comparable quarter, software operating income decreased $2.2 million from 1996
to 1997.
SIX MONTHS ENDED JUNE 30, 1997 VS SIX MONTHS ENDED JUNE 30, 1996
The financial summary for the six months ended June 30, 1997 and 1996,
INCLUDING THE PHH MERGER CHARGE OF $303.0 MILLION ($227.0 MILLION, AFTER TAX)
AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA MERGER CHARGE OF $28.6 MILLION
($25.1 MILLION, AFTER TAX) IS AS FOLLOWS ($000'S):
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $2,458,711 $ 1,757,050 40%
Operating expenses 2,097,381 1,404,559 49%
------------- ------------
Operating income $ 361,330 $ 352,491 3%
============= ============
Net income $ 152,432 $ 197,038 (23%)
============== ============
Net income per share $ 0.18 $ 0.25 (28%)
============== ============
The financial summary for the six months ended June 30, 1997 and 1996,
EXCLUDING THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA
MERGER CHARGE IS AS FOLLOWS ($000'S):
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 2,458,711 $1,757,050 40%
Operating expenses 1,794,381 1,375,924 30%
----------- ------------
Operating income $ 664,330 $ 381,126 74%
=========== ============
Net income $ 379,432 $ 222,138 71%
============ ============
Net income per share $ 0.44 $ 0.28 57%
============ ============
Net interest expense increased 92% ($13.6 million) primarily resulting
from borrowings under revolving credit arrangements which financed 1997
treasury stock purchases, restructuring expenditures, the RCI
117
acquisition and other acquisition related expenditures, while the weighted
average effective interest rate decreased 7.26% to 6.10 % as a result of
increased fixed rate borrowings at lower interest rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND
DISCUSSIONS EXCLUDE THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON
AND SIERRA MERGER CHARGE.
MEMBERSHIP SEGMENT
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 1,185,127 $ 1,004,953 18%
Operating expenses 914,415 811,994 13%
------------- -------------
Operating income $ 270,712 $ 192,959 40%
============= =============
The Company's overall membership base continues to grow at a rapid rate
(from 62.3 million members at June 30, 1996 to 70.7 million members at June 30,
1997), which is the largest contributing factor to the 18% increase in
membership revenues (from $1.0 billion for the six months ended June 30, 1996
to $1.2 billion for the six months ended June 30, 1997). While the overall
membership base increased by approximately 4.4 million members during the six
months ended June 30, 1997, the average annual fee collected for the Company's
membership services increased by approximately 3%.
Compared to the previous year's first six months, individual, wholesale and
discount program memberships grew by 11%, 22% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the six months ended June 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Included in net revenues for the six months
ended June 30, 1997, are revenues resulting from acquisitions which were
completed during the six months ended June 30, 1997. However, net revenue
contributed from these acquisitions are not material to the Company's total
reported net revenue. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
118
TRAVEL SEGMENT
LODGING
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 197,954 $ 180,223 10%
Operating expenses 117,753 115,024 2%
----------- -----------
Operating income $ 80,201 $ 65,199 23%
=========== ===========
The net revenue increase resulted from a 6% increase in royalty fees and a
70% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. Total royalty paying
rooms grew 3% from the same period in 1996 and total REVPAR increased 2%
primarily due to a 3% increase in ADR charged at franchised lodging facilities.
The 2% increase in operating expenses resulted primarily from an increase in
marketing and reservation expenses.
CAR RENTAL
SIX MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ----------------
Net revenue $ 118,870
Operating expenses 76,293
------------
Operating income $ 42,577
============
The car rental segment generated $42.6 million of operating income in the
six months ended June 30, 1997. Net revenue consisted primarily of $86.9
million of franchise fees and $21.6 million of information technology fees from
third party clients. Operating expenses consisted primarily of $22.4 million
and $30.3 million of reservation and information technology expenses as well as
$18.5 million of depreciation and amortization expenses associated with the
Avis trademark and goodwill.
TIMESHARE
SIX MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ----------------
Net revenue $ 187,710
Operating expenses 148,139
-----------
Operating income $ 39,571
===========
Net revenue primarily consists of $61.6 million of member fees and $92.8
million of exchange fees. Assuming Company ownership of timeshare operations
since January 1, 1996, pro forma first quarter membership revenue and exchange
fee revenue would have increased 23% and 10% respectively. Total members and
exchanges increased 8% to 2.0 million and 6% to 0.9 million compared to 1996,
respectively.
119
FLEET MANAGEMENT SERVICES
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 146,581 $ 133,770 10%
Operating expenses 89,387 90,899 (2%)
----------- -----------
Operating income $ 57,194 $ 42,871 33%
=========== ===========
Operating income increased $14.3 million (33%) to $57.2 million, primarily
as a result of a $9.4 million (14%) increase in fee-based services. The $1.5
million (2%) decrease in operating expenses was primarily associated with
expenses associated with a truck fuel management business which was sold in
January 1996 and operational efficiencies realized as part of the second
quarter 1997 restructuring of certain fleet management operations.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 139,068 $ 87,192 59%
Operating expenses 71,891 55,377 30%
----------- -----------
Operating income $ 67,177 $ 31,815 111%
=========== ===========
The royalty portion of revenue increased $52.4 million (74%) to $123.0
million primarily attributable to acquired Coldwell Banker franchise system
operations. Pro forma royalty revenue, which gives effect to the acquisitions
of Coldwell Banker and ERA franchise systems as if these acquisitions were
consummated on January 1, 1996, would have increased $6.8 million (6%) on the
strength of an 8% increase in the average price of homes sold. Operating
expenses increased as a result of incremental expenses associated with the
acquired franchise systems.
MORTGAGE SERVICES
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 76,129 $ 55,154 38%
Operating expenses 44,669 39,087 14%
----------- -----------
Operating income $ 31,460 $ 16,067 96%
=========== ===========
The increase in net revenue resulted from a 63% increase revenue from new
production and a 7% increase in revenue from the servicing portfolio. The
volume of new loan production decreased 5% from $4.5 billion to $4.3 billion as
a result of a 37% decrease in refinancing volume which was offset by a 21%
increase in purchase mortgage volume. The average fee earned in new production
increased from 68 basis points to 117 basis points as a result of improved
profitability achieved in the sale of loans in the secondary market. Operating
expenses increased 14% due to the larger servicing portfolio as well as
increased recruiting, training and systems development costs.
120
RELOCATION
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 188,693 $ 151,115 25%
Operating expenses 149,441 132,885 12%
----------- -----------
Operating income $ 39,252 $ 18,230 115%
=========== ===========
The $21.0 million (115%) increase in operating income is attributable to
approximately $14.3 million of operating income from relocation businesses
owned for the entire six month periods of 1997 and 1996 and the balance was
generated from acquired CBRS operations.
OTHER SEGMENT
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 218,579 $ 144,643 51%
Operating expenses 182,393 130,658 40%
----------- -----------
Operating income (loss) $ 36,186 $ 13,985 159%
=========== ===========
Operating income increased $22.2 million which primarily reflects $24.3
million of the equity in earnings of ARAC during 1997. The increase in net
revenues is in large part attributable to the continued focus on selling
software titles through retailers and the availability of a larger number of
titles as well as the significant increase in the installed base of CD-ROM
personal computers.
121
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS THREE MONTHS ENDED SEPTEMBER 30,
1996
The Company recorded a merger and related charge of $147.2 million ($89.6
million, after tax) (the "Third Quarter 1996 Davidson, Sierra and Ideon Merger
Charge") during the third quarter of 1996 in connection with the 1996 mergers
of the Company with Davidson, Sierra and Ideon. In connection with such charge
$127.2 million was allocated to the operations of the "Membership" segment, and
the remaining $20.0 million of the charge pertained to the Company's software
operations, which is included in the Company's "Other" segment.
The financial summary of the Company for the three months ended September
30, 1997 and 1996, INCLUDING AND EXCLUDING THE DAVIDSON, SIERRA AND IDEON
MERGER CHARGE, IS AS FOLLOWS ($000'S):
1996 VARIANCE
---------------------------- --------------------------
INCLUDING EXCLUDING INCLUDING EXCLUDING
1997 CHARGE CHARGE CHARGE CHARGE
-------------- ------------- ------------- ----------- ----------
Net revenue $ 1,431,304 $ 1,042,901 $ 1,042,901 37% 37%
Operating expenses 1,001,482 927,869 780,669 8% 28%
-------------- ------------- -------------
Operating income $ 429,822 $ 115,032 $ 262,232 274% 64%
============== ============= =============
Net income $ 248,264 $ 68,466 $ 158,066 263% 57%
============== ============= =============
Net income per share
(fully diluted) $ 0.28 $ 0.08 $ 0.19 250% 47%
============== ============= =============
Net interest expense increased $13.1 million in 1997 primarily resulting
from borrowings under revolving credit arrangements which financed 1997
treasury stock purchases, restructuring expenditures and acquisition related
expenditures. The weighted average effective interest rate decreased from 7.84%
to 5.30% as a result of increased fixed rate borrowings at lower interest
rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND
DISCUSSIONS EXCLUDE THE THIRD QUARTER 1996 DAVIDSON, SIERRA AND IDEON MERGER
CHARGE.
MEMBERSHIP SEGMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenues $ 690,220 $ 534,718 29%
Operating expenses 544,414 438,793 24%
----------- -------------
Operating income $ 145,806 $ 95,925 52%
=========== =============
The Company's overall membership base continues to grow at a rapid rate
(from 63.8 million members at September 30, 1996 to 72.9 million members at
September 30, 1997), which is the largest contributing factor to the 29%
increase in membership revenues (from $534.7 million for the quarter ended
September 30, 1996 to $690.2 million for the quarter ended September 30, 1997).
While the overall membership base increased by approximately 2.2 million
members during the quarter, the average annual fee collected for the Company's
membership services increased by approximately 1%.
122
Compared to the previous year's third quarter, individual, wholesale and
discount program memberships grew by 13%, 21% and 13%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended September 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Included in net revenue for the quarter
ended September 30, 1997, are revenues resulting from acquisitions which were
completed during the nine months ended September 30, 1997. However, net revenue
contributed from these acquisitions are not material to the Company's total
reported net revenue. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 124,473 $ 115,670 8%
Operating expenses 73,487 71,530 3%
----------- ------------
Operating income $ 50,986 $ 44,140 16%
=========== ============
The net revenue increase resulted from an 8% increase in royalty fees and a
41% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. The increase in
royalty fees resulted primarily from a 5% growth in franchised rooms from the
same period in 1996. The 3% increase in operating expenses represents increased
marketing expenses associated with funds administered by the Company on behalf
of franchisees on a pass-through basis (corresponding franchisee contribution
included in revenue).
CAR RENTAL
In September 1997, the IPO of ARAC, then a subsidiary that operated the car
rental operations of HFS Car Rental Inc., was completed, which diluted HFS's
equity interest in such subsidiary from 100% to 27.5%. The Company licenses the
Avis trademark to ARAC pursuant to a 50-year master license agreement and
receives royalty fees based upon 4% of ARAC revenue, escalating to 4.5% of ARAC
revenue over a 5-year period. In addition, the Company operates the
telecommunications and computer processing system, which services ARAC for
which the Company charges ARAC at cost.
123
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996
OPERATING INCOME ($000'S) 1997 (PRO FORMA) VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 62,787 $ 59,315 6%
Operating expenses 37,596 38,334 (2%)
------------- --------------
Operating income $ 25,191 $ 20,981 20%
============= ==============
Assuming the ARAC IPO occurred on January 1, 1996, pro forma operating
income increased $4.2 million (20%) from 1996 to 1997 as a result of $1.3
million (7%) increase in royalty fees and $2.2 million of preferred alliance
and other revenue. A 6% increase in franchisee car rental price per day
contributed to the royalty increase.
TIMESHARE
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996
OPERATING INCOME ($000'S) 1997 (PRO FORMA) VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 86,860 $ 78,164 11%
Operating expenses 64,392 66,649 (3%)
------------ -------------
Operating income $ 22,468 $ 11,515 95%
============ =============
Assuming Company ownership of timeshare operations since January 1, 1996,
pro forma operating income increased $11.0 million (95%) from 1996 to 1997 as a
result of expense reductions realized following the November 1996 acquisition
of RCI. Pro forma revenue increased 11% as a result of a 9% increase in
exchange revenue and a 24% increase in subscription revenue, resulting from
member fee and price increases.
FLEET MANAGEMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 59,810 $ 59,062 1%
Operating expenses 41,104 44,156 (7%)
------------ --------------
Operating income $ 18,706 $ 14,906 25%
============ ==============
Net revenue increased only $.7 million (1%) as a result of the Company's
January 1997 sale of certain credit card operations. The Company currently
participates in such credit card operations as a joint venture partner and
accordingly, records revenue based on its equity in earnings on the joint
venture. As a result, revenue in 1997 includes revenue, net of expenses from
the joint venture, compared to gross revenue received from corresponding,
wholly-owned credit card operations in 1996. Assuming the joint venture
commenced January 1, 1996, pro forma net revenue increased 12% primarily as a
result of $3.6 million of increased fuel card revenue in the United Kingdom and
a $1.6 million increase in the United States fleet card operations. Operating
income increased 25% as a result of savings generated from the restructuring of
operations subsequent to the HFS/PHH Merger.
124
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 98,344 $ 79,426 24%
Operating expenses 36,574 36,187 1%
----------- -------------
Operating income $ 61,770 $ 43,239 43%
=========== =============
The royalty portion of revenue increased $13.0 million (18%) to $85.8
million. Increased royalty revenue reflects higher broker sales volume
primarily resulting from a 5 % increase in real estate transactions and a 12%
increase in the average price of homes sold. The net revenue increase also
reflects a 75% increase in revenue from preferred alliance programs to $8.3
million in 1997. The Company limited operating expenses to a $0.4 million (1%)
increase as a result of the post-acquisition realization of cost savings
associated with the consolidation of operating functions of its franchise
systems.
RELOCATION
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 112,034 $ 101,958 10%
Operating expenses 76,907 80,804 (5%)
------------- -------------
Operating income $ 35,127 $ 21,154 66%
============= =============
The increase in net revenue was primarily attributable to an increase in
referral fees from home sale transactions. The $3.9 million reduction in
operating expenses primarily reflects savings associated with the restructuring
of relocation operations following the HFS/PHH Merger.
MORTGAGE SERVICES
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 51,602 $ 40,513 27%
Operating expenses 32,161 26,533 21%
----------- -------------
Operating income $ 19,441 $ 13,980 39%
=========== =============
The increase in net revenue resulted primarily from a $6.2 million (22%)
increase in loan origination revenue due to an increase in loan closings ($3.5
billion for third quarter ) and a $4.9 million (41%) increase in loan servicing
fees. Operating expenses increased $5.6 million (21%), reflecting the increase
in current loan origination volume, and the anticipation of future volume
increases.
125
OTHER SEGMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 145,174 $ 111,554 30%
Operating expenses 94,847 82,666 15%
----------- -------------
Operating income $ 50,327 $ 28,888 74%
=========== =============
Operating income increased $21.4 million (74%) primarily as a result of a
$26.9 million increase in the equity in earnings of ARAC (recorded in net
revenue) and a $6.0 million gain on the sale of an investment partially offset
by a decrease of $22.4 million from Software operations. As a result of the
Company recalendarizing only its 1997 results, software operations for calendar
1997 are compared against the fiscal period ended October 31, 1996. Assuming a
comparable quarter, software operating income remained relatively constant from
1996 to 1997. The increase in net revenues is also attributable to the
continued focus on selling software titles through retailers and the
availability of a large number of titles as well as the significant increase in
the installed base of CD-ROM personal computers.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company incurred an anticipated $303.0 million one-time merger and
restructuring charge ($227.0 million, after tax) during the nine months ended
September 30, 1997 in connection with the HFS/PHH Merger. In connection with
such charge, $40.4 million and $50.4 million of costs were allocated to the
operations of the fleet management and relocation business segments,
respectively. The remaining merger and related costs did not directly apply to
the Company's operating segments and were therefore included as operating
expenses in the Company's "Other" segment.
During the nine months ended September 30, 1996, the Company incurred a
merger and related charge of $175.8 million ($114.7 million after tax) in
connection with the mergers with Davidson, Sierra and Ideon. In connection with
such charge, $127.2 million was allocated to the operations of the membership
segment and the remaining $48.6 million pertained to the Company's software
operations, which is included in the Company's "Other" segment.
The financial summary for the nine months ended September 30, 1997 and 1996
INCLUDING THE PHH MERGER CHARGE OF $303.0 MILLION ($227.0 MILLION AFTER TAX)
AND THE MERGER AND RELATED CHARGES ASSOCIATED WITH THE MERGERS WITH DAVIDSON,
SIERRA AND IDEON OF $175.8 MILLION $114.6 MILLION AFTER TAX) IS AS FOLLOWS
($000's):
1997 1996 VARIANCE
------------- ------------ --------
Net revenue $ 3,890,015 $ 2,799,951 39%
Operating expenses 3,098,865 2,332,428 33%
------------- ------------
Operating income $ 791,150 $ 467,523 69%
============= ============
Net income $ 400,694 $ 265,504 51%
============= ============
Net income per share
(fully diluted) $ .47 $ .33 42%
============= ============
126
The financial summary for the nine months ended September 30, 1997 and 1996,
EXCLUDING THE PHH MERGER CHARGE AND THE MERGER AND RELATED CHARGES ASSOCIATED
WITH THE MERGERS WITH DAVIDSON, SIERRA AND IDEON IS AS FOLLOWS ($000's):
1997 1996 VARIANCE
------------- ------------ --------
Net revenue $ 3,890,015 $ 2,799,951 39%
Operating expenses 2,795,865 2,156,593 30%
------------- ------------
Operating income $ 1,094,150 $ 643,358 70%
============= ============
Net income $ 627,694 $ 380,104 65%
============= ============
Net income per share
(fully diluted) $ .73 $ .48 52%
============= ============
Net interest expense increased 155% ($26.7 million) primarily resulting from
borrowings under revolving credit arrangements which financed 1997 treasury
stock purchases, restructuring expenditures and acquisition related
expenditures, while the weighted average effective interest rate decreased from
7.53% to 6.09% as a result of increased fixed rate borrowings at lower interest
rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND DISCUSSIONS
EXCLUDE THE PHH MERGER CHARGE AND THE MERGER AND RELATED CHARGES ASSOCIATED
WITH THE MERGERS WITH DAVIDSON, SIERRA AND IDEON.
MEMBERSHIP SEGMENT
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 1,875,347 $ 1,539,240 22%
Operating expenses 1,458,829 1,250,785 17%
------------- -------------
Operating income $ 416,518 $ 288,455 44%
============= =============
The Company's overall membership base continues to grow at a rapid rate
(from 63.8 million members at September 30, 1996 to 72.9 million members at
September 30, 1997), which is the largest contributing factor to the 22%
increase in membership revenues (from $1.5 billion for the nine months ended
September 30, 1996 to $1.9 billion for the nine months ended September 30,
1997). While the overall membership base increased by approximately 6.6 million
members during the nine months ended September 30, 1997, the average annual fee
collected for the Company's membership services increased by approximately 3%.
Compared to the previous year's first nine months, individual, wholesale and
discount program memberships grew by 10%, 23% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended September 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates.
127
Historically, an increase in overall membership usage has had a favorable
impact on renewal rates. Included in total revenues for the quarter ended
September 30, 1997, are revenues resulting from acquisitions which were
completed during the nine months ended September 30, 1997. However, total
revenues contributed from these acquisitions are not material to the Company's
total reported revenues. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 322,427 $ 295,892 9%
Operating expenses 191,240 186,555 3%
------------- ------------
Operating income $ 131,187 $ 109,337 20%
============= ============
The net revenue increase resulted from a 7% increase in royalty fees and a
62% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. The increase in
royalty fees resulted primarily from a 4% growth in franchised rooms from the
same period in 1996. The 3% ($4.7 million) increase in operating expenses
resulted from a 10% ($12.2 million) increase in marketing and reservation
expenses which are funded by the Company's franchisees partially offset by the
absorption of corporate overhead expenses by several other operating segments
acquired in 1996.
CAR RENTAL
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 181,657 $ 165,112 10%
Operating expenses 113,889 109,561 4%
------------- ------------
Operating income $ 67,768 $ 55,551 22%
============= ============
Assuming the ARAC IPO occurred on January 1, 1996, pro forma operating
income increased 22% primarily as a result of a $3.3 million ( 5%) increase in
royalty fees and $5.2 million of preferred alliance and other revenue. The
increase in royalty fees was primarily attributable to a 5% increase in ARAC's
car rental price per day.
TIMESHARE
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 274,570 $ 236,675 16%
Operating expenses 212,531 207,397 2%
------------- ------------
Operating income $ 62,039 $ 29,278 112%
============= ============
Assuming Company ownership of timeshare operations since January 1, 1996,
pro forma operating income increased $32.8 million (112%) from 1996 to 1997 as
a result of a $37.9 million (16%) increase in net revenue and only a $5.1
million (2%) increase in operating expenses. Pro forma revenue increased 16% as
a result
128
of an $11.6 million (9%) increase in exchange revenue and an $18.0 million
(24%) increase in subscription revenue due to both membership and price
increases. The pro forma operating expense increase of only 2% is a result of
expense reductions realized following the November 1996 acquisition of RCI.
FLEET MANAGEMENT
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 206,391 $ 192,832 7%
Operating expenses 130,491 135,055 (3%)
------------- ------------
Operating income $ 75,900 $ 57,777 31%
============= ============
Operating income increased $18.1 million (31%) to $75.9 million, primarily
as a result of a $13.6 million (7%) increase in net revenue and a $4.6 million
(3%) decrease in operating expenses resulting from operational efficiencies
realized from the second quarter 1997 restructuring of certain fleet management
operations. The increase in net revenue is comprised of a 10% increase in
fee-based revenue and a 4% increase in asset-based fees.
REAL ESTATE INDUSTRY
REAL ESTATE FRANCHISE
NINE MONTHS
ENDED
SEPTEMBER 30,
NINE MONTHS ENDED SEPTEMBER 30, 1996
OPERATING INCOME ($000'S) 1997 1996 VARIANCE (PRO FORMA) VARIANCE
------------------------- ------------- -------------- ----------- ------------- ---------
Net revenue $ 237,412 $ 159,951 48% $ 203,519 17%
Operating expenses 108,465 84,897 28% 113,264 (4%)
------------- -------------- -------------
Operating income $ 128,947 $ 75,054 72% $ 90,255 43%
============= ============== =============
Operating income increased 72% as a result of a $77.5 million (48%) increase
in net revenue and only a $23.6 million (28%) increase in operating expenses.
The royalty portion of revenue increased $65.5 million (46%) to $208.8 million
which is primarily attributable to the Coldwell Banker franchise system
operations which were acquired in May 1996. Operating expenses increased as a
result of incremental expenses associated with the acquired franchise systems.
Pro forma operating income which gives effect to the acquisitions of the
Coldwell Banker and ERA franchise systems as if these acquisitions were
consummated on January 1, 1996, increased $38.7 million (43%) from 1996 to 1997
as a result of a $33.9 million (17%) increase in net revenue and a $4.8 million
(4%) reduction in operating expenses. Pro forma net revenue increased primarily
as a result of a 10% increase in royalty fees principally due to increases in
homes sold and the average price of homes sold. The pro forma reduction in
operating expenses reflects cost savings realized from the restructuring of
real estate businesses acquired.
129
RELOCATION
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1996
OPERATING INCOME ($000'S) 1997 1996 VARIANCE (PRO FORMA) VARIANCE
------------------------- ----------- ----------- --------- ------------ ---------
Net revenue $ 300,727 $ 253,073 19% $ 287,951 4%
Operating expenses 226,348 213,689 6% 241,859 (6%)
----------- ----------- -----------
Operating income $ 74,379 $ 39,384 89% $ 46,092 61%
=========== =========== ===========
The $35.0 million (89%) increase in operating income is primarily
attributable to operating income from the Coldwell Banker relocation business
acquired in May 1996. Pro forma operating income increased $28.3 million (61%)
from 1996 to 1997 as a result of a $12.8 million (4%) increase in net revenue
and a $15.5 million (6%) reduction in operating expenses. Pro forma net revenue
increased primarily as a result of an increase in referral fees from home sale
transactions. The pro forma reduction in operating expenses reflects savings
associated with the restructuring of relocation operations following the
HFS/PHH Merger.
MORTGAGE SERVICES
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 127,731 $ 95,667 34%
Operating expenses 76,832 65,620 17%
------------- ------------
Operating income $ 50,899 $ 30,047 69%
============= ============
Operating income increased 69% as a result of a 34% increase in net revenue,
net of a 17% increase in operating expenses. Loan origination revenue increased
$25.5 million (43%) as a result of a 19% increase in loan closings and a 20%
price increase. Servicing revenue increased $4.3 million (20%) as a result of
an 18% increase in revenue from the servicing portfolio. Operating expenses
increased 17% due to increases in loan origination volume as well as increased
recruiting, training and systems development costs associated with the
anticipation of increased volume, primarily from the retail teleservice
delivery systems.
OTHER SEGMENT
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 363,753 $ 263,296 38%
Operating expenses 277,240 219,992 26%
------------- ------------
Operating income $ 86,513 $ 43,304 100%
============= ============
Operating income increased $43.2 million (100%) primarily as a result of a
$51.2 million increase in the equity in earnings of ARAC (recorded in net
revenue) and a $16.7 million gain on the sale of investments, partially offset
by a decrease of $22.3 million from software operations. As a result of the
Company recalendarizing its 1997 results, software operations for calendar
1997 are compared against the fiscal period ended October 31, 1996. Assuming a
comparable nine month period, software operating income remained relatively
constant from 1996 to 1997.
The increase in net revenues is in large part attributable to the continued
focus on selling software titles through retailers and the availability of a
large number of titles as well as the significant increase in the installed
base of CD-ROM personal computers.
130
LIQUIDITY AND CAPITAL RESOURCES
ACQUISITION OVERVIEW
The Company continues to seek to expand and strengthen its leadership
position in its membership, travel and real estate industry segments with
strategic acquisitions. The Company's acquired businesses share similar
characteristics, foremost of which is that each was immediately accretive to
Company cash flow and earnings. Revenue is substantially generated from service
fees and is not dependent on tangible assets or the need for capital
expenditures other than technology investments. These service businesses each
generate significant cash flow which is enhanced by the Company's operating
leverage that supports acquired revenue streams without corresponding increases
in operating infrastructure expenses.
1997 POOLINGS
CENDANT - The Cendant Merger was completed on December 17, 1997 pursuant to
which the Company issued 440.0 million shares of its common stock for all of
the outstanding common stock of HFS. Pursuant to the agreement and plan of
merger, HFS stockholders received 2.4031 shares of Company common stock for
each share of HFS common stock. The Company anticipates that it will incur
merger and related charges approximating $825 million associated with fourth
quarter 1997 mergers.
As directed by the Federal Trade Commission ("FTC") as a condition of
terminating the waiting period under the Hart Scott Rodino Antitrust
Improvements Act in connection with the Cendant Merger, on December 17, 1997,
the Company sold its wholly-owned subsidiary, Interval International Inc. and
certain related entities ("Interval"), for approximately $200 million, subject
to certain adjustments. The agreement contemplates that the Company will
continue to provide certain existing services to Interval's developers and
members.
HEBDO MAG - On October 3, 1997, the Company acquired all of the outstanding
capital stock of Hebdo Mag for approximately $440 million, which was satisfied
by the issuance of approximately 14.2 million shares of Company common stock.
Hebdo Mag is a leading publisher and distributor of international classified
advertising information.
PHH - On April 30, 1997, HFS acquired PHH by merger, which was satisfied by the
issuance of 72.8 million equivalent shares of Company common stock in exchange
for all of the outstanding common stock of PHH. PHH is the world's largest
provider of corporate relocation services and also provides mortgage and fleet
management services. HFS recorded a one-time merger and related charge of
approximately $303.0 million in the second quarter of 1997 upon consummation of
the HFS/PHH Merger.
1996 POOLINGS
DAVIDSON AND SIERRA - During July 1996, the Company acquired all of the
outstanding capital stock of Davidson for a purchase price of approximately $1
billion, which was satisfied by the issuance of approximately 45.1 million
shares of Company common stock. Also during July 1996, the Company acquired all
of the outstanding capital stock of Sierra for a purchase price of
approximately $858 million, which was satisfied by the issuance of
approximately 38.4 million shares of the Company common stock. Davidson and
Sierra develop, publish and distribute educational and entertainment software
for home and school use. During August 1996, the Company acquired all of the
outstanding capital stock of Ideon, principally a
131
provider of credit card enhancement services, for a purchase price of
approximately $393 million, which was satisfied by the issuance of 16.6 million
shares of Company common stock.
In connection with the Davidson, Sierra and Ideon mergers, the Company recorded
a charge approximating $179.9 million in the year ended December 31, 1996. Such
costs are non-recurring and those associated with the Ideon Merger include a
provision relating to certain litigation matters giving consideration to the
Company's intended approach to these matters. The Company has since settled
certain of these litigation matters while certain of these matters remain
outstanding. Although the Company has attempted to estimate the amounts that
will be required to settle the remaining litigation matters, there can be no
assurance that the actual aggregate amount of such settlements will not exceed
the amount accrued.
1995 POOLINGS
GETKO, NAOG AND ADVANCE ROSS - During June 1995, the Company acquired all of
the outstanding capital stock of Getko Group, Inc. ("Getko") for a purchase
price of approximately $100 million, which was satisfied by the issuance of
approximately 5.6 million shares of Company common stock. Getko distributes
complimentary welcoming packages to new homeowners throughout the United States
and Canada. During September 1995, the Company acquired all of the outstanding
capital stock of North American Outdoor Group, Inc. ("NAOG") for a purchase
price of approximately $52 million, which was satisfied by the issuance of
approximately 2.3 million shares of Company common stock. NAOG owns one of the
largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns various other membership
organizations. During January 1996, the Company acquired all of the outstanding
capital stock of Advance Ross Corporation ("Advance Ross") for a purchase price
of approximately $183 million, which was satisfied by the issuance of
approximately 8.9 million shares of Company common stock. Advance Ross
processes value-added tax refunds to travelers in over 20 European countries.
1997 PURCHASE ACQUISITIONS
PROPOSED ACQUISITION
On January 27, 1998, the Company proposed to acquire American Bankers Insurance
Group Inc. ("American Bankers") for $58 per share in cash and stock, for an
aggregate purchase price approximating $2.7 billion. On January 28, 1998, the
Company commenced a tender offer to purchase approximately 23.5 million of
American Bankers' common stock at a price of $58 per share in cash, which
together with shares the Company owns on the announcement date approximating
51% of the fully diluted shares of American Bankers. The Company proposed to
exchange, on a tax free basis, shares of its common stock with a fixed value of
$58 per share for the balance of American Bankers' common stock. The tender
offer is subject to certain conditions and there can be no assurance that the
Company will be successful in its proposal to acquire American Bankers. The
Company has received a commitment from a bank to provide funds necessary to
finance the proposed acquisition.
132
HARPUR - On January 20, 1998, the Company completed its acquisition of The
Harpur Group Ltd., a leading fuel card and vehicle management company in the
United Kingdom, from privately held H-G Holdings, Inc., for approximately $186
million in cash plus future contingent payments of up to $20 million over the
next two years.
JACKSON HEWITT - On January 7, 1998, the Company completed the acquisition of
Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480 million in cash
or $68 per share of common stock of Jackson Hewitt. Jackson Hewitt is the
second largest tax preparation service franchise system in the United States
with locations in 41 states. Jackson Hewitt franchises a system of
approximately 2,050 offices that specialize in computerized preparation of
federal and state individual income tax returns.
PROVIDIAN - On December 9, 1997, HFS executed a definitive agreement to
acquire Providian Auto and Home Insurance Company and its subsidiaries from an
AEGON N.V. subsidiary for approximately $219 million in cash. Closing is
subject to receipt of required regulatory approval and other customary
conditions and is anticipated in the spring of 1998. Providian sells automobile
insurance to consumers through direct response marketing in 45 states and the
District of Columbia.
INVESTMENT IN NRT - During the third quarter of 1997, HFS acquired $182.0
million of preferred stock of NRT Incorporated ("NRT"), a newly formed
corporation created to acquire residential real estate brokerage firms. HFS
acquired $216.1 million of certain intangible assets including trademarks
associated with real estate brokerage firms acquired by NRT in 1997. The
Company, at its discretion, may acquire up to $81.3 million of additional NRT
preferred stock and may also purchase up to $229.9 million of certain
intangible assets of real estate brokerage firms acquired by NRT.
In September 1997, NRT acquired the real estate brokerage business and
operations of the Trust, and two other regional real estate brokerage
businesses. The Trust is an independent trust to which HFS contributed the
brokerage offices formerly owned by Coldwell Banker in connection with HFS's
acquisition of Coldwell Banker. NRT is the largest residential brokerage firm
in the United States.
1996 PURCHASE ACQUISITIONS
RCI - In November 1996, HFS completed the acquisition of all the outstanding
common stock of RCI for approximately $487 million comprised of $412 million in
cash and $75 million of HFS common stock plus future contingent payments of up
to $200 million over the next five years. The cash portion of the purchase
price was funded with borrowings under a revolving credit facility, acquired
RCI cash and excess proceeds from a second quarter public offering of
approximately 46.6 million equivalent shares of Company common stock (the
"Offering") which generated $1.2 billion of proceeds.
RCI is the world's largest provider of timeshare exchange programs and is also
engaged in publishing related to the timeshare industry and provides other
travel-related services, integrated software systems and resort management and
consulting services.
AVIS - In October 1996, HFS completed the acquisition of all of the outstanding
capital stock of HFS Car Rental Inc., formerly Avis Inc. ("Avis"), including
payments under certain employee stock plans of Avis and the redemption of
certain series of preferred stock of Avis for $806.5 million. The purchase
price was comprised of approximately $367.2 million in cash, $100.9 million in
indebtedness and $338.4 million
133
(approximately 11.1 million equivalent shares) in Company common stock. The
cash portion of the purchase price was funded with excess proceeds from the
Offering.
Prior to the consummation of the acquisition, HFS announced its strategy to
dilute its interest in the Avis car rental operations while retaining assets
that are consistent with its service provider business profile, including the
trademark, franchise agreements, reservation system and information technology
system assets. In September 1997, ARAC (the company which operated the rental
car operations of HFS Car Rental, Inc.) completed an IPO resulting in a 72.5%
dilution of HFS's equity interest in ARAC.
COLDWELL BANKER - In May 1996, HFS acquired by merger Coldwell Banker, the
largest gross revenue producing residential real estate company in North
America and a leading provider of corporate relocation services. HFS paid
$640.0 million in cash for all of the outstanding capital stock of Coldwell
Banker and repaid $105.0 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the May 1996 sale of an
aggregate 46.6 million equivalent shares of Company common stock generating
$1.2 billion of proceeds pursuant to a public offering. Immediately following
the closing of the Coldwell Banker acquisition, HFS conveyed Coldwell Banker's
318 owned real estate brokerage offices to National Realty Trust, an
independent trust in which HFS has no beneficial interest and recorded a $5.0
million pre-tax charge in connection with such contribution.
OTHER - During 1996, HFS acquired certain other entities for an aggregate
purchase price of $286.2 million comprised of $210.4 million in cash, $70.8
million of common stock (2.5 million equivalent Company shares) and $5.0
million of notes.
1995 PURCHASE ACQUISITIONS
CENTURY 21 - In August 1995, a majority owned subsidiary of HFS, C21 Holding
Corp. ("Holding"), acquired Century 21 Real Estate Corporation ("Century 21"),
the world's largest residential real estate brokerage franchisor. Aggregate
consideration for the acquisition consisted of $245.0 million plus expenses,
including an initial cash payment of $70.2 million, 9.6 million equivalent
shares of Company common stock valued at $64.8 million, the assumption of $80.0
million of Century 21 redeemable preferred stock prior to the acquisition
(subsequently redeemed in February 1996) and a $30.0 million contingent payment
made in February 1996. Consideration paid in 1996 financed these payments with
proceeds from the February 1996 issuance of $240 million of unsecured 4-3/4%
Convertible Senior Notes (the "4-3/4% Notes").
Effective October 29, 1996 (the "Effective Date"), HFS amended the Subscription
and Stockholders' Agreement dated as of August 1, 1995 among Holding, HFS and a
group of former executives of Century 21 Real Estate Corporation ("the Former
Management") pursuant to which the Company owned 87.5% of Holding and the
Former Management owned 12.5% of Holding. Such amendment provided for the
acceleration of HFS's option to purchase the 12.5% ownership from the Former
Management at fair market value, determined as of the Effective Date. The
Company completed such purchase in the second quarter of 1997 for $52.8
million.
OTHER - During 1995, the Company and HFS collectively acquired certain entities
for an aggregate purchase price of $163.3 million, comprised of $122.5 million
in cash and $40.8 million of common stock (6.0 million equivalent Company
shares).
TREASURY PURCHASES
134
In January 1997, HFS's Board of Directors authorized the purchase of 6.2
million equivalent shares of Company common stock to satisfy stock option
exercises and conversions of convertible debt securities and to fund future
acquisitions. HFS acquired approximately 6.2 million equivalent treasury shares
of Company common stock in the first quarter of 1997 for $179.4 million with
revolving credit borrowings.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
POST CENDANT MERGER
The Company continues to believe that it has excellent liquidity and access
to liquidity through various sources. The Company has also demonstrated its
ability to access equity and public debt markets and financial institutions to
generate capital for strategic acquisitions. Indicative of the Company's
creditworthiness, as of the consummation of the Cendant Merger, Standard and
Poors Corporation ("S&P") and Duff and Phelps ("Duff") affirmed A ratings to
the Company's debt and Moody's Investor Service ("Moody's") upgraded the
Company's senior unsecured debt rating to A3. A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time by S&P, Duff and Moody's.
As of the Cendant Merger consummation date, the Company terminated its
existing credit facility and amended the HFS revolving credit facilities to
provide aggregate commitments of $2.0 billion consisting of (i) a $1.25
billion, 364-day revolving credit facility (the "364 Day Revolving Credit
Facility") and (ii) a $750.0 million, five year revolving credit facility (the
"Five Year Revolving Credit Facility" and collectively with the 364 Day
Revolving Credit Facility, (the "Revolving Credit Facilities"). The 364 Day
Revolving Credit Facility will mature on September 30, 1998 but may be renewed
on an annual basis for an additional 364 days up to a maximum aggregate term of
five years upon receiving lender approval. The Five Year Revolving Credit
Facility will mature on October 1, 2001. The Revolving Credit Facilities, at
the option of the Company, bear interest based on competitive bids of lenders
participating in the facilities, at prime rates or at LIBOR plus a margin of
approximately 22 basis points. The Company is required to pay a per annum
facility fee of .08% and .06% of the average daily availability of the Five
Year Revolving Credit Facility and the 364 Day Revolving Credit Facility,
respectively. The interest rates and facility fees are subject to change based
upon credit ratings assigned to the Company's senior unsecured long-term debt
by nationally recognized statistical rating companies. The Revolving Credit
Facilities contain certain restrictive covenants including restrictions on
indebtedness, mergers, liquidations and sale and leaseback transactions.
The Company intends to file a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to an aggregate $3
billion of debt and equity securities. These securities may be offered from
time to time based on terms to be determined at the time of sale. The proceeds
would be used for general corporate purposes, which may include future
acquisitions.
PRE CENDANT MERGER
Prior to the Cendant Merger, the Company had a $500.0 million revolving
credit facility (the "CUC Credit Facility") with a variety of different types
of loans available thereunder. Interest was payable, depending on the type of
loan utilized by the Company, at a variety of rates based on the federal funds
rate, LIBOR, the prime rate or rates quoted by participating banks based on an
auction process for the CUC Credit Facility. No borrowings under this facility
were outstanding at December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997. The CUC Credit Facility required the Company to maintain
certain financial ratios and contained other restrictive covenants including,
without limitation, financial covenants and restrictions
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on certain corporate transactions, and also contained various events of default
provisions including, without limitation, defaults arising from certain changes
in control of the Company.
Prior to Cendant Merger, HFS maintained up to $1.5 billion in revolving
credit facilities pursuant to the same terms and conditions under the Company's
Revolving Credit Facilities post the Cendant Merger. Outstanding borrowings
under HFS's revolving credit facilities at December 31, 1996, March 31, 1997,
June 30, 1997 and September 30, 1997 aggregated $205.0 million, $430.0 million,
$615.0 million and $1.1 billion, respectively. At December 31, 1996, March 31,
1997, June 30, 1997 and September 30, 1997 available borrowings under HFS's
revolving credit facilities were $795.0 million, $570.0 million, $885.0 million
and $400.0 million respectively.
In connection with the acquisition of Hebdo Mag, the Company assumed a
$115.2 million revolving credit facility and other long-term debt of $110.5
million, consisting of senior and subordinated notes and other miscellaneous
loans. The revolving credit facility bears interest at varying rates ranging
from the prime rate plus .25% to 1.5% or LIBOR plus 1.0% to 2.25%, depending
upon Hebdo Mag's ratio of total debt to pro forma cash flow, as defined. This
facility expires on February 15, 1998 but may be renewed on an annual basis for
successive periods of one year upon receiving lender approval. Outstanding
borrowings under this facility at December 31, 1996, March 31, 1997, June 30,
1997 and September 30, 1997 aggregated $93.8 million, $89.3 million, $77.6
million and $82.9 million, respectively.
On February 11, 1997, the Company issued $550 million in principal amount of
3% convertible subordinated Notes (the "3% Notes") due February 15, 2002.
Interest on the 3% Notes is payable semi-annually. Each $1,000 principal amount
of 3% Notes is convertible into 32.6531 shares of Company common stock subject
to adjustment in certain events. The 3% Notes may be redeemed at the option of
the Company at any time on or after February 15, 2000, in whole or in part, at
the appropriate redemption prices (as defined in the Indenture governing the 3%
Notes) plus accrued interest to the redemption date. The 3% Notes will be
subordinated in right of payment to all existing and future Senior Debt (as
defined in the Indenture governing the 3% Notes) of the Company.
In January 1997, Wright Express Corporation, a wholly-owned subsidiary,
entered into a new revolving credit facility agreement replacing its previous
revolving line of credit. The new credit facility has an available line of $60
million. At December 31, 1996 and September 30, 1997, Wright Express had $31.4
million and $36.2 million, respectively outstanding under the new credit
facility. The new credit facility expires February 8, 1999.
On February 22, 1996, HFS completed a public offering of $240 million
unsecured 4-3/4% Convertible Senior Notes (the "4-3/4% Notes") due 2003, which
are convertible at the option of the holder at any time prior to maturity into
36.028 equivalent shares of Company common stock per $1,000 principal amount of
the 4-3/4% Notes, representing a conversion price of $27.756 per share. The
4-3/4% Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after March 3, 1998 at redemption prices decreasing from
103.393% of principal at March 3, 1998 to 100% of principal at March 3, 2003.
However, on or after March 3, 1998 and prior to March 3, 2000, the 4-3/4% Notes
will not be redeemable at the option of the Company unless the closing price of
the Company's common stock shall have exceeded $38.86 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days within a
period of 30 consecutive trading days ending within five days prior to
redemption. Interest on the 4-3/4% Notes is payable semi-annually commencing
September 1, 1996.
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In October 1994, HFS completed a public offering of $150 million unsecured
4-1/2% Convertible Senior Notes (the "4-1/2% Notes") due 1999, which were
convertible at the option of the holders at any time prior to maturity into
132.425 equivalent shares of Company common stock per $1,000 principal amount
of the 4- 1/2% Notes, representing a conversion price of $7.55 per share.
Interest was payable semi-annually commencing April 1995. On September 22,
1997, HFS exercised its option to redeem the outstanding 4-1/2% Notes effective
October 15, 1997 in accordance with the provisions of the indenture under which
the 4-1/2% Notes were issued. Prior to the redemption date, all of the
outstanding 4-1/2% Notes were converted. Accordingly, 19.7 million equivalent
shares of Company common stock were issued as a result of the conversion of
such notes.
In connection with the Company's 1996 acquisition of Sierra, the Company
assumed $50 million in principal amount of 6-1/2% convertible subordinated
notes due April 1, 2001 (the "Notes"). Interest on the Notes is payable
semi-annually on April 1 and October 1 of each year. Each $7.62 principal
amount of Notes is convertible into one share of Company common stock, subject
to adjustment under certain conditions. The Notes are redeemable after April 2,
1997, at the option of Sierra, at specified redemption prices. At December 31,
1996 and September 30, 1997, Sierra had $23.5 million and $20.3 million,
respectively, outstanding on the Notes.
Long-term debt increased $1.4 billion to $2.4 billion at September 30, 1997
when compared to amounts outstanding at December 31, 1996, primarily as a
result of the $550 million issuance of 3% Notes, and approximately $900 million
of incremental borrowings under HFS's revolving credit facilities, which was
principally used to fund $171.3 million of treasury share purchases, $137.0
million of the PHH Merger Charge and $680.0 million of the Company's investment
in NRT and certain intangible assets associated with NRT's acquisitions during
the third quarter of 1997 and other acquisition related payments. Long-term
debt at September 30, 1997 primarily consisted of $1.1 billion of fixed rate
publicly issued debt and $1.2 billion of borrowings under the Company's
revolving credit facilities.
Long-term debt increased $646.0 million from $354.0 million at December 31,
1995 to $1.0 billion at December 31, 1996, primarily due to the issuance of the
$240 million 4-3/4% Notes and $189.6 million of incremental borrowings under
HFS's revolving credit facilities which partially financed the November
acquisition of RCI. In addition, the Company assumed $204.3 million of debt in
connection with the merger of Hebdo Mag, which consisted of revolving credit
facility borrowings, senior and subordinated notes and other miscellaneous
loans.
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH operates mortgage services, fleet management and relocation businesses
as a separate public reporting entity and supports purchases of leased vehicles
and originated mortgages primarily by issuing commercial paper and medium term
notes. Such borrowings are not classified based on contractual maturities, but
rather are included in liabilities under management and mortgage programs
rather than long-term debt since such debt corresponds directly with high
quality related assets. Although PHH's debt to equity ratio approximates 6 to
1, such debt corresponds directly with net investments in high quality related
assets. Accordingly, following the announcement of the HFS/PHH Merger, S&P,
Moody's and Fitch Investor Service affirmed investment grade ratings of A+, A2
and A+, respectively to PHH debt and A1 and F1, respectively to PHH commercial
paper. A security rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal at any time.
137
PHH debt is issued without recourse to the Company. The Company expects to
continue to have broad access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing credit
standards to minimize credit risk and the potential for losses. Depending upon
asset growth and financial market conditions, PHH utilizes the United States,
European and Canadian commercial paper markets, as well as other cost-effective
short-term instruments. In addition, PHH will continue to utilize the public
and private debt markets to issue unsecured senior corporate debt. Augmenting
these sources, PHH will continue to manage outstanding debt with the potential
sale or transfer of managed assets to third parties while retaining fee-related
servicing responsibility.
PHH's aggregate outstanding borrowings at the underlying balance sheet dates
were as follows ($ billions):
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
-------------- ------------- ------------- -------------
Commercial paper $ 3.1 $ 3.5 $ 3.1 $ 2.5
Medium-term notes 1.7 1.2 1.5 2.3
Other 0.4 0.3 0.2 0.2
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 80 percent of the
average amount of outstanding commercial paper. PHH maintains a $2.5 billion
syndicated unsecured credit facility which is backed by domestic and foreign
banks and is comprised of $1.25 billion of lines of credit maturing in 364 days
and $1.25 billion maturing in five years. In addition, PHH has approximately
$300 million of uncommitted lines of credit with various financial
institutions. Management closely evaluates not only the credit of the banks but
the terms of the various agreements to ensure ongoing availability. The full
amount of PHH's committed facilities in 1997 to date are undrawn and available.
Management believes that its current policy provides adequate protection should
volatility in the financial markets limit PHH's access to commercial paper or
medium-term notes funding.
PHH minimizes its exposure to interest rate and liquidity risk by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
domestic and international funding sources, and securing available credit under
committed banking facilities.
The Company and PHH currently operate under policies limiting (a) the
payment of dividends on PHH's capital stock to 40% of net income of PHH on an
annual basis, less the outstanding principal balance of loans from PHH to the
Company as of the date of the proposed dividend payment, and (b) the
outstanding principal balance of loans from PHH to the Company to 40% of net
income of PHH on an annual basis, less payment of dividends on PHH's capital
stock during such year.
CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 VS YEAR ENDED DECEMBER 31, 1995
The Company generated $1.6 billion of cash flows from operations in 1996
representing a $464.3 million increase from 1995. This increase primarily
reflects improved net income net of non-cash charges.
In 1996, cash flows from operating activities of $1.6 billion and $1.8
billion of cash flows from financing activities, principally consisting of net
debt financing of $733 million and $1.2 billion of proceeds from the
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issuance of common stock were used principally to fund $1.7 million of Company
acquisitions and the Company's net investment in assets under management
mortgage programs of $1.3 billion and core service fee based operations.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company generated $1.3 billion of cash flows from operations in 1997
representing a $452.4 million increase from 1996. This increase primarily
reflects improved net income net of non cash charges. In 1997, cash flows from
operating activities of $1.3 billion and net debt borrowings of $1.1 billion,
including the February 1997 issuance of $550 million 3% convertible
subordinated Notes were used principally to fund the Company's net investment
in assets under mangement and mortgage programs of $893.5 million, $748.6
million of Company acquisitions, treasury stock purchases of $171.3 million,
and core service fee based operations.
CAPITAL EXPENDITURES
The Company anticipates investing approximately $200 million during
calendar year 1998 in capital expenditures. Such capital expenditures are
primarily associated with the consolidation of internationally based call
centers and information technology systems to support expected volume increases
in the Company's mortgage services business and improve operational
efficiencies in the delivery of relocation services.
IMPACT OF INFLATION AND SEASONALITY
To date, inflation has not had a material impact on Company operations.
The third quarter represented 29% of annual pro forma net income as a result of
peak leisure travel and real estate sales in summer months. Fourth quarter
respresented 27% of pro forma net income due to holiday season demand for
software products.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company is currently assessing these statements, which are effective for
fiscal years beginning after December 15, 1997 and establish standards for the
reporting and display of comprehensive income and disclosure regarding related
segments.
In March 1997, FASB issued SFAS No. 128, "Earnings per Share" which is
effective for the Company in financial statements issued after December 15,
1997. SFAS No. 128 supersedes APB 15 and replaces the presentations of primary
EPS with a presentation of Basic EPS. It also requires presentation of Basic
and Diluted EPS on the income statement for all entities with complex capital
structures. Assuming SFAS No. 128 was applicable for 1996, the Company would
have reported the following net income (loss) per share amounts:
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BASIC DILUTED
-------- ------------
YEAR ENDED DECEMBER 31,
-----------------------
1996 .56 .52
1995 .45 .42
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 .21 .19
1996 .14 .12
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 (.02) (.02)
1996 .14 .13
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 .19 .18
1996 .27 .25
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 .31 .29
1996 .89 .84
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 .50 .47
1996 .36 .34
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and, among other things, also requires that
previously recognized servicing receivables that exceed contractually specified
servicing fees be reclassified as interest-only strips receivable, and
subsequently measured under the provisions of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." The Company adopted the
provisions of SFAS No. 125 on January 1, 1997 and has reclassified a portion of
its excess servicing fees to interest-only strips. The effect of adopting SFAS
No. 125 was not material to the Company's operations or financial condition.
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forwarding-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forwarding-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forwarding-looking statements. These forwarding-looking statements were based
on various factors and were derived utilizing numerous important assumptions
and other important factors that could cause actual results to differ
materially from those in the forwarding-looking statements. Important
assumptions and other factors that could cause actual results to differ
materially from those in the forwarding-looking statements, include, but are
not limited to: uncertainty as to the Company's future profitability, the
Company's ability to develop and implement operational and financial systems to
manage rapidly growing operations; competition in the Company's existing and
potential future lines of business; the Company's ability to integrate and
operate
140
successfully acquired and merged businesses and the risks associated with such
businesses, including the Company's ability to obtain financing on acceptable
terms to finance the Company's growth strategy and for the Company to operate
within the limitations imposed by financing arrangements; uncertainty as to the
future profitability of acquired businesses, and other factors. Other factors
and assumptions not identified above were also involved in the derivation of
these forwarding-looking statements, and the failure of such other assumptions
to be realized as well as other factors may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forwarding-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forwarding-looking
statements.
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