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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
COMMISSION FILE NO. 1-10308
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CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0918165
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6 SYLVAN WAY 07054
PARSIPPANY, NEW JERSEY (Zip Code)
(Address of principal executive office)
(973) 428-9700
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, Par Value $.01 New York Stock Exchange
5 7/8% Senior Notes due 1998 New York Stock Exchange
FELINE PRIDES(SM) New York Stock Exchange
Income PRIDES(SM) New York Stock Exchange
Growth PRIDES(SM) New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock issued and outstanding and
held by nonaffiliates of the Registrant, based upon the closing price for the
Common Stock on the New York Stock Exchange on September 25, 1998, was
$11,480,920,000. All executive officers and directors of the registrant have
been deemed, solely for the purpose of the foregoing calculation, to be
"affiliates" of the registrant.
The number of shares outstanding of each of the Registrant's classes of
common stock was 851,531,353 shares of Common Stock outstanding as at
September 25, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement which was mailed
to stockholders in connection with the registrant's annual shareholders'
meeting which is scheduled to be held on October 30, 1998 (the "Proxy
Statement") are incorporated by reference into Part III hereof.
DOCUMENT CONSTITUTING PART OF SECTION 10(A) PROSPECTUS
FOR FORM S-8 REGISTRATION STATEMENTS
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act of 1933.
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
- ---- ----------- ----
PART I
1 Business .................................................................... 1
2 Properties .................................................................. 32
3 Legal Proceedings ........................................................... 32
4 Submission of Matters to a Vote of Security Holders ......................... 34
PART II
5 Market for the Registrant's Common Stock and Related Stockholder Matters .... 35
6 Selected Financial Data ..................................................... 36
7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................. 38
7A Quantitative and Qualitative Disclosures About Market Risk .................. 60
8 Financial Statements and Supplementary Data ................................. 61
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................. 61
PART III
10 Directors and Executive Officers of the Registrant .......................... 62
11 Executive Compensation ...................................................... 62
12 Security Ownership of Certain Beneficial Owners and Management .............. 62
13 Certain Relationships and Related Transactions .............................. 62
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ............. 62
Signatures .................................................................. 63
Index to Exhibits ........................................................... 65
i
PART I
ITEM 1. BUSINESS
GENERAL
Cendant Corporation (the "Registrant", which, together with its
subsidiaries is herein called collectively the "Company" or "Cendant") is one
of the foremost consumer and business services companies in the world. The
Company was created through the merger (the "Merger") of CUC International Inc.
("CUC") and HFS Incorporated ("HFS") in December 1997 with the resultant
corporation being renamed Cendant Corporation. The Company provides all the
services formerly provided by each of CUC and HFS, including travel services,
real estate services and membership-based consumer services.
Within three principal operating segments -- real estate services, travel
services and alliance marketing -- Cendant's businesses provide a wide range of
complementary consumer and business services. The travel segment facilitates
vacation timeshare exchanges, manages corporate and government vehicle fleets
and franchises car rental and hotel businesses; the real estate segment assists
in employee relocation, provides home buyers with mortgages and franchises real
estate brokerage businesses; and the alliance marketing segment provides an
array of value driven products and services through more than 20 membership
clubs and client relationships. The Company also offers tax preparation
services, consumer software in various multimedia forms, information technology
services, credit information services and financial products.
In the travel industry, the Company, through certain of its subsidiaries,
franchises hotels primarily in the mid-priced and economy markets. The Company
is the world's largest hotel franchisor, operating the Days Inn (Registered
Trademark) , Ramada (Registered Trademark) (in the United States), Howard
Johnson (Registered Trademark) , Super 8 (Registered Trademark) , Travelodge
(Registered Trademark) (in North America), Villager Lodge (Registered
Trademark) , Knights Inn (Registered Trademark) and Wingate Inn (Registered
Trademark) lodging franchise systems. Additionally, the Company owns the Avis
(Registered Trademark) worldwide vehicle rental franchise system which,
operated by its franchisees, is the second-largest car rental system in the
world (based on total revenues and volume of rental transactions). The Company
currently owns approximately 20% of the capital stock of the world's largest
Avis franchisee, Avis Rent A Car, Inc. ("ARAC"). The Company also owns Resort
Condominiums International, LLC ("RCI"), the world's leading timeshare exchange
organization, and PHH Vehicle Management Services Corporation which operates
the second largest provider in North America of comprehensive vehicle
management services, and is the market leader in the United Kingdom for fuel
and fleet management services. Through the acquisition of National Parking
Corporation Limited in April 1998, the Company is the largest private
(non-municipality owned) single car park operator in the United Kingdom and a
leader in vehicle emergency support and rescue services for approximately 3.5
million members in the United Kingdom. The Company also operates the world's
leading value-added tax refund service for travelers.
In the residential real estate industry, the Company, through certain of
its subsidiaries, franchises real estate brokerage offices under the CENTURY 21
(Registered Trademark) , COLDWELL BANKER (Registered Trademark) and ERA
(Registered Trademark) real estate brokerage franchise systems and is the
world's largest real estate brokerage franchisor. Additionally, the Company,
through Cendant Mobility Services Corporation, is the largest provider of
corporate relocation services in the United States, offering relocation clients
a variety of services in connection with the transfer of a client's employees.
Through Cendant Mortgage Corporation ("Cendant Mortgage"), the Company
originates, sells and services residential mortgage loans in the United States,
marketing such services to consumers through relationships with corporations,
affinity groups, financial institutions, real estate brokerage firms and
mortgage banks.
The Company's alliance marketing segment is divided into three divisions:
individual membership; insurance/wholesale; and lifestyle. The individual
membership division, with more than 33 million memberships, provides customers
with access to a variety of products and services in such areas as retail
shopping, travel, auto, dining and home improvement. The insurance/wholesale
division, with nearly 31 million customers, markets and administers insurance
products, primarily accidental death insurance, and also provides products and
services such as checking account enhancement packages, financial
1
products and discount programs to customers of various financial institutions.
The lifestyle division, with over 11 million customers, provides customers with
unique products and services that are designed to enhance a customer's
purchasing power. The Company's alliance marketing activities are conducted
principally through Cendant Membership Services, Inc. and certain of the
Company's other wholly-owned subsidiaries, including FISI*Madison Financial
Corporation ("FISI"), Benefit Consultants, Inc. ("BCI"), and Entertainment
Publications, Inc. ("EPub").
Through the acquisition of Jackson Hewitt, Inc. ("Jackson Hewitt") on
January 7, 1998, the Company operates the second largest tax preparation
service system in the United States with locations in 43 states. The Company
franchises a system of approximately 2,000 offices that specialize in
computerized preparation of federal and state individual income tax returns.
The Company also offers consumer software in various multimedia forms,
predominately on CD-ROM for personal computers. The Company's Cendant Software
unit is one of the largest personal computer consumer software groups in the
world, and a leader in entertainment, educational and personal productivity
software. It includes Sierra On-Line, Inc., Blizzard Entertainment and
Knowledge Adventure, Inc., and offers such titles as Diablo, Starcraft, You
Don't Know Jack, King's Quest, JumpStart, Math Blaster, Reading Blaster and
many others. See "DISCONTINUED OPERATIONS."
As a franchisor of hotels, residential real estate brokerage offices, car
rental operations and tax preparation services, the Company licenses the owners
and operators of independent businesses to use the Company's brand names. The
Company does not own or operate hotels, real estate brokerage offices, car
rental operations or tax preparation offices (except for certain company-owned
Jackson Hewitt offices which the Company intends to sell). Instead, the Company
provides its franchisee customers with services designed to increase their
revenue and profitability.
RECENT DEVELOPMENTS
American Bankers Acquisition. On March 23, 1998, the Company announced
that it had entered into a definitive agreement (the "ABI Merger Agreement") to
acquire American Bankers Insurance Group Inc. ("American Bankers") for $67 per
share in cash and stock, for an aggregate consideration of approximately $3.1
billion. The Company has agreed to purchase 23.5 million shares of American
Bankers at $67 per share through its pending cash tender offer, to be followed
by a merger in which the Company has agreed to deliver Cendant shares with a
value of $67 for each remaining share of American Bankers common stock
outstanding. The Company has already received anti-trust clearance to acquire
American Bankers. The tender offer is subject to the receipt of tenders
representing at least 51 percent of the common shares of American Bankers as
well as customary closing conditions, including regulatory approvals. From time
to time representatives of the Company and representatives of American Bankers
have discussed possible modifications to the terms of the ABI Merger Agreement,
including a change in the mix of consideration to increase the cash component
and decrease the stock component and changing the transaction to a taxable
transaction. No agreement regarding any such modifications has been reached and
there can be no assurance that such discussions will result in any agreement
being reached. If no agreement regarding the terms of any modification to the
terms of the ABI Merger Agreement is reached, the current ABI Merger Agreement
will remain in effect in accordance with its terms. The transaction is expected
to be completed in the fourth quarter of 1998 or the first quarter of 1999.
American Bankers concentrates on marketing affordable, specialty insurance
products and services through financial institutions, retailers and other
entities offering consumer financing as a regular part of their business.
American Bankers, through its subsidiaries, operates in the United States,
Canada, Latin America, the Caribbean and the United Kingdom.
In connection with the Company's proposal to acquire American Bankers, the
Company entered into a commitment letter, dated June 30, 1998, with The Chase
Manhattan Bank and Chase Securities Inc. to provide a $650 million 364-day
revolving credit facility (the "New Facility") which will mature 364 days after
the execution of the definitive documentation relating thereto. The New
Facility will bear interest, at the option of the Company, at rates based on
competitive bids of lenders participating in such facilities at a prime rate or
at LIBOR plus an applicable variable margin based on the Company's senior
unsecured long-term debt rating.
2
Providian Acquisition. On December 10, 1997, the Company announced that it
had entered into a definitive agreement to acquire Providian Auto and Home
Insurance Company ("Providian") and its subsidiaries from an Aegon N.V.
subsidiary for approximately $219 million in cash. Providian sells automobile
insurance to consumers through direct response marketing in 45 states and the
District of Columbia. The closing of this transaction is subject to customary
conditions, including regulatory approval and no assurances can be made that
the acquisition will be completed. Prior to the acquisition the name of
Providian will be changed to Cendant Auto Insurance Company ("Cendant Auto").
The Company intends to expand Cendant Auto's marketing channels to the
Company's existing distribution channels, while also providing the Company's
existing customer base with a new product offering.
National Parking Corporation. On April 27, 1998, the Company completed the
acquisition of National Parking Corporation ("NPC") for $1.6 billion in cash,
which included the repayment of approximately $227 million of outstanding NPC
debt. NPC is the largest private (non-municipality owned) single car park
operator in the United Kingdom, with a portfolio of approximately 500 owned and
managed car parks in over 100 towns and city centers and major airport
locations. NPC, through its acquisitions of National Breakdown Limited and UK
Insurance Limited in 1984, has also developed a broad-based assistance group,
under the brand name of Green Flag. Green Flag offers a wide range of emergency
support and rescue services to approximately 3.5 million members.
RAC Motoring Services Acquisition. On May 21, 1998, the Company announced
that it has reached definitive agreements with the Board of Directors of Royal
Automobile Club ("RAC") to purchase RAC Motoring Services ("RACMS") for total
consideration of \P450 million, or approximately $735 million in cash. As part
of the purchase price, the Company has agreed to make a charitable endowment of
\P13 million to the RAC Foundation to promote awareness and understanding of
the environmental issues related to mobility and the use of motor vehicles, and
to help promote, research and investigate solutions.
On June 19, 1998, members of the RAC approved the first stage of the
two-step process to implement the sale of RACMS to the Company. On July 8,
1998, the U.K. Court approved the reorganization within the RAC group
companies. The final stage of the process involves the sale of RACMS to the
Company. On August 12, 1998, the shareholders of RACMS approved the sale of
RACMS to the Company. On September 24, 1998, the U.K. Secretary of State for
Trade and Industry referred the RACMS acquisition to the U.K. Monopolies and
Mergers Commission (the "MMC'). The closing of this transaction is subject to
certain conditions, including MMC approval. Although no assurances can be made,
the Company currently anticipates that the transaction will be completed in the
spring of 1999.
RACMS operates in three principal segments -- The RAC, the U.K.'s second
largest roadside assistance company with over 6 million associate members,
including 2.7 million under fleet programs and car manufacturers warranty
programs and 2.9 million direct individual members, and London Wall Insurance,
a provider of auto warranty products. RACMS also owns the British School of
Motoring (BSM), the U.K.'s largest driving school company. Sales for 1997,
adjusted for the acquisition of BSM, were approximately $500 million.
Sale of Hebdo Mag and Plan to Sell Software Business. On August 12, 1998,
the Company announced that it agreed to sell 100% of its Hebdo Mag
International, Inc. ("Hebdo Mag") subsidiary to a company organized by Hebdo
Mag management for approximately 7 million shares of Company common stock and
$410 million in cash. The sale of Hebdo Mag is conditioned upon, among other
things, the receipt of certain governmental approvals and financing. The
transaction is expected to be completed in the fourth quarter of 1998.
The Company also announced that it has engaged Credit Suisse First Boston
to analyze strategic alternatives in regard to the potential 100% initial
public offering or a third party sale of its entire consumer software business
unit.
Interval Divestiture. On December 17, 1997, in connection with the Merger,
the Company completed the divestiture of its timeshare exchange subsidiary,
Interval International Inc., as contemplated by a consent decree with the
Federal Trade Commission.
MATTERS RELATING TO THE ACCOUNTING IRREGULARITIES AND ACCOUNTING POLICY CHANGE
Accounting Irregularities. On April 15, 1998, the Company announced that
in the course of transferring responsibility for the Company's accounting
functions from the former CUC personnel to HFS accounting personnel and
preparing for the reporting of first quarter 1998 financial results, it had
3
discovered accounting irregularities in certain CUC business units. As a
result, upon discovering such accounting irregularities in certain former CUC
business units, the Company together with its counsel and assisted by auditors,
immediately began an intensive investigation (the "Company Investigation"). In
addition, the Audit Committee of the Board of Directors engaged Willkie Farr &
Gallagher ("Willkie Farr") as special legal counsel and Willkie Farr engaged
Arthur Andersen LLP to perform an independent investigation into these
accounting irregularities (the "Audit Committee Investigation," together with
the Company Investigation, the "Investigations"). On July 14, 1998, the Company
announced that the accounting irregularities were greater than those initially
discovered in April and that the irregularities affected the accounting records
of the majority of the CUC business units. On August 13, 1998, the Company
announced that the Company Investigation was complete. On August 27, 1998, the
Company announced that the Audit Committee of the Board of Directors had
submitted its report (the "Report") to the Board of Directors on the Audit
Committee Investigation into the accounting irregularities and its conclusions
regarding responsibility for those actions. A copy of the Report has been filed
as an exhibit to the Company's Current Report on Form 8-K dated August 28,
1998. As a result of the findings of the Investigations, the Company has
restated its previously reported financial results for 1997, 1996 and 1995. The
restated financial statements also include the cumulative effect of a change in
accounting, effective January 1, 1997, related to revenue and expense
recognition for memberships (see Note 3 to the consolidated financial
statements).
The restated net income (loss) totalled $(217.2) million, $330.0 million
and $229.8 million in 1997, 1996 and 1995, respectively ($(0.27), $0.41 and
$0.31 per diluted share, respectively). The Company originally reported
corresponding net income of $55.4 million, $423.6 million and $302.8 million in
1997, 1996 and 1995, respectively ($0.06, $0.52 and $0.42 per diluted share,
respectively).
The Company originally reported $872.2 million of 1997 net income excluding
merger-related costs and other unusual charges ("Unusual Charges") or $1.00 per
diluted share which included $816.2 million or $.94 per diluted share from
continuing operations. The restated income from continuing operations excluding
Unusual Charges, extraordinary gain and the cumulative effect of a change in
accounting totalled $571.0 million or $.66 per diluted share. The $245.2
million or $.28 per diluted share decrease in income from continuing operations
represents additional after tax expense of $15.3 million ($.02 per diluted
share) due to the aforementioned change in accounting and $229.9 million
($.26 per diluted share) of accounting errors and irregularities.
The Company originally reported $542.3 million and $364.9 million of 1996
and 1995 net income excluding Unusual Charges, respectively ($0.67 and $0.50
per diluted share, respectively). The restated income from continuing
operations excluding Unusual Charges totalled $383.3 million and $269.2 million
in 1996 and 1995, respectively ($0.47 and $0.36 per diluted share,
respectively). The $159.0 million and $95.7 million decreases in 1996 and 1995,
respectively, primarily represent accounting errors and irregularities in both
periods.
Class Action Litigation and Government Investigation. As a result of the
aforementioned accounting irregularities, numerous purported class action
lawsuits, two purported derivative lawsuits and an individual lawsuit have been
filed against the Company, and among others, its predecessor, HFS, and certain
current and former officers and directors of the Company and HFS, asserting
various claims under the federal securities laws and certain state statutory
and common laws. SEE "ITEM 3. LEGAL PROCEEDINGS".
In addition, the staff of the Securities and Exchange Commission (the
"SEC") and the United States Attorney for the District of New Jersey are
conducting investigations (the "Government Investigations") relating to the
accounting irregularities. The SEC staff has advised the Company that its
inquiry should not be construed as an indication by the SEC or its staff that
any violations of law have occurred. While management has made all adjustments
considered necessary as a result of the findings of the Investigations and the
restatement of the Company's financial statements for 1997, 1996 and 1995,
there can be no assurances that additional adjustments will not be required as
a result of the Government Investigations.
Management and Corporate Governance Changes. On July 28, 1998, Walter A.
Forbes resigned as Chairman of the Company and as a member of the Board of
Directors. Henry R. Silverman, Chief Executive Officer of the Company, was
unanimously elected by the Board of Directors to be Chairman and will continue
to serve as Chief Executive Officer and President of the Company. Ten members
of the Board formerly associated with CUC also resigned, leaving the Company
with 18 directors.
4
On July 28, 1998, the Board also approved the adoption of Amended and
Restated By-Laws of the Company and voted to eliminate the governance plan
adopted as part of the Merger, resulting in the elimination of the 80%
super-majority vote requirement provisions of the Company's By-Laws relating to
the composition of the Board and the limitations on the removal of the Chairman
and the Chief Executive Officer.
* * *
The Company continually explores and conducts discussions with regard to
acquisitions and other strategic corporate transactions in its industries and
in other franchise, franchisable or service businesses. As part of this regular
on-going evaluation of acquisition opportunities, the Company currently is
engaged in a number of separate, unrelated preliminary discussions concerning
possible acquisitions. The purchase price for the possible acquisitions may be
paid in cash, through the issuance of common stock (which would increase the
number of shares of common stock outstanding) or other securities of the
Company, borrowings, or a combination thereof. Prior to consummating any such
possible acquisitions, the Company, among other things, will need to initiate
and complete satisfactorily its due diligence investigations; negotiate the
financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and secure financing. No assurance can be
given with respect to the timing, likelihood or business effect of any possible
transaction. In the past, the Company has been involved in both relatively
small acquisitions and acquisitions which have been significant.
Financial information about the Company's industry segments may be found
in Note 24 to the Company's consolidated financial statements presented in Item
8 of this Annual Report on Form 10-K/A and incorporated herein by reference.
Except where expressly noted, information herein does not include information
on or with respect to American Bankers, NPC, RACMS, Providian or their
respective businesses.
Certain statements in this Annual Report on Form 10-K/A constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-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 forward-looking statements. These forward-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 forward-looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements, include, but are not limited to: the
outcome of the pending litigation relating to the previously announced
accounting irregularities; 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 successfully acquired businesses and the risks
associated with such businesses, including the Merger and the NPC acquisition
and the proposed American Bankers, RACMS and Providian acquisitions; 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; the ability of the Company and its vendors to complete
the necessary actions to achieve a year 2000 conversion for its computer
systems and applications; and other factors. Other factors and assumptions not
identified above were also involved in the derivation of these forward-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 forward-looking
statements to reflect actual results, changes in assumptions or changes in
other factors affecting such forward-looking statements.
The Company's principal executive offices are located at 6 Sylvan Way,
Parsippany, New Jersey 07054 (telephone number: (973) 428-9700).
5
TRAVEL SERVICES
THE LODGING FRANCHISE BUSINESS
GENERAL. The lodging industry can be divided into three broad segments
based on price and services: luxury or upscale, which typically charge room
rates above $82 per night; middle market, with room rates generally between $55
and $81 per night; and economy, where rates generally are less than $54 per
night. Of the brand names franchised by the Company, Ramada, Howard Johnson and
Wingate Inn compete principally in the middle market segment and Days Inn,
Knights Inn, Super 8, Travelodge and Villager Lodge ("Villager") compete
primarily in the economy segment, which is currently the fastest growing
segment of the industry.
As franchisor of lodging facilities, the Company provides a number of
services designed to directly or indirectly increase hotel occupancy rates,
revenues and profitability, the most important of which is a centralized
brand-specific national reservations system. Similarly, brand awareness derived
from nationally recognized brand names, supported by national advertising and
marketing campaigns, can increase the desirability of a hotel property to
prospective guests. The Company believes that, in general, national franchise
brands with a greater number of hotels enjoy greater brand awareness among
potential hotel guests, and thus are perceived as more valuable by existing and
prospective franchisees than brands with a lesser number of properties.
Franchise brands can also increase franchisee property occupancy through
national direct sales programs to businesses, associations and affinity groups.
In determining whether to affiliate with a national franchise brand, hotel
operators compare the costs of affiliation (including the capital expenditures
and operating costs required to meet a brand's quality and operating standards,
plus the ongoing payment of franchise royalties and assessments for the
reservations system and marketing programs) with the increase in gross room
revenue anticipated to be derived from brand membership. Other benefits to
brand affiliation include group purchasing services, training programs, design
and construction advice, and other franchisee support services, all of which
provide the benefits of a national lodging services organization to operators
of independently-owned hotels. The Company believes that, in general, franchise
affiliations are viewed as enhancing the value of a hotel property by providing
economic benefits to the property.
The Company entered the lodging franchise business in July 1990 with the
acquisition of the Howard Johnson franchise system and the rights to operate
the U.S. Ramada franchise system. The Company acquired the Days Inn franchise
system in 1992, the Super 8 franchise system and substantially all of the
assets of the Park Inn International (Registered Trademark) franchise system
in the U.S. and Canada in 1993 (which the Company sold in 1996), the Villager
Lodge franchise system in 1994, the Knights Inn franchise system in August 1995
and the Travelodge franchise system in January 1996. Each of these acquisitions
has increased the Company's earnings per share. The Company continues to seek
opportunities to acquire or license additional hotel franchise systems,
including established brands in the upper end of the market, where the Company
is not currently represented. See "Lodging Franchise Growth" below.
The fee and cost structure of the Company's business provides significant
opportunities for the Company to increase earnings by increasing the number of
franchised properties. Hotel franchisors, such as the Company, derive
substantially all of their revenue from annual franchise fees. Annual franchise
fees are comprised of two components, a royalty portion and a marketing and
reservations portion, both of which are normally charged by the franchisor as a
percentage of the franchisee's gross room sales. The royalty portion of the
franchise fee is intended to cover the operating expenses of the franchisor,
such as expenses incurred in quality assurance, administrative support and
other franchise services and to provide the franchisor with operating profits.
The marketing/reservations portion of the franchise fee is intended to
reimburse the franchisor for the expenses associated with providing such
franchise services as a national reservations system, national media
advertising and certain training programs.
The Company's franchisees are dispersed geographically which minimizes the
exposure to any one hotel owner or geographic region. Of the more than 5,500
properties and 3,700 franchisees in the Company's systems, no individual hotel
owner accounts for more than 2% of the Company's lodging revenue.
6
LODGING FRANCHISE GROWTH. Growth of the franchise systems through the sale
of long-term franchise contracts to operators of existing and newly constructed
hotels is the leading source of revenue and earnings growth in the Company's
lodging franchise business. Franchises are terminated primarily for not paying
the required franchise fees and/or not maintaining compliance with brand
quality assurance standards required pursuant to the applicable franchise
agreement.
LODGING FRANCHISE SALES. The Company markets franchises principally to
independent hotel and motel owners, as well as to owners whose properties are
affiliated with other hotel brands. The Company believes that its existing
franchisees also represent a significant potential market because many own, or
may own in the future, other hotels which can be converted to the Company's
brand names. Accordingly, a significant factor in the Company's sales strategy
is maintaining the satisfaction of its existing franchisees by providing
quality services.
The Company employs a national franchise sales force consisting of
approximately 80 salespeople and sales management personnel, which is divided
into several brand-specific sales groups, with regional offices around the
country. The sales force is compensated primarily through commissions. In order
to provide broad marketing of the Company's brands, sales referrals are made
among the sales groups and a referring salesperson is entitled to a commission
for referrals which result in a franchise sale.
The Company seeks to expand its franchise systems and provide marketing
and other franchise services to franchisees on an international basis through a
series of master license agreements with internationally based developers and
franchisors. As of December 31, 1997, the Company's franchising subsidiaries
(other than Ramada) have entered into international master licensing agreements
for part or all of 46 countries on six continents. The agreements typically
include minimum development requirements and require an initial development fee
upon execution of the license agreement as well as recurring franchise fees.
PRINCIPAL LODGING FRANCHISE SYSTEMS. The following is a summary
description of the Company's principal lodging franchise systems. Information
reflects properties which are open and operating and is presented as of
December 31, 1997.
PRIMARY MARKET AVG. ROOMS DOMESTIC
BRAND SERVED PER PROPERTY # OF PROPERTIES # OF ROOMS INTERNATIONAL*
- ---------------- ---------------- -------------- ----------------- ------------ -----------------
Days Inn Lower Economy 91 1,761 159,400 International(1)
Howard Johnson Mid-market 108 483 51,944 International(2)
Knights Inn Lower Economy 83 190 15,771 International(3)
Ramada Mid-market 135 885 119,132 Domestic
Super 8 Economy 61 1,630 100,166 International(3)
Travelodge Upper Economy 81 479 39,030 Domestic(1)(5)
Villager Lodge Lower Economy 77 82 6,339 International(4)
Wingate Mid-market 94 19 1,790 International(4)
- ----------
* Description of rights owned or licensed.
(1) Includes properties in Mexico, Canada, Israel, China, South Africa and
India.
(2) Includes Mexico, Canada, Columbia, Israel, Japan, Venezeula and Malta.
(3) Includes properties in Canada.
(4) No international properties currently open and operating.
(5) Rights include all of North America.
OPERATIONS -- LODGING. The Company's organization is designed to provide a
high level of service to its franchisees while maintaining a controlled level
of overhead expense. In the lodging segment, expenses related to marketing and
reservations services are budgeted to match marketing and reservation fees each
year.
National Reservations Systems. Unlike many other franchise businesses
(such as restaurants), the lodging business is characterized by remote
purchasing through travel agencies and through use by
7
consumers of toll-free telephone numbers. Each of the Company's reservations
systems is independently operated, focusing on its specific brand and franchise
system, and is comprised of one or more nationally advertised toll-free
telephone numbers, reservation agents who accept inbound calls, a computer
operation that processes reservations, and automated links which accept
reservations from travel agents and other travel providers, such as airlines,
and which report reservations made through the system to each franchisee
property. Each reservation agent handles reservation requests and inquiries for
only one of the Company's franchise systems and there is no "cross selling" of
franchise systems. The Company maintains seven reservations centers that are
located in Knoxville and Elizabethton, Tennessee; Phoenix, Arizona; Winner and
Aberdeen, South Dakota; Orangeburg, South Carolina and Saint John, New
Brunswick, Canada. Generally, reservation agents for each of the franchise
systems are located in at least two of the Company's seven facilities, thereby
ensuring continuous service in the event of a power failure or telephone line
interruption occurring at any one of the locations.
Brand Name Marketing Programs. The Company's brand name marketing programs
seek to increase the traveling public's awareness of the Company's franchise
systems and thereby to increase franchisee property occupancy rates and
revenues. To achieve this objective, each of the franchise systems' programs is
managed by its own staff, who develop the marketing strategy for the system and
report to the brand president. A central corporate marketing services
department implements the strategy.
The marketing services department publishes hotel directories for each
franchise system, conducts market research and produces artwork for national
and regional advertising programs. In addition, the marketing services
department works with the independent advertising agencies that have been
retained for each franchise system. These advertising agencies produce
television, radio and print advertising and assist in placing advertisements in
the media.
Quality Assurance. The Company believes that franchisees have a high level
of interest in the degree to which the quality of fellow franchise operators is
monitored, both upon admission to the system and on an ongoing basis. Franchise
quality control occurs through inspections at the time of application, upon
entry into the system and on an ongoing basis through quality assurance
programs. Quality assurance programs promote uniformity within the franchise
system, an important marketing factor with respect to increasing consumer
demand for lodging facilities. These programs consist of generally unannounced
inspections of properties (two to four times a year) by inspectors who are
rotated through franchise system properties to promote consistent grading
standards. Properties proposed to be converted to one of the Company's
franchise systems are inspected by the Company's most experienced inspectors,
who are dedicated specifically to this function and who prepare specific
renovation schedules to which the potential franchisees are required to adhere.
These specialists report to the Senior Vice President of Operations -- Hotel
Division rather than to the sales personnel proposing the property. As of
December 31, 1997, the Company employed 82 persons in the quality assurance
department.
Various brand-specific quality assurance initiatives are designed to
encourage compliance. The Company has instituted certain financial incentive
programs to encourage franchisees to improve their properties. Approximately
13% of the franchisee properties are in quality assurance default at any time,
with many defaults due to operating standards issues (e.g., failure to attend
training programs, outdated signage, logo violations, etc.). In general,
franchisees are given 30 days to correct the conditions that led to default or
implement a plan to correct the default. If the default is not cured in a
timely fashion, the Company has the right to terminate the defaulting
franchisee's franchise agreement and realize a termination fee.
Training. Each of the Company's franchise systems has a training
department which conducts both mandatory and optional training programs. These
departments are staffed by experienced Company employees who conduct regularly
scheduled regional educational seminars for both non-management and property
level management personnel. Training programs are designed to teach franchisees
how to utilize best the Company's reservations system and marketing programs,
as well as the fundamentals of hotel operations such as recruiting,
housekeeping and yield management. The Company also provides special
8
on-site training upon request. The Company has developed and maintains a
library of training videos, cassettes and tapes, as well as printed training
material, which are available to franchisees. The Company also employs Property
Opening Specialists who help the property staff become acclimated when their
property enters a franchise system.
Purchasing. Through its Cendant Supplier Services operation, the Company
provides its franchisees with volume purchasing discounts for products,
services, furnishings and equipment used in lodging operations. In addition to
the preferred alliance programs described hereinafter, Cendant Supplier
Services establishes relationships with lodging industry vendors and negotiates
discounts for purchases by its customers. The Company does not maintain
inventory, directly supply any of the products or, generally, extend credit to
franchisees for purchases. See "COMBINED OPERATIONS -- Preferred Alliance and
Co-Marketing Arrangements" below.
Franchise Services. In all of its operations, the Company emphasizes
service to its franchisees. This emphasis is exemplified by the franchise
services department which is comprised of 48 persons with extensive experience
in the lodging industry, who are available to respond to inquiries by
franchisees. Each franchisee is assigned a franchise service manager who is
available via a toll-free telephone number. After each communication with a
franchisee, the franchise service manager prepares a contact report which is
circulated within the Company to the departments responsible for responding to
the inquiry.
LODGING FRANCHISE AGREEMENTS. The Company's lodging franchise agreements
grant the right to utilize one of the brand names associated with the Company's
lodging franchise systems to lodging facility owners or operators under
long-term franchise agreements. An annual average of 2.7% of the Company's
existing franchise agreements are scheduled to expire from January 1, 1998
through December 31, 2006, with no more than 3.6% (in 2002) scheduled to expire
in any one of those years.
The current standard agreements generally are for 15-year terms for
converted properties and 20-year terms for newly constructed properties and
generally require, among other obligations, franchisees to pay a minimum
initial fee of between $15,000 and $35,000 based on property size and type, as
well as annual franchise fees comprised of royalty fees and
marketing/reservation fees based on gross room revenues.
Under the terms of the standard franchise agreements in effect at December
31, 1997, franchisees are typically required to pay recurring fees comprised of
a royalty portion and a reservation/marketing portion, calculated as a
percentage of annual gross room revenue that range from 7.0% to 8.8%. The
Company discounts fees from the standard rates from time to time and under
certain circumstances.
The Company's typical franchise agreement is terminable by the Company
upon the franchisee's failure to maintain certain quality standards or to pay
franchise fees or other charges. In the event of such termination, the Company
is typically entitled to be compensated for lost revenues in an amount equal to
the franchise fees accrued during periods specified in the respective franchise
agreements which are generally between one and five years.
LODGING SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY. The service marks
"Days Inn," "Ramada," "Howard Johnson," "Super 8," "Travelodge" and related
logos are material to the Company's business. The Company, through its
franchisees, actively uses these marks. All of the material marks in each
franchise system are registered (or have applications pending for registration)
with the United States Patent and Trademark Office. The marks relating to the
Days Inn system, the Howard Johnson system, the Knights Inn system, the Super 8
system, the Travelodge system (in North America), the Villager Lodge system and
the Wingate Inn system are owned by the Company through its subsidiaries.
The Company franchises the service mark "Ramada" and related marks, Ramada
brands and logos (the "Ramada Marks") to lodging facility owners in the United
States pursuant to two license agreements (the "Ramada License Agreements")
between an indirect subsidiary of Marriott Corporation ("Licensor") and Ramada
Franchise Systems, Inc. ("RFS"), a wholly-owned subsidiary of the Company. The
Ramada License Agreements limit RFS's use of the Ramada Marks to the U.S.
market.
The Ramada License Agreements have initial terms terminating on March 31,
2024. At the end of the initial terms, RFS has the right either (i) to extend
the Ramada License Agreements, (ii) to purchase
9
the Ramada Marks for their fair market value at the date of purchase, subject
to certain minimums after the initial terms, or (iii) to terminate the Ramada
License Agreements. The Ramada License Agreements require that RFS pay license
fees to the Licensor calculated on the basis of percentages of annual gross
room sales, subject to certain minimums and maximums as specified in each
Ramada License Agreement. RFS received approximately $44 million in royalties
from its Ramada franchisees in 1997 and paid the Licensor approximately $22
million in license fees.
The Ramada License Agreements are subject to certain termination events
relating to, among other things, (i) the failure to maintain aggregate annual
gross room sales minimum amounts stated in the Ramada License Agreements, (ii)
the maintenance by the Company of a minimum net worth of $50 million (however,
this minimum net worth requirement may be satisfied by a guaranty of an
affiliate of the Company with a net worth of at least $50 million or by an
irrevocable letter of credit (or similar form of third-party credit support)),
(iii) non-payment of royalties, (iv) failure to maintain registrations on the
Ramada Marks and to take reasonable actions to stop infringements, (v) failure
to pay certain liabilities specified by the Restructuring Agreement, dated July
15, 1991, by and among New World Development Co., Ltd. (a predecessor to
Licensor), Ramada International Hotels and Resorts, Inc., Ramada Inc.,
Franchise System Holdings, Inc., the Company and RFS and (vi) failure to
maintain appropriate hotel standards of service and quality. A termination of
the Ramada License Agreements would result in the loss of the income stream
from franchising the Ramada brand names and could result in the payment by the
Company of liquidated damages equal to three years of license fees. The Company
does not believe that it will have difficulty complying with all of the
material terms of the Ramada License Agreements.
LODGING COMPETITION. Competition among the national lodging brand
franchisors to grow their franchise systems is intense. The Company's primary
national lodging brand competitors are the Holiday Inn (Registered Trademark)
and Best Western (Registered Trademark) brands and Choice Hotels, which
franchises seven brands, including the Comfort Inn (Registered Trademark) ,
Quality Inn (Registered Trademark) and Econo Lodge (Registered Trademark)
brands. Days Inn, Travelodge and Super 8 properties principally compete with
Comfort Inn, Hampton Inn (Registered Trademark) and Econo Lodge in the limited
service economy sector of the market. The chief competitor of Ramada, Howard
Johnson and Wingate Inn properties, which compete in the middle market segment
of the hotel industry, is Holiday Inn. The Company's Knights Inn and Travelodge
brands compete with Motel 6 (Registered Trademark) properties. In addition, a
lodging facility owner may choose not to affiliate with a franchisor but to
remain independent.
The Company believes that competition for the sale of franchises in the
lodging industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. The Company believes that prospective franchisees value a franchise
based upon their view of the relationship of conversion costs and future
charges to the potential for increased revenue and profitability. The
reputation of the franchisor among existing franchisees is also a factor which
may lead a property owner to select a particular affiliation. The Company also
believes that the perceived value of its brand names to prospective franchisees
is, to some extent, a function of the success of its existing franchisees.
The ability of the Company's lodging franchisees to compete in the lodging
industry is important to the Company's prospects for growth, although, because
franchise fees are based on franchisee gross room revenue, the Company's
revenue is not directly dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in the
vicinity, its affiliation with a recognized brand name, community reputation
and other factors. A franchisee's success may also be affected by general,
regional and local economic conditions. The effect of these conditions on the
Company's results of operations is substantially reduced by virtue of the
diverse geographical locations of the Company's franchises. At December 31,
1997, the Company had franchised lodging properties in North America (including
all 50 states of the United States), Europe, Asia, Africa and South America.
LODGING SEASONALITY. The principal source of lodging revenue for the
Company is based upon the annual gross room revenue of franchised properties.
As a result, the Company's revenue from the lodging franchise business
experiences seasonal lodging revenue patterns similar to those of the hotel
industry
10
wherein the summer months, because of increases in leisure travel, produce
higher revenues than other periods during the year. Therefore, any occurrence
that disrupts travel patterns during the summer period could have a material
adverse effort on the franchisee's annual performance and effect the Company's
annual performance.
THE TIMESHARE EXCHANGE BUSINESS
GENERAL. The Company acquired Resort Condominiums International, Inc. (now
Resort Condominiums International, LLC), on November 12, 1996. RCI is the
world's largest provider of timeshare vacation exchange opportunities and
timeshare services for nearly 2.4 million timeshare households from more than
200 nations and more than 3,200 resorts in 90 countries around the world. RCI's
business consists primarily of the operation of an exchange program for owners
of condominium timeshares or whole units at affiliated resorts, the publication
of magazines and other periodicals related to the vacation and timeshare
industry, travel related services, resort management, integrated software
systems and service and consulting services. RCI has significant operations in
North America, Europe, the Middle East, Latin America, Africa, Australia, and
the Pacific Rim. RCI has more than 3,500 employees worldwide.
The resort component of the leisure industry is primarily serviced by two
alternatives for overnight accommodations: commercial lodging establishments
and timeshare resorts. Commercial lodging consists principally of: a) hotels
and motels in which a room is rented on a nightly, weekly or monthly basis for
the duration of the visit and b) rentals of privately-owned condominium units
or homes. Oftentimes, this segment is designed to serve both the leisure and
business traveler. Timeshare resorts present an economical and reliable
alternative to commercial lodging for many vacationers who want to experience
the added benefits associated with ownership. Timeshare resorts are purposely
designed and operated for the needs and enjoyment of the leisure traveler.
Resort timesharing -- also referred to as vacation ownership -- is the
shared ownership and/or periodic use of property by a number of users or owners
for a defined period of years or in perpetuity. An example of a simple form of
timeshare is a condominium unit that is owned by fifty-one persons, with each
person having the right to use the unit for one week of every year and with one
week set aside for maintenance. In the United States, industry sources estimate
that the average price of such a timeshare is about $10,000, plus a yearly
maintenance fee of approximately $350 per interval owned. Based upon
information published about the industry, the Company believes that 1997 sales
of timeshares exceeded $6 billion worldwide. Two principal segments make up the
timeshare exchange industry: owners of timeshare interests (consumers) and
resort properties (developers/operators). Industry sources have estimated that
the total number of owner households of timeshare interests is nearly 4 million
worldwide, while the total number of timeshare resorts worldwide has been
estimated to be more than 4,500. The timeshare exchange industry derives
revenue from annual membership fees paid by owners of timeshare interests, fees
paid by such owners for each exchange and fees paid by members and resort
affiliates for various other products and services.
The "RCI Network" provides RCI members who own timeshares at
RCI-affiliated resorts the capability to exchange their timeshare vacation
accommodations in any given year for comparable value accommodations at other
RCI-affiliated resorts. Approximately 1.2 million members of the RCI Network,
representing approximately 50% of the total members of the RCI Network reside
outside of the United States. RCI's membership volume has grown at a compound
annual rate for the last five years of approximately 8%, while exchange volumes
have grown at a compound annual rate of approximately 10% for the same time
period.
RCI provides members of the RCI Network with access to both domestic and
international timeshare resorts, publications regarding timeshare exchange
opportunities and other travel-related services, including discounted
purchasing programs. In 1997, members in the United States paid an average
annual membership fee of $65 as well as an average exchange fee of $107 for
every exchange arranged by RCI. In 1997, membership and exchange fees totaled
approximately $300 million and RCI arranged more than 1.8 million exchanges.
11
Developers of resorts affiliated with the RCI Network typically pay the
first year membership fee for new members upon the sale of the timeshare
interest. In the United States, nearly 60% of such owners renew their
memberships in their second year and nearly 80% of these owners renew each year
thereafter.
TIMESHARE EXCHANGE BUSINESS GROWTH. The timeshare exchange industry has
experienced significant growth over the past decade. The Company believes that
the factors driving this growth include the demographic trend toward older,
more affluent Americans who travel more frequently; the entrance of major
hospitality and entertainment companies into timeshare development; a worldwide
acceptance of the timeshare concept; and an increasing focus on leisure
activities, family travel and a desire for value, variety and flexibility in a
vacation experience. The Company believes that future growth of the timeshare
exchange industry will be determined by general economic conditions both in the
U.S. and worldwide, the public image of the industry, improved approaches to
marketing and sales, a greater variety of products and price points, the
broadening of the timeshare market and a variety of other factors. Accordingly,
the Company cannot predict if future growth trends will continue at rates
comparable to those of the recent past.
OPERATIONS. The Company's timeshare exchange business is designed to
provide high-quality, leisure travel services to its members and
cost-effective, single-source support services to its affiliated timeshare
resorts. Most members are acquired from timeshare developers who purchase an
initial RCI membership for each buyer at the time the timeshare interval is
sold. A small percentage of members are acquired through direct solicitation
activities of RCI.
MEMBER SERVICES. International Exchange System. Members are served through
a network of call centers located in more than 20 countries throughout the
world. These call centers are staffed by approximately 2,000 people. Major
regional call and information support centers are located in Indianapolis,
Kettering (England), Cork (Ireland), Mexico City and Singapore. All members
receive a directory that lists resorts available through the exchange system, a
periodic magazine and other information related to the exchange system and
available travel services. These materials are published in various languages.
Travel Services. In addition to exchange services, RCI's call centers also
engage in telemarketing and cross-selling of other ancillary travel and
hospitality services. These services are offered to a majority of members
depending on their location. RCI provides travel services to U.S. members of
the RCI Network through its affiliate, RCI Travel, Inc. ("RCIT"). On a global
basis, RCI provides travel services through entities operating in local
jurisdictions (hereinafter, RCIT and its local entities are referred to as
"Travel Agencies"). Travel Agencies provide airline reservations and airline
ticket sales to members in conjunction with the arrangement of their timeshare
exchanges, as well as providing other types of travel services, including hotel
accommodations, car rentals, cruises and tours. Travel Agencies also from time
to time offer travel packages utilizing resort developers' unsold inventory to
generate both revenue and prospective timeshare purchasers to affiliated
resorts.
Quality Assurance. Members have a high level of interest in the quality of
their home resorts and other resorts within the exchange system. Quality
control of affiliated resorts occurs through inspections at the time of
application, unannounced inspections and visits by Company personnel, and
comment card feedback from members exchanging into each resort. Resorts meeting
certain quality measures are given special recognition through RCI's Gold Crown
Resort and Resorts of International Distinction award programs.
RESORT SERVICES. Resort Affiliations. Growth of the timeshare business is
dependent on the sale of timeshare units by affiliated resorts. RCI affiliates
international brand names and independent developers, owners' associations and
vacation clubs. The Company believes that national lodging and hospitality
companies are attracted to the timeshare concept because of the industry's
relatively low product cost and high profit margins, and the recognition that
timeshare resorts provide an attractive alternative to the traditional
hotel-based vacation and allow the hotel companies to leverage their brands
into additional resort markets where demand exists for accommodations beyond
traditional rental-based lodging operations. Today, 7 of every 10 timeshare
resorts worldwide are affiliated with RCI. The Company also
12
believes that RCI's existing affiliates represent a significant potential
market because many developers and resort managers may become involved in
additional resorts in the future which can be affiliated with RCI. Accordingly,
a significant factor in RCI's growth strategy is maintaining the satisfaction
of its existing affiliates by providing quality support services.
Sales Support Services. Exchange services are considered to be an
essential component of timeshare ownership. In fact, exchange is one of the
primary reasons given for purchasing timeshare. RCI provides a wide variety of
sales and marketing materials to assist its affiliated resorts in selling more
efficiently and effectively. These include videos explaining the concept of
timesharing and exchange, interactive multi-media sales tools, wall displays
customized for the resort, a wide variety of promotional brochures, travel
services, purchasing discounts and the Endless Vacation Special Resort Edition
Directory which includes photos and/or summary information for all
RCI-affiliated resorts. In addition, RCI uses state-of-the-art database
marketing techniques to identify highly qualified sales prospects for its
resort affiliates.
Advertising. RCI provides many advertising opportunities in its member and
developer focused publications, as well as through its site on the Internet
World Wide Web at http://www.rci.com.
Timeshare Consulting. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. ("RCIC"). These services include
comprehensive market research, site selection, strategic planning, community
economic impact studies, resort concept evaluation, financial feasibility
assessments, on-site studies of existing resort developments, and tailored
sales and marketing plans.
Resort Management Software. RCI provides computer software systems to
timeshare resorts and developers through its affiliate, Resort Computer
Corporation ("RCC"). RCC provides software that integrates resort functions
such as sales, accounting, inventory, maintenance, dues and reservations. The
Company's RCC Premier information management software is believed to be the
only technology available today that can fully support timeshare club
operations and points-based reservation systems.
Property Management. RCI provides resort property management services
through its affiliate, RCI Management, Inc. ("RCIM"). RCIM is a single source
for any and all resort management services, and offers a menu including
hospitality services, a centralized reservations service center, advanced
reservations technology, human resources expertise and owners' association
administration.
TIMESHARE PROPERTY AFFILIATION AGREEMENTS. More than 3,200 timeshare
resorts are affiliated with the RCI Network, of which nearly 1,300 resorts are
located in the United States and Canada, more than 1,200 in Europe and Africa,
more than 450 in Mexico and Latin America, and nearly 300 in the Asia-Pacific
region. The terms of RCI's affiliation agreement with its affiliates generally
require that the developer enroll each new timeshare purchaser at the resort as
a member of RCI, license the affiliated resort to use the RCI name and marks
for certain purposes, set forth the materials and services RCI will provide to
the affiliate, and generally describe RCI's expectations of the resort's
management. The affiliation agreement also includes stipulations for
representation of the exchange program, minimum enrollment requirements and
treatment of exchange guests. Affiliation agreements are typically for a term
of five or six years, and automatically renew thereafter for terms of one to
six years unless either party takes affirmative action to terminate the
relationship. RCI makes available a wide variety of goods and services to its
affiliated developers, including publications, advertising, sales and marketing
materials, timeshare consulting services, resort management software, travel
packaging and property management services.
RCI LICENSED MARKS AND INTELLECTUAL PROPERTY. The service marks "RCI",
"Resort Condominiums International" and related marks and logos are material to
RCI's business. RCI and its subsidiaries actively use the marks. All of the
material marks used in RCI's business are registered (or have applications
pending for registration) with the United States Patent and Trademark Office as
well as major countries worldwide where RCI or its subsidiaries have
significant operations. The marks used in RCI's business are owned by the
Company.
SEASONALITY. A principal source of timeshare revenue relates to exchange
services to members. Since members have historically shown a tendency to plan
their vacations in the first quarter of the year,
13
revenues are generally slightly higher in the first quarter in comparison to
other quarters of the year. The Company cannot predict whether this trend will
continue in the future as the timeshare business expands outside of the United
States and Europe, and as global travel patterns shift with the aging of the
world population.
COMPETITION. The global timeshare exchange industry is comprised of a
number of entities, including resort developers and owners. RCI's largest
competitor is Interval International Inc. ("Interval"), formerly a wholly-owned
subsidiary of the Company, and a few other smaller firms. Based upon industry
sources, the Company believes that 98% of the more than 4,500 timeshare resorts
in the world are affiliated with either RCI or Interval. Based upon 1997
published statistics and Company information, RCI has nearly 2.4 million
timeshare households that are members, while Interval has approximately 850,000
timeshare households that are members. Also in 1997, RCI confirmed more than
1.8 million exchange transactions while Interval confirmed approximately
480,000 transactions. As a result, based on 1997 business volume, RCI services
approximately 73% of members and approximately 79% of exchange transactions.
RCI is bound by the terms of a Consent Order issued by the Federal Trade
Commission which restricts the right of RCI to solicit, induce, or attempt to
induce clients of Interval International Inc. to either terminate or not to
renew their existing Interval contracts. The proposed Consent Order contains
certain other restrictions. The restrictions generally expire on or before
December 17, 1999.
AVIS CAR RENTAL FRANCHISE BUSINESS
GENERAL. On October 17, 1996, the Company completed the acquisition of all
of the outstanding capital stock of Avis, Inc. which together with its
subsidiaries, licensees and affiliates, operated the Avis Worldwide Vehicle
System (the "Avis System"). As part of its previously announced plan, on
September 24, 1997, the Company completed the initial public offering ("IPO")
of the subsidiary, Avis Rent A Car, Inc. ("ARAC"), which owned and operated the
company-owned Avis car rental operations. The Company currently owns
approximately 20% of the outstanding Common Stock of ARAC. The Company no
longer operates any car rental locations but owns the Avis brand name and the
Avis System, which it licenses to its franchisees, including ARAC, the largest
Avis System franchisee.
The Avis System is comprised of approximately 4,200 rental locations,
including locations at the largest airports and cities in the United States and
approximately 160 other countries and territories and a fleet of approximately
378,000 vehicles during the peak season, all of which are granted by
franchisees. Approximately 87% of the Avis System rental revenues in the United
States are received from locations operated by ARAC directly or under agency
arrangements, with the remainder being received from locations operated by
independent licensees. The Avis System in Europe, Africa, part of Asian and the
Middle East is operated under franchise by Avis Europe Ltd ("Avis Europe").
INDUSTRY. The car rental industry provides vehicle rentals to business and
individual customers worldwide. The industry has been composed of two principal
segments: general use (mainly at airport and downtown locations) and local
(mainly at downtown and suburban locations). The car rental industry rents
primarily from on-airport, near-airport, downtown and suburban locations to
business and leisure travelers and to individuals who have lost the use of
their vehicles through accident, theft or breakdown. In addition to revenue
from vehicle rentals, the industry derives significant revenue from the sale of
rental related products such as insurance, refueling services and loss damage
waivers (a waiver of the franchisee's right to make a renter pay for damage to
the rented car).
Car renters generally are (i) business travelers renting under negotiated
contractual arrangements between specified rental companies and the travelers'
employers, (ii) business travelers who do not rent under negotiated contractual
arrangements (but who may receive discounts through travel, professional or
other organizations), (iii) leisure travelers and (iv) renters who have lost
the use of their own vehicles through accident, theft or breakdown. Contractual
arrangements normally are the result of negotiations between rental companies
and large corporations, based upon rates, billing and service arrangements, and
influenced by reliability and renter convenience. Business travelers who are
not parties to negotiated contractual arrangements and leisure travelers
generally are influenced by advertising, renter convenience and access to
special rates because of membership in travel, professional and other
organizations.
14
AVIS SYSTEM AND WIZARD SYSTEM SERVICES. The Avis System provides Avis
System franchisees access to the benefits of a variety of services, including
(i) comprehensive safety initiatives, including the "Avis Cares" Safe Driving
Program, which offers vehicle safety information, directional assistance such
as satellite guidance, regional maps, weather reports and specialized equipment
for travelers with disabilities; (ii) standardized system-identity for rental
location presentation and uniforms; (iii) training program and business
policies, quality of service standards and data designed to monitor service
commitment levels; (iv) marketing/advertising/public relations support for
national consumer promotions including Frequent Flyer/Frequent Stay programs
and the Avis System internet website; and (v) brand awareness of the Avis
System through the familiar "We try harder" service announcements.
Avis System franchisees are also provided with access to the Wizard
System, a reservations, data processing and information management system for
the vehicle rental business. The Wizard System is linked to all major travel
networks on six continents through telephone lines and satellite communica-
tions. Direct access with other computerized reservations systems allows
real-time processing for travel agents and corporate travel departments. Among
the principal features of the Wizard System are:
o an advanced graphical interface reservation system;
o "Rapid Return," which permits customers who are returning vehicles to obtain
completed charge records from radio-connected "Roving Rapid Return" agents
who complete and deliver the charge record at the vehicle as it is being
returned;
o "Preferred Service," an expedited rental service that provides customers
with a preferred service rental record printed prior to arrival, a
pre-assigned vehicle and fast convenient check out;
o "Wizard on Wheels," which enables the Avis System locations to assign
vehicles and complete rental agreements while customers are being
transported to the vehicle; a flight arrival notification system that
alerts the Company's rental location when flights have arrived so that
vehicles can be assigned and paperwork prepared automatically;
o "Flight Check," a system that provides flight arrival and departure times
and the next three available flights to the Roving Rapid Return terminals
and Wizard System terminals;
o "Avis Link," which automatically identifies the fact that a user of a major
credit card is entitled to special rental rates and conditions, and
therefore sharply reduces the number of instances in which the Company
inadvertently fails to give renters the benefits of negotiated rate
arrangements to which they are entitled;
o interactive interfaces through third-party computerized reservation systems;
and
o sophisticated automated ready-line programs that, among other things, enable
rental agents to ensure that a customer who rents a particular type of
vehicle will receive the available vehicle of that type which has the
lowest mileage.
In 1997, the Wizard System processed approximately 30.8 million incoming
customer calls, during which customers inquired about locations, rates and
availability and placed or modified reservations. In addition, millions of
inquiries and reservations come to franchisees through travel agents and travel
industry partners, such as airlines. Regardless of where in the world a
customer may be located, the Wizard System is designed to ensure that
availability of vehicles, rates and personal profile information is accurately
delivered at the proper time to the customer's rental destination.
AVIS LICENSED MARKS AND INTELLECTUAL PROPERTY. The service mark "Avis",
related marks incorporating the word "Avis", and related logos are material to
the Company's business. The Company, through its subsidiaries, joint ventures
and licensees, actively uses these marks. All of the material marks used in
Avis's business are registered (or have applications pending for registration)
with the United States Patent and Trademark Office. The marks used in Avis's
business are owned by the Company through its subsidiaries. The purposes for
which the Company is authorized to use the marks include use in connection with
businesses in addition to car rental and related businesses, including, but not
limited to, equipment rental and leasing, hotels, insurance and information
services.
15
LICENSEES AND LICENSE AGREEMENTS. The Company has 73 independent licensees
which operate locations in the United States. The largest licensee, ARAC,
accounts for approximately 87% of all United States licensees' rentals. Other
than ARAC, certain licensees in the United States pay the Company a fee equal
to 5% of their total time and mileage charges, less all customer discounts, of
which the Company is required to pay 40% for corporate licensee-related
programs, while 17 licensees pay 8% of their gross revenue. Licensees outside
the United States normally pay higher fees. Most of the Company's United States
licensees currently pay 50 cents per rental agreement for use of certain
portions of the Wizard System, and they are charged for use of other aspects of
the Wizard System.
ARAC has entered into a Master License Agreement with the Company which
grants ARAC the right to operate the Avis vehicle rental business in certain
specified territories. Pursuant to the Master License Agreement, ARAC has
agreed to pay the Company a monthly base royalty of 3.0% of ARAC's gross
revenue. In addition, ARAC has agreed to pay a supplemental royalty of 1.0% of
gross revenue payable quarterly in arrears which will increase 0.1% per year
commencing in 1999 and in each of the following four years thereafter to a
maximum of 1.5% (the "Supplemental Fee"). These fees have been paid by ARAC
since January 1, 1997. Until the fifth anniversary of the effective date of the
Master License Agreement, the Supplemental Fee or a portion thereof may be
deferred by ARAC if ARAC does not attain certain financial targets.
In, 1997, Avis Europe's previously paid-up license for Europe, the Middle
East and Africa was modified to provide for a paid-up license only as to Europe
and the Middle East. Avis Europe will pay annual royalties to the Company for
Africa and a defined portion of Asia which covers the area between 60E
longitude and 150E longitude, excluding Australia, New Zealand and Papua New
Guinea. The Avis Europe license expires on November 30, 2036, unless earlier
termination is effected in accordance with the license terms. Avis Europe also
entered into a Preferred Alliance Agreement with the Company under which Avis
Europe became a preferred alliance provider for car rentals to RCI customers in
Europe, Asia and Africa, and for car rentals to PHH customers needing
replacement vehicles for fleets managed by PHH in Europe, Asia and Africa.
COMPETITION. The vehicle rental industry is characterized by intense price
and service competition. In any given location, franchisees may encounter
competition from national, regional and local companies, many of which,
particularly those owned by the major automobile manufacturers, have greater
financial resources than the Company and Avis. However, because the Company's
royalty fees are based upon the gross revenue of Avis and the other Avis System
franchisees, the Company's revenue is not directly dependent on franchisee
profitability.
The franchisees' principal competitors for commercial accounts in the
United States are the Hertz Corporation ("Hertz") and National Car Rental
System, Inc. ("National"). Principal competitors for unaffiliated business and
leisure travelers in the United States are Budget Rent A Car Corporation, Hertz
and National, and, particularly with regard to leisure travelers, Alamo
Rent-A-Car Inc. In addition, the franchisees compete with a variety of smaller
vehicle rental companies throughout the country.
SEASONALITY. The car rental franchise business is subject to seasonal
variations in customer demand, with the third quarter of the year, which covers
the summer vacation period, representing the peak season for vehicle rentals.
Therefore, any occurrence that disrupts travel patterns during the summer
period could have a material adverse effect on the franchisee's annual
performance and affect the Company's annual financial performance. The fourth
quarter is generally the weakest financial quarter for the Avis System because
there is limited leisure travel and a greater potential for adverse weather
conditions at such time.
FLEET MANAGEMENT SERVICES BUSINESS
Fleet Management Services. The Company, through PHH Vehicle Management
Services Corporation ("VMS"), is a provider of fully integrated fleet
management services principally to corporate clients and government agencies
comprising over 600,000 units under management on a worldwide basis. These
services include vehicle leasing, advisory services and fleet management
services for a broad range of vehicle fleets. Advisory services include fleet
policy analysis and recommendations, benchmarking, and
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vehicle recommendations and specifications. In addition, VMS provides
managerial services which include ordering and purchasing vehicles, arranging
for their delivery through dealerships located throughout the United States,
Canada, the United Kingdom, Germany and the Republic of Ireland, as well as
capabilities throughout Europe, administration of the title and registration
process, as well as tax and insurance requirements, pursuing warranty claims
with vehicle manufacturers and remarketing used vehicles. VMS offers various
leasing plans for its vehicle leasing programs, financed primarily through the
issuance of commercial paper and medium-term notes and through unsecured
borrowings under revolving credit agreements and bank lines of credit.
Fuel and Expense Management Programs. VMS also offers fuel and expense
management programs to corporations and government agencies for the effective
management and control of automotive business travel expenses. By utilizing the
VMS service card issued under the fuel and expense management programs, a
client's representatives are able to purchase various products and services
such as gasoline, tires, batteries, glass and maintenance services at numerous
outlets.
The Company also provides a fuel and expense management program and a
centralized billing service for companies operating truck fleets in each of the
United Kingdom, Republic of Ireland and Germany. Drivers of the clients' trucks
are furnished with courtesy cards together with a directory listing the names
of strategically located truck stops and service stations which participate in
this program. Service fees are earned for billing, collection and record
keeping services and for assuming credit risk. These fees are paid by the truck
stop or service stations and/or the fleet operator and are based upon the total
dollar amount of fuel purchased or the number of transactions processed.
Other. Wright Express Corporation, a wholly-owned subsidiary of the
Company acquired as part of the Ideon acquisition, is a provider of information
and transaction processing services for commercial fleet operators, as well as
private label fleet card processing, in North America. The Wright Express
Universal Fleet Card is the nation's most widely accepted electronic fleet
fueling credit card and is accepted at over 120,000 fueling locations.
Competitive Conditions. The principal factors for competition in vehicle
management services are service quality and price. In the United States and
Canada, an estimated 30% of the market for vehicle management services is
served by third-party providers. There are 5 major providers of such services
in North America, as well as an estimated several hundred local and regional
competitors. The Company is the second largest provider of comprehensive
vehicle management services in North America. In the United Kingdom, the
Company is the market leader for fuel and fleet management services. Numerous
local and regional competitors serve each such market element.
TAX REFUND BUSINESS
Through a subsidiary, Global Refund, the Company assists travelers to
receive valued-added tax ("VAT") refunds in 22 European countries, Canada and
Singapore. Global Refund is the world's leading VAT refund service, with over
125,000 affiliated retailers and seven million transactions per year. Global
Refund operates over 400 cash refund offices at international airports and
other major points of departure and arrival worldwide. The Company plans to
expand the services Global Refund provides to travelers to include
Entertainment (Registered Trademark) coupon book memberships and the Travelers
Advantage (Registered Trademark) memberships.
REAL ESTATE SERVICES
REAL ESTATE BROKERAGE FRANCHISE BUSINESS
GENERAL. In August 1995, the Company acquired Century 21 Real Estate
Corporation ("Century 21"), the world's largest franchisor of residential real
estate brokerage offices with approximately 6,300 independently owned and
operated franchised offices with approximately 110,000 sales agents worldwide.
In February 1996, the Company acquired the ERA franchise system. The ERA system
is the fourth largest residential real estate brokerage franchise system with
over 2,500 independently owned and operated franchised offices and more than
30,000 sales agents worldwide. In May 1996, the Company
17
acquired Coldwell Banker Corporation ("Coldwell Banker"), the owner of the
world's premier brand for the sale of million-dollar-plus homes and the third
largest residential real estate brokerage franchise system with approximately
2,800 independently owned and operated franchised offices and approximately
61,000 sales agents worldwide.
The Company believes that application of its franchisee focused management
strategies and techniques can significantly increase the revenues produced by
its real estate brokerage franchise systems while also increasing the quality
and quantity of services provided to franchisees. The Company believes that
independent real estate brokerage offices currently affiliate with national
real estate franchisors principally to gain the consumer recognition and
credibility of a nationally known and promoted brand name. Brand recognition is
especially important to real estate brokers since home buyers are generally
infrequent users of brokerage services and have often recently arrived in an
area, resulting in little ability to benefit from word-of-mouth
recommendations.
During 1996, the Company implemented a preferred alliance program which
seeks to capitalize on the dollar volume of home sales brokered by CENTURY 21,
Coldwell Banker and ERA agents and the valuable access point these brokerage
offices provide for service providers who wish to reach these home buyers and
sellers. Preferred alliance marketers include providers of property and
casualty insurance, moving and storage services, mortgage and title insurance,
environmental testing services, and sellers of furniture, fixtures and other
household goods.
The Company's real estate brokerage franchisees are dispersed
geographically, which minimizes the exposure to any one broker or geographic
region. During 1997, the Company acquired an equity interest in NRT
Incorporated ("NRT"), a newly formed corporation created to acquire residential
real estate brokerage firms. NRT acquired the assets of National Realty Trust,
the largest franchisee of the Coldwell Banker system, in September 1997. NRT
has also acquired other independent regional real estate brokerage businesses
during 1997 which NRT has converted to Coldwell Banker, CENTURY 21 and ERA
franchises. As a result, NRT is the largest franchisee of the Company's
franchise systems representing 4% of the franchised offices. Of the more than
11,700 franchised offices in the Company's real estate brokerage franchise
systems, no individual broker, other than NRT, accounts for more than 1% of the
Company's real estate brokerage services.
REAL ESTATE FRANCHISE SYSTEMS. CENTURY 21. Century 21 is the world's
largest residential real estate brokerage franchisor, with approximately 6,300
independently owned and operated franchise offices with more than 110,000 sales
agents located in 20 countries and territories.
The primary component of Century 21's revenue is service fees on
commissions from real estate transactions. Service fees are 6% of gross
commission income. CENTURY 21 franchisees who meet certain levels of annual
gross revenue (as defined in the franchise agreements) are eligible for the
CENTURY 21 Incentive Bonus ("CIB") Program, which results in a rebate payment
to qualifying franchisees determined in accordance with the applicable
franchise agreement (up to 2% of gross commission income in current agreements)
of such annual gross revenue. For 1997, approximately 12% of CENTURY 21
franchisees qualified for CIB payments and such payments aggregated less than
1% of gross commissions.
CENTURY 21 franchisees generally contribute 2% (subject to specified
minimums and maximums) of their brokerage commissions each year to the CENTURY
21 National Advertising Fund (the "NAF") which in turn disburses them for
local, regional and national advertising, marketing and public relations
campaigns. In 1997, the NAF spent approximately $37 million on advertising and
marketing campaigns.
Coldwell Banker. Coldwell Banker is the world's premier brand for the sale
of million-dollar-plus homes and the third largest residential real estate
brokerage franchisor, with approximately 2,800 independently owned and operated
franchise offices in the United States, Canada and Puerto Rico, with
approximately 61,000 sales agents. The primary revenue from the Coldwell Banker
system is derived from service and other fees paid by franchisees, including
initial franchise fees and ongoing services. Coldwell Banker franchisees pay
annual fees to the Company consisting of ongoing service and advertising fees,
which are generally 6.0% and 2.5%, respectively, of a franchisee's annual gross
revenues (subject to annual rebates to franchisees who achieve certain
threshold levels of gross commission income annually, and to minimums and
maximums on advertising fees).
18
Coldwell Banker franchisees who meet certain levels of annual gross
revenue (as defined in the franchise agreements) are eligible for the
Performance Premium Award ("PPA") Program, which results in a rebate payment to
qualifying franchisees determined in accordance with the applicable franchise
agreement (up to 3% in current agreements) of such annual gross revenue. For
1997, approximately 24% of Coldwell Banker franchisees qualified for PPA
payments and such payments aggregated approximately 1% of gross commissions.
Advertising fees collected from Coldwell Banker franchisees are generally
expended on local, regional and national marketing activities, including media
purchases and production, direct mail and promotional activities and other
marketing efforts. In 1997, Coldwell Banker expended approximately $19 million
for such purposes.
ERA. The ERA franchise system is the fourth largest residential real
estate brokerage franchise system in the world, with more than 2,500
independently owned and operated franchise offices, with more than 30,000 sales
agents located in 15 countries. The primary revenue from the ERA franchise
system results from (i) franchisees' payments of monthly membership fees
ranging from $213 to $839 per month, based on volume, plus per transaction fees
of approximately $119, and (ii) for franchise agreements entered into after
January 1, 1998, royalty fees equal to 6% of the franchisees' gross revenues.
For franchise agreements dated after January 1, 1998, the Volume Incentive
Program may result in a rebate payment to qualifying franchisees determined in
accordance with the applicable franchise agreement.
In addition to membership fees and transaction fees, franchisees of the
ERA system pay (i) a fixed amount per month, which ranges from $229 to $918,
based on volume, plus an additional $229 per month for each branch office, into
the ERA National Marketing Fund (the "ERA NMF") and (ii) for franchise
agreements entered into after January 1, 1998, an NMF equal to 2% of the
franchisees' gross revenues, subject to minimums and maximums. The Company
utilizes the funds in the ERA NMF for local, regional and national marketing
activities, including media purchases and production, direct mail and
promotional activities and other marketing efforts. In 1997, the ERA NMF spent
approximately $9 million on marketing campaigns.
REAL ESTATE BROKERAGE FRANCHISE SALES. The Company markets real estate
brokerage franchises primarily to independent, unaffiliated owners of real
estate brokerage companies as well as individuals who are interested in
establishing real estate brokerage businesses. The Company believes that its
existing franchisee base represents another source of potential growth, as
franchisees seek to expand their existing business to additional markets.
Therefore, the Company's sales strategy focuses on maintaining satisfaction and
enhancing the value of the relationship between the franchisor and the
franchisee.
The Company's real estate brokerage franchise systems employ a national
franchise sales force consisting of approximately 123 salespersons and sales
management personnel, which is divided into separate sales organizations for
the CENTURY 21, Coldwell Banker and ERA systems. These sales organizations are
compensated primarily through commissions on sales concluded. Members of the
sales forces are also encouraged to provide referrals to the other sales forces
when appropriate.
OPERATIONS -- REAL ESTATE BROKERAGE. The Company's brand name marketing
programs for the real estate brokerage business focus on increasing brand
awareness generally, in order to increase the likelihood of potential home
buyers and home sellers engaging franchise brokers' services. Each brand has a
dedicated marketing staff in order to develop the brand's marketing strategy
while maintaining brand integrity. The corporate marketing services department
provides services related to production and implementation of the marketing
strategy developed by the brand marketing staffs.
Each brand provides its franchisees and their sales associates with
training programs which have been developed by such brand. The training
programs include mandatory programs instructing the franchisee and/or the sales
associate on how to best utilize the methods of the particular system and
additional optional training programs which expand upon such instruction. Each
brand's training department is staffed with instructors experienced in both
real estate practice and instruction. In addition, the Company has established
regional support personnel who provide consulting services to the franchisees
in their respective regions.
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Each system provides a series of awards to brokers and their sales
associates who are outstanding performers in each year. These awards signify
the highest levels of achievement within each system and provide a significant
incentive for franchisees to attract and retain sales associates.
Each system provides its franchisees with referrals of potential
customers, which referrals are developed from sources both within and outside
of the system.
Through its Cendant Supplier Services operations, the Company provides its
franchisees with volume purchasing discounts for products, services,
furnishings and equipment used in real estate brokerage operations. In addition
to the preferred alliance programs described hereinafter, Cendant Supplier
Services establishes relationships with vendors and negotiates discounts for
purchases by its customers. The Company does not maintain inventory, directly
supply any of the products or, generally, extend credit to franchisees for
purchases. See "COMBINED OPERATIONS -- Preferred Alliance and Co-Marketing
Arrangements" below.
REAL ESTATE BROKERAGE FRANCHISE AGREEMENTS. The Company's real estate
brokerage franchise agreements grant the franchises the right to utilize one of
the brand names associated with the Company's real estate brokerage franchise
systems to real estate brokers under franchise agreements.
The current standard franchise agreement for the CENTURY 21 system
provides for a 10-year term (prior to October 1995, agreements provided for
five-year terms). Franchise agreements generally require, among other
obligations, that franchisees pay annual fees comprised of royalty fees and
National Advertising Fund fees which are generally 6% and 2%, respectively, of
gross commissions on closed transactions (subject to minimums and maximums or
advertising fees). See "CENTURY 21" above. The marketing fee is brand-specific
national and local media advertising and promotion. In addition, the CENTURY 21
agreements provide for the payment of the CIB to qualified franchisees who meet
certain levels of annual gross revenue (as defined in the franchise
agreements).
Coldwell Banker franchise agreements generally have a term of seven to ten
years for which franchisees pay annual fees consisting of ongoing service and
advertising fees, which are generally 6.0% and 2.5%, respectively, of a
franchisee's annual gross revenues (subject to minimums and maximums on
advertising fees and subject to annual rebates to franchisees who achieve
certain threshold levels of gross commission revenue annually). See "Coldwell
Banker" above. In return for payment of the franchise fees, the Company
provides Coldwell Banker franchisees access to the Coldwell Banker name and
systems and the combined market presence of all its franchised offices.
The current form of the franchise agreement for the ERA system provides
for a term of 10 years. New ERA franchisees pay royalty fees and advertising
fees of 6.0% and 2.0% respectively on annual gross revenue. Prior to 1997, ERA
agreements provided for franchisees to pay monthly membership fees and
marketing fees at fixed rates determined by gross annual volume of real estate
sales, and a per transaction charge of approximately $119. See "ERA" above.
The Company's current form of franchise agreement for all real estate
brokerage brands is terminable by the Company for the franchisee's failure to
pay fees thereunder or other charges or for other material default under the
franchise agreement. In the event of such termination, the agreement generally
provides that the Company is entitled to be compensated for lost revenues in an
amount equal to the average monthly franchise fees calculated for the remaining
term of the agreement. Pre-1996 agreements do not provide for liquidated
damages of this sort.
REAL ESTATE BROKERAGE SERVICE MARKS. The service marks "CENTURY 21,"
"Coldwell Banker," and "ERA" and related logos are material to the Company's
business. The Company, through its franchisees, actively uses these marks. All
of the material marks in each franchise system are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office. The marks used in the real estate brokerage systems are owned
by the Company through its subsidiaries.
COMPETITION. Competition among the national real estate brokerage brand
franchisors to grow their franchise systems is intense. The chief competitors
of the Company's real estate brokerage franchise systems are the RE/MAX, Better
Homes & Gardens and Prudential real estate brokerage brands. In addition, a
real estate broker may choose to affiliate with a regional chain or not to
affiliate with a franchisor but to remain independent.
20
The Company believes that competition for the sale of franchises in the
real estate brokerage industry is based principally upon the perceived value
and quality of the brand and services offered to franchisees, as well as the
nature of those services. The Company also believes that the perceived value of
its brand names to prospective franchisees is, to some extent, a function of
the success of its existing franchisees.
The ability of the Company's real estate brokerage franchisees to compete
in the industry is important to the Company's prospects for growth, although,
because franchise fees are based on franchisee gross commissions or volume, the
Company's revenue is not directly dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation
and other factors. A franchisee's success may also be affected by general,
regional and local economic conditions. The effect of these conditions on the
Company's results of operations is substantially reduced by virtue of the
diverse geographical locations of the Company's franchises. At December 31,
1997, the combined real estate franchise systems had more than 8,600 franchised
brokerage offices in the United States and more than 11,700 offices worldwide.
The real estate franchise systems have offices in 23 countries and territories
in North America, Europe, Asia, Africa and Australia.
SEASONALITY. The principal sources of real estate segment revenue for the
Company are based upon the timing of residential real estate sales, which are
lower in the first calendar quarter each year, and relatively level the other
three quarters of the year. As a result, the Company's revenue from the real
estate brokerage segment of its business is less in the first calendar quarter
of each year.
RELOCATION SERVICES BUSINESS
Cendant Mobility Services Corporation ("Cendant Mobility"), a wholly owned
subsidiary of the Company, is the largest provider of employee relocation
services in the world. The employee relocation business offers relocation
clients a variety of services in connection with the transfer of its clients'
employees. At December 31, 1997, Cendant Mobility employed approximately 2,720
people in its relocation business at its corporate office and five regional
offices.
The relocation services provided to customers of Cendant Mobility include
primarily appraisal, inspection and selling of transferees' homes, equity
advances (guaranteed by the corporate customer), purchase of a home which is
not sold for at least a price determined on the appraised value within a
specified time period, certain home management services, assistance in locating
a new home at the transferee's destination, consulting services and other
related services.
All costs associated with such services are reimbursed by the corporate
client, including, if necessary, repayment of equity advances and reimbursement
of losses on the sale of homes purchased by one of the Company's relocation
subsidiaries. Corporate clients also pay a fee for the services performed.
Another source of revenue for the Company is interest on the equity advances.
As a result of the obligations of corporate clients to pay the losses and
guarantee repayment of equity advances, the exposure of the Company on such
items is limited to the credit risk of the corporate clients of its relocation
businesses and not on the potential changes in value of residential real
estate. The Company believes such risk is minimal, due to the credit quality of
the corporate, government and affinity clients of its relocation subsidiaries.
Competitive Conditions. The principal methods of competition within
relocation services are service quality and price. In each of the United States
and Canada, there are two major national providers of such services. The
Company is the market leader in the United States and Canada, and third in the
United Kingdom.
MORTGAGE SERVICES BUSINESS
The Company, through Cendant Mortgage Corporation, is the eleventh largest
originator of residential first mortgage loans in the United States as reported
by Inside Mortgage Finance in 1997. Cendant Mortgage offers services consisting
of the origination, sale and servicing of residential first
21
mortgage loans. A variety of first mortgage products are marketed to consumers
through relationships with corporations, affinity groups, financial
institutions, real estate brokerage firms and other mortgage banks. Cendant
Mortgage is a centralized mortgage lender conducting its business in all 50
states. Cendant Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae Corp., the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association while
generally retaining mortgage servicing rights. Mortgage servicing consists of
collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage-related expenses such
as taxes and insurance, and otherwise administering the Company's mortgage loan
servicing portfolio.
Competitive Conditions. The principal methods of competition in mortgage
banking services are service, quality and price. There are an estimated 20,000
national, regional or local providers of mortgage banking services across the
United States.
OTHER REAL ESTATE SERVICES
Welcome Wagon International, Inc. ("Welcome Wagon"), a wholly-owned
subsidiary of the Company, has approximately 1,800 field representatives who
visit households and campuses each year to provide consumers with discounts for
local merchants. Getko Group Inc. ("Getko"), a wholly-owned subsidiary of the
Company, distributes complimentary welcoming packages which provide new
homeowners throughout the United States and Canada with discounts for local
merchants. The Company is exploring opportunities to leverage the assets and
the distribution channels of such subsidiaries.
ALLIANCE MARKETING
The Company's Alliance Marketing segment is divided into three divisions;
individual membership: insurance/wholesale; and lifestyle. The individual
membership division, with more than 33 million memberships, provides customers
with access to a variety of products and services in such areas as retail
shipping, travel, auto, dining and home improvement. The insurance/wholesale
division, with nearly 31 million customers, markets and administers insurance
products, primarily accidental death insurance, and also provides products and
services such as checking account enhancement packages, financial products and
discount programs to customers of various financial institutions. The lifestyle
division, with over 11 million customers, provides customers with unique
products and services that are designed to enhance a customer's purchasing
power. The Alliance Marketing activities are conducted principally through
Cendant Membership Services, Inc. and certain of the Company's other
wholly-owned subsidiaries, including FISI, BCI, and EPub.
The Company derives its Alliance Marketing revenue principally from
membership service fees, insurance premiums and product sales. The Company
solicits members and customers for many of its programs by direct marketing and
by using a direct sales force to call on financial institutions, schools,
community groups, companies and associations. Some of the Company's individual
memberships are available on-line to interactive computer users via major
on-line services and the Internet's World Wide Web. See "-- Distribution
Channels".
INDIVIDUAL MEMBERSHIP
The Individual Membership division represented 43%, 45% and 47% of the
Alliance Marketing revenues for the year ended December 31, 1997, 1996 and
1995, respectively. The Company affiliates with business partners such as
leading financial institutions, retailers, and oil companies to offer
membership as an enhancement to their credit card customers. Participating
institutions generally receive commissions on initial and renewal memberships,
averaging fifteen to twenty percent of the net membership fees. Individual
memberships are marketed, primarily using direct marketing techniques, through
participating institutions with the Company generally paying for the marketing
costs to solicit the prospective members. The member pays the Company directly
for the service and, in most instances, is billed via a credit card. Membership
fees vary depending upon the particular membership program, and annual fees
generally
22
range from $49 to $79 per year. Most of the Company's memberships are for
one-year renewable terms, and members are generally entitled to unlimited use
during the membership period of the service for which the members have
subscribed. Members generally may cancel their memberships and obtain a full
refund at any point during the membership term.
Individual membership programs link consumers to an array of products and
services offering shop at home convenience with significant savings in areas
such as retail shopping, travel, automotive, dining and home improvement.
Membership programs include among others Shoppers Advantage (Registered
Trademark) , Travelers Advantage (Registered Trademark) , AutoVantage
(Registered Trademark) , Credit Card Guardian (Registered Trademark) , and
PrivacyGuard (Registered Trademark) , and other membership programs. A brief
description of the different types of membership programs are as follows:
Shopping. Shoppers Advantage (Registered Trademark) is a discount
shopping program whereby the Company, through Comp-U-Card Services, Inc.,
provides product price information and home shopping services to its members.
The Company's merchandise database contains information on over 100,000 brand
name products, including a written description of the product, the
manufacturer's suggested retail price, the vendor's price, features and
availability. All of these products may be purchased through the Company's
independent vendor network. Vendors include manufacturers, distributors and
retailers nationwide. Individual members are entitled to an unlimited number of
toll-free calls seven days a week to the Company's shopping consultants, who
access the merchandise database to obtain the lowest available fully delivered
cost from participating vendors for the product requested and accept any orders
that the member may place. The Company informs the vendor providing the lowest
price of the member's order and that vendor then delivers the requested product
directly to the member. The Company acts as a conduit between its members and
the vendors; accordingly, it does not maintain an inventory of products.
As part of its individual member Shoppers Advantage (Registered
Trademark) program, the Company distributes catalogs four to ten times per
year to certain members. In addition, the Company automatically extends the
manufacturer's warranty on all products purchased through the Shoppers
Advantage (Registered Trademark) program and offers a low price guarantee.
Travel. Travelers Advantage (Registered Trademark) is a discount travel
service program whereby the Company, through Cendant Travel, Inc. ("Cendant
Travel") (one of the ten largest full-service travel agencies in the U.S.),
obtains information on schedules and rates for major scheduled airlines, hotel
chains and car rental agencies from the American Airlines Sabre (Registered
Trademark) Reservation System. In addition, the Company maintains its own
database containing information on tours, travel packages and short-notice
travel arrangements. Members book their reservations through Cendant Travel,
which earns commissions (ranging from 5%-25%) on all travel sales from the
providers of the travel services. Certain Travelers Advantage (Registered
Trademark) members can earn cash awards from the Company equal to a specified
percentage (generally 5%) of the price of travel arrangements purchased by the
member through Cendant Travel. Travel members may book their reservations by
making toll-free telephone calls seven days a week, twenty-four hours a day to
agents at Cendant Travel. Cendant Travel provides its members with special
negotiated rates on many air, car and hotel bookings. Cendant Travel's agents
reserve the lowest air, hotel and car rental fares available for the members'
travel requests and offers a low price guarantee on such fares.
Auto. The Company's auto service, AutoVantage (Registered Trademark) ,
offers members comprehensive new car summaries and preferred prices on new
domestic and foreign cars purchased through the Company's independent dealer
network (which includes over 1,800 dealer franchises); discounts on
maintenance, tires and parts at more than 25,000 locations, including over 35
chains, including nationally known names, such as Goodyear (Registered
Trademark) and Firestone (Registered Trademark) , plus regional chains and
independent locations; and used car valuations. AutoVantage Gold (Registered
Trademark) offers members additional services including road and tow emergency
assistance 24 hours a day in the United States and trip routing.
Dining. Dinner on Us Club (Registered Trademark) features two-for-one
dining offers at more than 17,000 restaurants in major metropolitan areas
across the United States. The Company also manages other dining programs which
allow members to earn additional benefits for each dollar spent for dining at
participating restaurants in the United States.
Credit Card Registration. The Company's Credit Card Guardian (Registered
Trademark) service enables consumers to register their credit and debit cards
with the Company so that the account numbers of these cards may be
23
kept securely in one place. If the member notifies the Company that any of
these credit or debit cards are lost or stolen, the Company will notify the
issuers of these cards, arrange for them to be replaced and reimburse the
member for any amount for which the card issuer may hold the member liable.
During 1996, the Company acquired Ideon Group, Inc. ("Ideon"), which through
its principal subsidiary, SafeCard Services, Inc. ("SafeCard"), offers a credit
card registration service, "Hot-Line". If a member notifies SafeCard of a loss
or theft of his/her credit cards, SafeCard retrieves (or, if cards have not
been previously registered, obtains) the necessary card registration
information, and then promptly notifies the credit card issuers of the loss,
simultaneously requesting replacement, and reimburses the member for any amount
for which the card issuer may hold the member liable.
PrivacyGuard Service. The PrivacyGuard (Registered Trademark) service
provides members with a comprehensive and understandable means of monitoring
key personal information. The service offers a member access to information in
certain key areas including: credit history and monitoring, driving records
maintained by state motor vehicle authorities, and medical files maintained by
third parties. This service is designed to assist members in obtaining and
monitoring information concerning themselves that is used by third parties in
making decisions such as granting or denying credit or setting insurance rates.
The Company also operates the Credentials (Registered Trademark) service,
which provides its members with a credit monitoring service offering a credit
report, quarterly credit monitoring and automatic inquiry notification.
Buyers Advantage. The Buyers Advantage (Registered Trademark) service
extends the manufacturer's warranty on products purchased by the member. This
service also rebates 20% of repair costs and offers members price protection by
refunding any difference between the price the member paid for an item and its
reduced price, should the item be sold at a lower price within sixty days after
purchase. In addition, the service offers return guarantee protection by
refunding the purchase price of an item that the member wishes to return.
CompleteHome. The CompleteHome (Registered Trademark) service is designed
to save members time and money in maintaining and improving their homes.
Members can order do-it-yourself "How-To Guides" or call the service for a
tradesperson referral. Tradespersons are available in all 50 states through a
toll-free phone line. Members also receive discounts ranging from 10% to 50%
off on a full range of home-related products and services.
Family FunSaver Club. The Family FunSaver Club (Registered Trademark)
provides its members with a variety of benefits, including the opportunity to
inquire about and purchase family travel services and family related products,
the opportunity to buy new cars at a discount, a discounted family dining
program and a Family Values Guide offering coupon savings on family related
products such as movie tickets, casual restaurants, and theme parks.
The Family Software Club. The Family Software Club(SM) has no membership
fee and offers members a way to purchase educational and entertainment CD-ROM
titles, often at an introductory price with a small commitment to buy titles at
regular club prices over a specified time period. Approximately every six to
eight weeks, members receive information on CD-ROM titles and other related
products and have the opportunity to purchase their featured selection,
alternate titles or no selections at that time. The club also provides its
members with special offers and discounts on software and other related
products from time to time.
Business Advantage. The Business Advantage(SM) service is targeted at
small business operators and provides benefits in the areas of travel, auto,
shopping, and health. In addition, the service provides its members with
special discounts and other benefits from a number of partners in product areas
that appeal to small business owners, such as telecommunications, office
supplies, shipping, printing and insurance.
Health Services. The HealthSaver(SM) membership provides discounts ranging
from 10% to 60% off retail prices on prescription drugs, eyewear, eyecare,
dental care, selected health-related services and fitness equipment, including
sporting goods. Members may also purchase prescription and over-the-counter
drugs through the mail.
INSURANCE/WHOLESALE
The Insurance/Wholesale division represented 31%, 30% and 27% of Alliance
Marketing revenues for the year ended December 31, 1997, 1996 and 1995,
respectively. The Company affiliates with financial
24
institutions, such as credit unions and community banks, to offer their
respective customer base competitively priced insurance products, primarily
accidental death insurance, as well as an array of services associated with the
Individual Membership division.
Enhancement Package Service. The Company, primarily through FISI, sells
enhancement package for financial institution consumer and business checking
and deposit account holders. FISI's financial institution clients select a
customized package of the Company's products and services and then usually adds
its own services (such as unlimited check writing privileges, personalized
checks, cashiers' or travelers' checks without issue charge, or discounts on
safe deposit box charges or installment loan interest rates). With the
Company's marketing and promotional assistance, the financial institution then
offers the complete package of account enhancements to its checking account
holders as a special program for a monthly fee. Most these financial
institutions choose a standard enhancement package, which generally includes
$10,000 of accidental death insurance associated with BCI, travel discounts and
a nationwide check cashing service. Others may choose the Company's shopping
and credit card registration services, a financial newsletter or pharmacy,
eyewear or entertainment discounts as enhancements. The accidental death
coverage is underwritten under group insurance policies with independent
insurers. The Company continuously seeks to develop new enhancement features
which may be added to any package at an additional cost to the financial
institution. The Company generally charges a financial institution client an
initial fee to implement this program and monthly fees thereafter based on the
number of customer accounts participating in that financial institution's
program. The Company's enhancement packages are designed to enable a financial
institution to generate additional fee income, because the institution should
be able to charge participating accounts more than the combined costs of the
services it provides and the payments it makes to the Company.
The Company, primarily through National Card Control Inc. ("NCCI"), a
wholly-owned subsidiary, also sells enhancement services to credit card issuers
who make these services available to their credit card holders to foster
increased product usage and loyalty. NCCI's clients create a customized package
of the Company's products and services. These enhancements include loyalty
products, such as frequent flyer/buyer programs, as well as shopping, travel,
concierge, insurance and credit card registration services. Like FISI, NCCI
generally charges its credit card issuer clients an initial fee to implement
the program and monthly fees thereafter, based on the number of accounts
participating in that institution's program.
Insurance Products. The Company, through BCI, serves as a third party
administrator for marketing accidental death insurance throughout the country
to the customers of BCI's financial institution clients. This accidental death
insurance is often combined with other Company services to enhance their value.
These products are generally marketed through direct mail solicitations, which
generally offer $1,000 of accidental death insurance at no cost to the
customers and the opportunity to choose additional coverage of up to $300,000.
The annual premium generally ranges from $10 to $250. BCI also acts as an
administrator for some term, graded term and hospital accident insurance.
BCI's insurance products and other services are offered through credit
unions to their account holders and to the account holders of FISI's and the
Company's financial institution clients. BCI also markets the Company's
shopping and travel membership services as well as certain lifestyle products
to its clients. See also "-- General -- Proposed Acquisitions and Recent
Divestiture -- Providian Acquisition" and "-- Proposed Acquisition of American
Bankers."
LIFESTYLE
The Lifestyle division represented 26%, 25% and 26% of Alliance Marketing
revenues for the year ended December 31, 1997, 1996 and 1995, respectively. The
Lifestyle division includes numerous businesses established to provide unique
products and services that are designed to enhance a customers' purchasing
power.
Products. The Company, primarily through its wholly-owned subsidiary,
EPub, offers discount programs in specific markets throughout North America and
certain international markets and enhances other of the Company's Individual
and Insurance/Wholesale products. The Company believes EPub is the largest
marketer of discount program books of this type in the United States.
25
EPub solicits restaurants, hotels, theaters, sporting events, retailers
and other businesses which agree to offer books and/or merchandise at discount
prices (primarily on a two-for-the-price-of-one or 50% discount basis). EPub
sells discount programs, under its Entertainment (Registered Trademark) ,
Entertainment (Registered Trademark) Values, Gold C (Registered Trademark) and
other trademarks, which typically provides discount offers to individuals in
the form of local discount coupon books. These books typically contain coupons
and/or a card entitling individuals to hundreds of discount offers from
participating establishments. Targeting middle to upper income consumers, many
of EPub's products also contain selected discount travel offers, including
offers for hotels, car rentals, airfare, cruises and tourist attractions. More
than 100,000 merchants participate in these programs. EPub also uses this
national base of merchants to develop other products, most notably, customized
discount programs for major corporations. These programs also may contain
additional discount offers, specifically designed for customized discount
programs.
EPub's discount coupon books are sold annually by geographic area.
Customers are solicited primarily through schools and community groups that
distribute the discount coupon books and retain a portion of the proceeds for
their non-profit causes. To a lesser extent, distribution occurs through
corporations as an employee benefit or customer incentive, as well as through
retailers and directly to the public. The discount coupon books are generally
provided to schools and community groups on a consignment basis. Customized
discount programs are distributed primarily by major corporations as loyalty
incentives for their current customers and/or as premiums to attract new
customers.
While prices of local discount coupon books vary, the customary price for
Entertainment (Registered Trademark) , Entertainment (Registered
Trademark) Values and Gold C (Registered Trademark) coupon books range between
$10 and $45. Customized discount programs are generally sold at significantly
lower prices. In 1997, over nine million Entertainment (Registered Trademark) ,
Entertainment (Registered Trademark) Values, Gold C (Registered Trademark) and
other trademarked local discount coupon books were published in North America.
Sally Foster, Inc., a subsidiary of EPub, provides elementary and middle
schools and selected youth community groups with gift wrap and other seasonal
products for sale in their fund-raising efforts. EPub uses the same sales force
that sells the discount coupon books to schools, attempting to combine the sale
of gift wrap with the sale of discount coupon books. In addition, EPub has a
specialized Sally Foster sales force.
Clubs. The Company's North American Outdoor Group, Inc. subsidiary
("NAOG") owns and operates the North American Hunting Club (Registered
Trademark) , the North American Fishing Club (Registered Trademark) , the
Handyman Club of America (Registered Trademark) , the National Home Gardening
Club (Registered Trademark) and the PGA Tour Partners Club (Registered
Trademark) , among others. Members of these clubs receive fulfillment kits,
discounts on related goods and services, magazines and other benefits.
Spark Services, Inc. ("Spark") provides database-driven dating services to
over 300 radio stations throughout the United States and Canada. Spark is the
leading provider of dating and personals services to the radio industry. Spark
has also begun to test television distribution of its services through
infomercials, as well as through short form advertising and affiliation deals
with various programs. Consumers pay for Spark's services on a per minute of
usage transaction basis.
Other. The Company's Numa Corporation subsidiary publishes personalized
heritage publications, including publications under the Halbert's name, and
markets and sells personalized merchandise.
ONLINE PRODUCTS
The Company operates netMarket (www.netmarket.com), its flagship online,
membership-based, value-oriented consumer site which offers discounts on over a
million products and services. It offers discounted shopping, travel, auto and
other benefits to both members and non-members, with members receiving
preferred pricing, access to specials, cash back benefits, low price guarantees
and extended warranties on certain items.
The Company also operates other online consumer offerings such as
Books.com (www.books.com), one of the largest online booksellers in the world
with more than four million titles available in its
26
database with discounts of up to 20 to 40 percent below retail prices;
Musicspot (www.musicspot.com) an online music store with more than 145,000
titles discounted up to 20 percent below retail prices; and GoodMovies
(www.goodmovies.com) an online movie store offering more than 30,000 movie
titles up to 20 to 40 percent below retail cost. The Company, through
Match.com, Inc. ("Match"), is the leading matchmaking service on the Internet,
servicing over 100,000 consumers. Subscriptions to the Match service range from
approximately $10 per month to just under $60 for one year.
The Company, through its Rent Net operation (www.rent.net) is the leading
apartment information and rental service on the Internet, with listings in more
than 2,000 North American cities. Rent Net's clients include many of the top 50
property management companies across North America, and its apartment and
relocation information has been seen by more than one million users monthly.
DISTRIBUTION CHANNELS
The Company markets its Individual Memberships, Insurance/Wholesale and
Lifestyle products through a variety of distribution channels. The consumer is
ultimately reached in the following ways: 1) at financial institutions or other
associations through direct marketing; 2) at financial institutions or other
associations through a direct sales force, participating merchant or general
advertising; and 3) through schools, community groups and companies. Some of
the Company's individual memberships, such as shopping, travel and auto
services, are available to computer users via on-line services and the
Internet's World Wide Web. These users are solicited primarily through direct
mail, inserts in newly-purchased computer equipment containers and interactive
communications networks, such as America Online. The Company believes that its
interactive users account for less than 2% of its total Alliance Marketing
members and customers. The Company is currently working with a range of
industry leaders developing interactive technologies. Strategic alliances have
been formed with major phone companies and on-line services.
INTERNATIONAL
As of December 31, 1997, Cendant International Membership Services had
expanded its international membership and customer base to almost four million
individuals. This base is driven by retail and wholesale membership through
over 35 major banks in Europe and Asia, as well as through other distribution
channels. The Company has exclusive licensing agreements covering the use of
its merchandising systems in Japan, Canada and Australia, under which licensees
paid initial license fees and agree to pay royalties to the Company on
membership fees, access fees and merchandise service fees paid to them.
Royalties to the Company from these licenses were less than 1% of the Company's
Alliance Marketing revenues and profits in the years-ended December 31, 1997,
1996 and 1995, respectively.
In 1997, in addition to Canadian discount coupon books, Entertainment
(Registered Trademark) discount coupon books were distributed in seven
European markets and Australia. The Canadian discount coupon books are
published independently by a Canadian subsidiary of EPub and the European
discount books are published by the Company's European subsidiaries. The
Australian discount coupon books are published by an Australian joint venture
in which EPub has a controlling interest. United States and Canadian discount
coupon books are also made available to foreign travelers. With publication of
these overseas discount programs, the Company has created additional customized
discount programs for international use.
The economic impact of currency exchange rate movements on the Company is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because the Company operates in a mix of services and
numerous countries, management believes currency exposures are fairly well
diversified. See Item 7A: "Quantitative and Qualitative Disclosure About Market
Risk".
SEASONALITY
Except principally for the sale of discount coupon books and gift wrap,
the Company's Alliance Marketing business is not seasonal. Publication of
Entertainment (Registered Trademark) , Entertainment (Registered
Trademark) Values and Gold C (Registered Trademark) discount coupon books is
substantially completed by the end of August of each year with significant
27
solicitations beginning immediately thereafter. Most cash receipts from these
discount coupon books are received in the fourth quarter and, to a lesser
extent, in the first and third quarters of each fiscal year. For financial
statement purposes, the Company recognizes revenue upon the sale of its
discount coupon books and gift wrap through participating institutions.
COMPETITION
Individual Membership. The Company believes that there are competitors
which offer membership programs similar to the Company's and some of these
entities, which include large retailers, travel agencies, insurance companies
and financial service institutions, have financial resources, product
availability, technological capabilities or customer bases greater than those
of the Company. To date, the Company has been able to compete effectively with
such competitors. However, there can be no assurances that it will continue to
be able to do so. In addition, the Company competes with traditional methods of
merchandising that enjoy widespread consumer acceptance, such as catalog and
in-store retail shopping and shopping clubs (with respect to its discount
shopping service), and travel agents (with respect to its discount travel
service). The Company's systems are not protected by patent.
Insurance/Wholesale. Each of the Company's account enhancement services
competes with similar services offered by other companies, including insurance
companies. Many of the competitors are large and more established, with greater
resources and financial capabilities than those of the Company. Finally, in
attempting to attract any relatively large financial institution as a client,
the Company also competes with that institution's in-house marketing staff and
the institution's perception that it could establish programs with comparable
features and customer appeal without paying for the services of an outside
provider.
Lifestyle. The Company believes that there are a number of competitors in
most markets throughout North America which offer similar lifestyle products.
The majority of these competitors are relatively small, with discount coupon
books in only a few markets. To date, the Company has been able to compete
effectively in markets that include these competitors, primarily on the basis
of price and product performance. The Company does not anticipate that these
competitors will significantly affect the Company's ability to expand.
COMBINED OPERATIONS
PREFERRED ALLIANCE AND CO-MARKETING ARRANGEMENTS
The Company believes a significant portion of its revenue growth
opportunities will arise from its ability to capitalize on the significant and
increasing amount of aggregate purchasing power and marketing outlets
represented by the businesses in the Company's business units. The Company
initially tapped the potential of these synergies within the lodging franchise
systems in 1993 when it launched its Preferred Alliance Program, under which
hotel industry vendors provide significant discounts, commissions and
co-marketing revenue to hotel franchisees plus preferred alliance fees to the
Company in exchange for being designated as the preferred provider of goods or
services to the owners of the Company's franchised hotels or the preferred
marketer of goods and services to the millions of hotel guests who stay in the
hotels and customers of the real estate brokerage offices each year.
The Company currently participates in preferred alliance relationships
with more than 90 companies, including AT&T, ADT Security Systems, Aon, Kodak,
VISA U.S.A., Office Depot and Coca-Cola. Fees to the Company from these
contracts have increased from $6.5 million in 1993 to $77.5 million in 1997.
The operating profit generated by most new preferred alliance arrangements
closely approximates the incremental revenue produced by such arrangements
since the costs of the existing infrastructure required to negotiate and
operate these programs are largely fixed.
OTHER BUSINESSES
TAX PREPARATION BUSINESS. In January 1998, the Company acquired Jackson
Hewitt, the second largest tax preparation service in the United States, with a
43-state network comprised of approximately
28
2,000 offices operating under the trade name "Jackson Hewitt Tax Service"
during the 1997 tax season. The Company believes that the application of its
focused management strategies and techniques for franchise systems to the
Jackson Hewitt network can significantly increase revenues produced by the
Jackson Hewitt franchise system while also increasing the quality and quantity
of services provided to franchisees.
Office locations range from stand-alone store front offices to offices
within Wal-Mart Stores, Inc. and Montgomery Ward & Co., Inc. locations. Through
the use of proprietary interactive tax preparation software, the Company is
engaged in the preparation and electronic filing of federal and state
individual income tax returns (collectively referred to as "tax returns").
During 1997, Jackson Hewitt prepared approximately 875,000 tax returns, which
represented an increase of 21% from the approximately 722,000 tax returns it
prepared during 1996. To complement its tax preparation services, the Company
also offers accelerated check requests and refund anticipation loans to its tax
preparation customers.
INFORMATION TECHNOLOGY SERVICES. WizCom International, Ltd ("WizCom"), a
wholly owned indirect subsidiary of the Company, owns and operates the Wizard
System more fully described under "TRAVEL SERVICES -- Avis Car Rental Franchise
Business -- Avis System and Wizard System" above. In 1995, Budget Rent A Car
Corporation ("Budget") entered into a computer services agreement with WizCom
that provides Budget with certain reservation system computer services that are
substantially similar to computer services provided to the Avis System. WizCom
has also entered into agreements with hotel and other rental car companies to
provide travel related reservation and distribution system services.
CREDIT INFORMATION BUSINESS. In 1995, the Company acquired Central Credit
Inc. ("CCI"), a gambling patron credit information business. CCI maintains a
database of information provided by casinos regarding the credit records of
casino gaming patrons, and provides, for a fee, such information and related
services to its customers, which primarily consist of casinos.
FINANCIAL PRODUCTS. Essex Corporation ("Essex"), a subsidiary of the
Company, is a third-party marketer of financial products for banks, primarily
marketing annuities, mutual funds and insurance products through financial
institutions. Essex generally markets annuities issued by insurance companies
or their affiliates, mutual funds issued by mutual fund companies or their
affiliates, and proprietary mutual funds of banks. Essex's contracts with the
insurance companies whose financial products it distributes generally entitle
Essex to a commission of slightly less than 1% on the premiums generated
through Essex's sale of annuities for these insurance companies.
MUTUAL FUNDS. In August 1997, the Company formed a joint venture with
Frederick R. Kobrick, a longtime mutual fund manager, to form a mutual fund
company known as Kobrick-Cendant Funds, Inc. ("Kobrick-Cendant").
Kobrick-Cendant currently offers two no-load funds, Kobrick-Cendant Capital
Fund and Kobrick-Cendant Emerging Growth Fund.
DISCONTINUED OPERATIONS
On August 12, 1998, the Company announced that its Executive Committee of
the Board of Directors committed to discontinue the Company's consumer software
and classified advertising businesses by disposing of wholly-owned subsidiaries
Cendant Software Corporation ("Software") and Hebdo Mag, respectively. The
Company disclosed that it has entered into a definitive agreement to sell Hebdo
Mag to its former 50% owners for 7.1 million shares of Company common stock and
approximately $410 million in cash. The transaction is expected to generate a
gain of approximately $250 million upon anticipated consummation date in the
fourth quarter of 1998 subject to certain conditions, including regulatory
approval and financing by the purchaser. The Company also disclosed that it has
engaged investment bankers to analyze various strategic alternatives in regard
to the disposition of Software. The Company anticipates that the disposition of
Software will be completed within one year and will result in a significant
gain.
SOFTWARE. The Company offers consumer software in various multimedia
forms, predominately on CD-ROM for personal computers. The Company's Cendant
Software unit is one of the largest personal computer consumer software groups
in the world, and a leader in entertainment, educational and personal
29
productivity software. It includes Sierra On-Line, Inc., Blizzard Entertainment
and Knowledge Adventure, Inc., and offers such titles as Diablo, Starcraft, You
Don't Know Jack, King's Quest, JumpStart, Math Blaster, Reading Blaster and
many others. These products are offered through a variety of distribution
channels, including specialty retailers, mass merchandisers, discounters and
schools.
The entertainment, education and productivity software industry is
competitive. The Company competes primarily with other developers of multimedia
PC based software. Products in the market compete primarily on the basis of
subjective factors such as entertainment value and objective factors such as
price, graphics and sound quality. Large diversified entertainment, cable and
telecommunications companies, in addition to large software companies, are
increasing their focus on the interactive entertainment and education software
market, which will result in greater competition for the Company.
The Company's software segment has seasonal elements. Revenues are
typically highest during the third and fourth quarters and lowest during the
first and second quarters. This seasonal pattern is due primarily to the
increased demand for the Company's products during the holiday season.
CLASSIFIED ADVERTISING BUSINESS. Hebdo Mag is an international publisher
of over 180 titles and distributor of classified advertising information with
operations in fifteen countries including Canada, France, Sweden, Hungary,
Taiwan, the United States, Italy, Russia, the Netherlands, Australia, Argentina
and Spain. Hebdo Mag is involved in the publication, printing and distribution,
via print and electronic media, of branded classified advertising information
products. Hebdo Mag has also expanded into other related business activities,
including the distribution of third-party services and classified advertising
web sites.
Hebdo Mag publishes over 11 million advertisements per year in over 180
publications. With a total annual circulation of over 85 million, management
estimates Hebdo Mag publications are read by over 200 million people. Unlike
newspapers which contain significant editorial content, Hebdo Mag publications
contain primarily classified and display advertisements. These advertisements
target buyers and sellers of goods and services in the markets for used and new
cars, trucks, boats, real estate, computers, second-hand general merchandise
and employment as well as personals.
Hebdo Mag owns leading local classified advertising publishing franchises
in most of the regional markets where it has a presence. In addition to its
print titles, Hebdo Mag generates revenues by distributing third-party services
related to its classified business such as vehicle financing, vehicle and life
insurance and warranty protection.
The classified advertising information industry is highly fragmented, with
a large number of small, independent companies publishing local or regional
titles. Hebdo Mag is the only major company focused exclusively on this
industry on an international basis. In most of its major markets, the Company
owns leading classified advertising franchises which have long standing,
recognized reputations with readers and advertisers. Among the Company's
leading titles, many of which have been in existence for over 15 years, are: La
Centrale des Particuliers (France) - 1969, Expressz (Hungary) - 1986, The
Trader (Indianapolis) - 1969, Traders Post (Nashville) - 1972, Car News
(Taiwan) - 1991, Secondamano (Italy) - 1977, Auto Trader - 1978, Renters News -
1998, The Computer Paper (Canada) - 1989, Iz Ruk v Ruki (Russia) - 1992, Gula
Tidningen (Sweden) - 1981, Segundamano (Argentina) and The Melbourne Trading
Post (Australia) - 1966.
Hebdo Mag publications fall into three general revenue generating models:
1. Paid ad papers in which both the individual and commercial "display" ads
are paid for as well as having paid circulation. Examples include Auto
Trader (Canada), La Centrale des Particuliers (France), Truck Trader
(Canada), and Expressz (Hungary).
2. Free ad papers in which the individual classified ads are free and
commercial "display" ads, are paid for, with paid circulation. Examples
include Secondamano (Italy), Buy & Sell (Canada), Gula Tidningen (Sweden)
and Iz Ruk v Ruki (Russia).
3. Free distribution papers in which the ads, typically commercial
classified and "display" ads, are paid for and the paper is distributed
without charge to free-standing racks at targeted locations. Examples
include Renters News, Immobilier Hebdo and Condo Guide (Canada) and Zart
New Homes Guide (Indianapolis).
30
Because of the broad mix of the types of classified publications published
by Hebdo Mag, it has a diversified revenue mix. In 1997, Hebdo Mag's classified
advertisements represented 29% of its revenues, commercial display
advertisements 37%, circulation 31%, and printing, royalties and other services
3%. Hebdo Mag is not dependent on any one publication, with the Company's
largest publication, La Centrale des Particuliers ("La Centrale"), representing
only 11% of revenues in 1997. Hebdo Mag is diversified geographically with 63%
of 1997 revenues coming from Europe, 23% coming from Canada, 10% coming from
the United States and 4% coming from Asia. Hebdo Mag is also diversified across
the products sold in its publications such as automobiles, real estate and
general merchandise.
Specialized classified publications compete locally with daily newspapers,
and in some segments, with free shoppers and other classified publications. The
competition is both for the content, the advertisement, and for the consumer of
that content, the reader.
REGULATION
Alliance Marketing Regulation. The Company markets its products and
services through a number of distribution channels including telemarketing,
direct mail and on-line. These channels are regulated on the state and federal
level and the Company believes that these activities will increasingly be
subject to such regulation. Such regulation may limit the Company's ability to
solicit new members or to offer one or more products or services to existing
members and may materially affect the Company's business and revenues.
A number of the Company's products and services (such as Buyers Advantage
(Registered Trademark) and certain insurance products) are also subject to
state and local regulations. The Company believes that such regulations do not
have a material impact on its business or revenues.
Franchise Regulation. The sale of franchises is regulated by various state
laws as well as by the Federal Trade Commission (the "FTC"). The FTC requires
that franchisors make extensive disclosure to prospective franchisees but does
not require registration. A number of states require registration or disclosure
in connection with franchise offers and sales. In addition, several states have
"franchise relationship laws" or "business opportunity laws" that limit the
ability of the franchisor to terminate franchise agreements or to withhold
consent to the renewal or transfer of these agreements. While the Company's
franchising operations have not been materially adversely affected by such
existing regulation, the Company cannot predict the effect of any future
legislation or regulation.
Real Estate Regulation. The federal Real Estate Settlement Procedures Act
and state real estate brokerage laws restrict payments which real estate
brokers and mortgage brokers and other parties may receive or pay in connection
with the sales of residences and referral of settlement services (e.g.,
mortgages, homeowners insurance, title insurance). Such laws may to some extent
restrict preferred alliance arrangements involving the Company's real estate
brokerage franchisees, mortgage business and relocation business. The Company's
mortgage banking services business is also subject to numerous federal, state
and local laws and regulations, including those relating to real estate
settlement procedures, fair lending, fair credit reporting, truth in lending,
federal and state disclosure, and licensing.
Timeshare Exchange Regulation. The Company's timeshare exchange business
is subject to foreign, federal, state and local laws and regulations including
those relating to taxes, consumer credit, environmental protection and labor
matters. In addition, the Company is subject to state statutes in those states
regulating timeshare exchange services, and must prepare and file annually,
with regulators in states which require it, the "RCI Disclosure Guide to
Vacation Exchange". The Company is not subject to those state statutes
governing the development of timeshare condominium units and the sale of
timeshare interests, but such statutes directly affect the members and resorts
that participate in the RCI Network. Therefore, the statutes indirectly impact
the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 34,000 persons
full time. Management considers its employee relations to be satisfactory.
31
ITEM 2. PROPERTIES
The principal executive offices of the Company are located in a building
owned by the Company and situated at 6 Sylvan Way, Parsippany, New Jersey
07054.
The Travel Services Division owns two properties, a 166,000 facility in
Virginia Beach, Virginia which serves as a satellite administrative and
reservations facility for Wizcom and ARAC, and a property located in Kettering,
Europe which is the European office for RCI. The Travel Services Division also
leases space for its reservations centers and data warehouse in Winner and
Aberdeen, South Dakota; Phoenix, Arizona; Knoxville and Elizabetown, Tennessee;
Tulsa and Drumright, Oklahoma; Indianapolis, Indiana; Orangeburg, South
Carolina and St. John, New Brunswick, Canada pursuant to leases that expire in
2000, 2003, 2007, 2015, 2004, 1999, 2001, 2000/2001, 2008, 2008 and 2008
respectively. The Tulsa, Oklahoma location serves as an Avis car rental
reservations center. In addition, the Travel Services Division has 38 leased
offices spaces located in various countries outside the United States.
The Real Estate Services Division has two owned buildings in Mission
Viejo, California, one in Westbury, New York and one owned internationally in
Swindon, UK. The Real Estate Services Division has leased properties located in
Danbury, Connecticut; Oak Brook and Schaumburg, Illinois; Mount Laurel, New
Jersey and Walnut Creek, CA, pursuant to leases that expire in 2003, 2003,
2001, 2001, and 2003, respectively. The Real Estate Services Division shares
approximately 6 leases with the Travel Services Division in various locations
that function as sales offices.
The Alliance Marketing Division's principal offices are located in
Stamford and Trumbull, Connecticut. The Alliance Marketing Division has an
owned building that is located in Cheyenne, Wyoming and also leases space for
several of its call centers in Aurora, Colorado; Westerville, Ohio; Brentwood,
Tennessee; Nashville, Tennessee; Houston and Arlington, Texas; San Carlos,
California and Woburn, Massachusetts and Great Falls, Montana pursuant to
leases that expire in 2000, 2005, 2002, 2006, 2000, 2000, 2003, 2001 and 1999,
respectively. In addition, the Alliance Marketing Division has leased smaller
space in various locations for business unit and ancillary needs.
Internationally, the Alliance Marketing Division has approximately 45 leased
office spaces located in various countries.
The Company owns properties located in Torrance and Oakhurst, California
and Virginia Beach, Virginia and leases 9 office spaces internationally, which
represent space for businesses classified as "Other". In addition, there are
approximately 66 sales offices and other ancillary office space leased in
locations around the country.
Management believes that such properties are sufficient to meet its
present needs and does not anticipate any difficulty in securing additional
space, as needed, on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
As described in Item 1 above, as a result of the discovery of accounting
irregularities in the former CUC business units and the investigation of the
Audit Committee of the Company's Board of Directors into such matters, the
Company has restated its previously reported financial results for 1997, 1996
and 1995.
Since the Company's announcement of the discovery of such irregularities
on April 15, 1998, and prior to the date hereof, seventy-one purported class
action lawsuits and one individual lawsuit have been filed against the Company,
and certain current and former officers and directors of the Company and HFS,
asserting various claims under the federal securities laws (the "Federal
Securities Actions"). Some of the actions also name as defendants Merrill Lynch
& Co. and, in one case, Chase Securities Inc., underwriters for the Company's
PRIDES securities offerings; two others also name Ernst & Young LLP, the
Company's former independent accountants. Sixty-four of the Federal Securities
Actions were filed in the United States District Court for the District of New
Jersey, six were filed in the United States District Court for the District of
Connecticut (including the individual action), one was filed in the United
States District Court for the Eastern District of Pennsylvania and one was
filed in New Jersey Superior Court. The Federal Securities Actions filed in the
District of Connecticut and the Eastern District of Pennsylvania have been
transferred to the District of New Jersey. On June 10, 1998, the Company moved
to dismiss or
32
stay the Federal Securities Action filed in New Jersey Superior Court on the
ground that, among other things, it is duplicative of the actions filed in
federal courts. The court granted that motion on August 7, 1998, without
prejudice to the plaintiff's right to re-file the case in the District of New
Jersey.
Certain of the Federal Securities Actions purport to be brought on behalf
of purchasers of the Company's common stock and/or options on common stock
during various periods, most frequently beginning May 28, 1997 and ending April
15, 1998 (although the alleged class periods begin as early as March 21, 1995
and end as late as July 15, 1998). Others claim to be brought on behalf of
persons who exchanged HFS common stock for the Company's common stock in
connection with the Merger. Some plaintiffs purport to represent both of these
types of investors. In addition, eight actions pending in the District of New
Jersey purport to be brought, either in their entirety or in part, on behalf of
purchasers of the Company's PRIDES securities. The complaints in the Federal
Securities Actions allege, among other things, that as a result of accounting
irregularities, the Company's previously issued financial statements were
materially false and misleading and that the defendants knew or should have
known that these financial statements caused the prices of the Company's
securities to be inflated artificially. The Federal Securities Actions
variously allege violations of Section 10(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder,
Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder,
Section 20(a) of the Exchange Act, and Sections 11, 12 and 15 of the Securities
Act of 1933, as amended (the "Securities Act"). Certain actions also allege
violations of common law. The individual action also alleges violations of
Section 18(a) of the Exchange Act and the Florida securities law. The class
action complaints seek damages in unspecified amounts. The individual action
seeks damages in the amount of approximately $9 million plus interest and
expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
Order consolidating the 50 Federal Securities Actions that had at that time
been filed in the United States District Court for the District of New Jersey
under the caption In re: Cendant Corporation Litigation, Master File No.
98-1664 (WHW). Pursuant to the Order, all related actions subsequently filed in
the District of New Jersey are also to be consolidated under that caption.
United States District Judge William H. Walls has selected lead plaintiffs to
represent all potential class members in the consolidated action. He has also
ordered that applications seeking appointment as lead counsel to represent the
lead plaintiffs are to be filed with the Court by September 17, 1998. The
selection of lead counsel is pending.
In addition, on April 27, 1998, a purported shareholder derivative action,
Deutch v. Silverman, et al., No. 98-1998 (WHW), was filed in the District of
New Jersey against certain of the Company's current and former directors and
officers; The Bear Stearns Companies, Inc.; Bear Stearns & Co., Inc.; and, as a
nominal party, the Company. The complaint in the Deutch action alleges that
certain individual officers and directors of the Company breached their
fiduciary duties by selling shares of the Company's stock while in possession
of non-public material information concerning the accounting irregularities.
The complaint also alleges various other breaches of fiduciary duty,
mismanagement, negligence and corporate waste, and seeks damages on behalf of
the Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of Delaware. The
Corwin action is purportedly brought both derivatively, on behalf of the
Company, and as a class action, on behalf of all shareholders of HFS who
exchanged their HFS shares for the Company's shares in connection with the
Merger. The Corwin action names as defendants HFS and twenty-eight individuals
who are or were directors of Cendant and HFS. The complaint in the Corwin
action, as amended on July 28, 1998, alleges that HFS and its directors
breached their fiduciary duties of loyalty, good faith, care and candor in
connection with the Merger, in that they failed to properly investigate the
operations and financial statements of the Company before approving the Merger
at an allegedly inadequate price. The amended complaint also alleges that the
Company's directors breached their fiduciary duties by entering into an
employment agreement with Cendant's former Chairman, Walter Forbes, in
connection with the Merger that purportedly amounted to corporate waste. The
Corwin action seeks, among other things, recission of the Merger and
compensation for all losses and damages allegedly suffered in connection
therewith.
The staff of the SEC and the United States Attorney for the District of
New Jersey are conducting investigations relating to the matters referenced
above. The SEC staff has advised the Company that its inquiry should not be
construed as an indication by the SEC or its staff that any violations of law
have occurred.
33
In connection with the Merger, certain officers and directors of HFS
exchanged their shares of HFS common stock and options exercisable for HFS
common stock for shares of the Company's Common Stock and options exercisable
for the Company's Common Stock, respectively. As a result of the aforementioned
accounting irregularities, such officers and directors have advised the Company
that they believe they have claims against the Company in connection with such
exchange. In addiiton, certain current and former officers and directors of the
Company would consider themselves to be members of any class ultimately
certified in the Federal Securities Actions now pending in which the Company is
named as a defendant by virtue of their having been HFS stockholders at the
time of the Merger.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material adverse impact on the
Company's financial position, results of operations and cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of its shareholders on October 1, 1997,
pursuant to a Notice of Special Meeting and Proxy Statement dated August 28,
1997, a copy of which has been filed previously with the Securities and
Exchange Commission, at which shareholders of the Company considered and
approved the Merger (and related transactions contemplated thereby) and the
Company's 1997 Stock Incentive Plan. The results of such matters are as
follows:
Proposal 1: To approve the proposed Merger (and related transactions
contemplated below).
Results: For Against Abstain
280,653,487 630,695 911,958
Proposal 2: To approve the Company's 1997 Stock Incentive Plan.
Results: For Against Abstain
214,725,702 65,934,965 1,535,472
34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK
HOLDER MATTERS
MARKET PRICE ON COMMON STOCK
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "CD". At September 25, 1998 the number of
stockholders of record was approximately 13,768. The following table sets forth
the quarterly high and low sales prices per share as reported by the NYSE for
1997 and 1996 based on a year ended December 31.
1996 HIGH LOW
- ----------------------------------- ---------- ---------
First Quarter ................... 26 11/64 19 5/64
Second Quarter .................. 26 1/2 18 43/64
Third Quarter ................... 26 37/64 21 1/4
Fourth Quarter .................. 27 21/64 22 1/2
1997 HIGH LOW
- ----------------------------------- -------- ---------
First Quarter ................... 26 7/8 22 1/2
Second Quarter .................. 26 3/4 20
Third Quarter ................... 31 3/4 23 11/16
Fourth Quarter .................. 31 3/8 26 15/18
On September 25, 1998, the last sale price of the Company's Common Stock
on the NYSE was $13 9/16 per share.
All stock price information has been restated to reflect a three-for-two
stock split effected in the form of a dividend to stockholders of record on
October 7, 1996, payable on October 21, 1996.
DIVIDEND POLICY
The Company expects to retain its earnings for the development and
expansion of its business and the repayment of indebtedness and does not
anticipate paying dividends on Common Stock in the foreseeable future.
35
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the Company's financial statements and notes thereto appearing
on pages F-1 through F-61. Such financial data for 1997, 1996 and 1995 was
restated as described in Note 3 to the Consolidated Financial Statements.
Financial data prior to December 31, 1994 has not been restated and is
therefore not presented herein. Previously reported information for periods
prior to December 31, 1994 should not be relied upon.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997(4)(5)(6) 1996(4)(7) 1995(4)(8)
--------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:(1)(2)
Net Revenues $ 4,240.0 $ 3,237.7 $ 2,616.1
------------ ------------ ------------
Expenses:
Total expenses exclusive of depreciation,
amortization and interest, net 3,694.4 2,544.4 2,148.8
Depreciation and amortization 237.7 145.5 100.4
Interest-net 50.6 14.3 16.6
------------ ------------ ------------
Total expenses 3,982.7 2,704.2 2,265.8
Income from continuing operations
before extraordinary gain and
cumulative effect of accounting change 66.3 313.3 207.1
Per share information:
Income from continuing operations
before extraordinary gain and
cumulative effect of accounting change .08 .39 .28
Weighted average shares outstanding --
diluted 851.7 821.6 763.7
AT DECEMBER 31,
-----------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Balance Sheet Data:(1)(2)(3)
Total assets $ 14,073.4 $ 12,762.5 $ 8,519.5
Long-term debt 1,246.0 780.8 336.0
Assets under management and mortgage
programs 6,443.7 5,729.2 4,955.6
Debt under management and mortgage
programs 5,602.6 5,089.9 4,427.9
Shareholders' equity 3,921.4 3,955.7 1,898.2
- ----------
(1) Financial data includes the following mergers and acquisitions accounted
for under the pooling of interests method of accounting: (i) the Merger;
(ii) the April 30, 1997 merger with PHH Corporation ("PHH"); (iii) the
August 1996 merger with Ideon Group, Inc. ("Ideon"); and (iv) the 1995
acquisitions of Getko Group Inc., North American Outdoor Group, Inc. and
Advance Ross Corporation.
(2) Financial data includes the operating results of the following
significant acquisitions accounted for under the purchase method of
accounting since the respective dates of acquisition: (i) Resort
Condominiums International, Inc. ("RCI") in November 1996; (ii) Avis,
Inc. ("Avis") equity investment in October 1996; (iii) Coldwell Banker
Corporation ("Coldwell Banker") in May 1996; and (iv) Century 21 Real
Estate Corporation in August 1995.
(3) Prior to the Merger, CUC and HFS had not declared or paid cash dividends
on their common stock. However, cash dividends were declared and paid by
Ideon and PHH to their shareholders prior to
36
their respective mergers with the Company. The Company expects to retain
its earnings for the development and expansion of its business and the
repayment of indebtedness and does not anticipate paying dividends on its
common stock in the foreseeable future.
(4) Excludes a non-cash after-tax charge of $283.1 million or $.35 per
diluted share, to account for the cumulative effect of a change in
accounting, effective January 1, 1997, related to revenue and expense
recognition for memberships. The effect of adopting such accounting
change on the Company's 1997 operating results, before the cumulative
effect adjustment, was additional after-tax expense of $15.3 million or
$0.02 per diluted share comprised of a reduction in revenues of $4.7
million with an increase in operating expenses of $19.0 million and a tax
benefit of $8.4 million. The pro forma effect of the accounting change on
income from continuing operations before extraordinary gain for 1996 and
1995, as if the accounting change had been applied retroactively to those
years, was additional after-tax expense of $7.4 million ($0.01 per
diluted share) and $29.1 million ($0.04 per diluted share), respectively.
(5) Includes merger related costs and other unusual charges ("Unusual
Charges") related to continuing operations, recorded during the second
and fourth quarters of 1997 primarily associated with and coincident to
the Merger and the PHH Merger, of $704.1 million ($504.7 million
after-tax, or $.58 per diluted share).
(6) Excludes extraordinary gain, net of tax of $26.4 million, or $.03 per
diluted share, related to the sale of a Company subsidiary which was sold
in consideration of Federal Trade Commission anti-trust concerns within
the timeshare industry.
(7) Includes provision for merger-related costs and other unusual charges,
related to continuing operations of $109.4 million ($70.0 million
after-tax, or $.09 per diluted share) incurred in connection with the
1996 merger with Ideon.
(8) Includes provision for costs related to the abandonment of certain Ideon
development efforts and the restructuring of the SafeCard division and
corporate infrastructure of Ideon. The charges aggregated $97.0 million
($62.1 million, after-tax or $.08 per diluted share).
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
On December 17, 1997, Cendant Corporation (the "Company") was created through
the merger (the "Cendant Merger") of HFS Incorporated ("HFS") and CUC
International Inc. ("CUC"). The Company is one of the foremost consumer and
business services companies in the world. The combination of HFS and CUC
provides the Company's businesses new access to consumer contacts through the
Company's expanded consumer base, while providing such businesses with the
direct marketing expertise necessary to successfully cross-market within its
existing business units.
The Company provides fee-based services to consumers within the Travel, Real
Estate and Alliance Marketing business segments. The Company generally does not
own the assets or share the risks associated with the underlying businesses of
its customers. In the Travel Services segment, the Company is the world's
largest franchisor of lodging facilities and rental car facilities, the leading
provider of vacation timeshare exchange services and a leading provider of
international fleet management services. In the Real Estate Services segment,
the Company is both the world's largest franchisor of residential real estate
brokerage offices and provider of corporate relocation services and is a
leading mortgage lender in the United States. In the Alliance Marketing
segment, the Company is a leading provider of membership consumer services and
products.
As publicly announced on April 15, 1998, the Company discovered accounting
irregularities in the former CUC business units. The Audit Committee of the
Company's Board of Directors (the "Audit Committee") initiated an investigation
into such matters, which has since been completed (see "Litigation"). As a
result of the findings of the Audit Committee investigation and the Company's
investigation, the Company has restated its financial results for the years
1995 through 1997. The financial information contained herein has been restated
to incorporate all relevant information obtained from the aforementioned
investigations. The 1997 annual results, presented herein, have also been
restated for a change in accounting, effective January 1, 1997, related to
revenue and expense recognition for memberships (See Notes 2 and 3 to the
consolidated financial statements).
The restated net income (loss) totalled $(217.2) million, $330.0 million
and $229.8 million in 1997, 1996 and 1995, respectively ($(0.27), $0.41, and
$0.31 per diluted share, respectively). The Company originally reported
corresponding net income of $55.4 million, $423.6 million and $302.8 million in
1997, 1996 and 1995, respectively ($0.06, $0.52 and $0.42 per diluted share,
respectively).
The Company originally reported $872.2 million of 1997 net income excluding
merger-related costs and other unusual charges ("Unusual Charges") or $1.00 per
diluted share which included $816.2 million or $.94 per diluted share from
continuing operations. The restated income from continuing operations excluding
Unusual Charges, extraordinary gain and the cumulative effect of a change in
accounting totalled $571.0 million or $.66 per diluted share. The $245.2
million or $.28 per diluted share decrease in income from continuing operations
represents additional after-tax expense of $15.3 million ($.02 per diluted
share) due to the aforementioned change in accounting and $229.9 million
($.26 per diluted share) of accounting errors and irregularities.
The Company originally reported $542.3 million and $364.9 million of 1996 and
1995 net income excluding Unusual Charges, respectively ($0.67 and $0.50 per
diluted share, respectively). The restated income from continuing operations
excluding Unusual Charges totalled $383.3 million and $269.2 million in 1996
and 1995, respectively ($0.47 and $0.36 per diluted share, respectively). The
$159.0 million and $95.7 million decreases in 1996 and 1995, respectively,
primarily represent accounting errors and irregularities in both periods.
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information contained in
the Company's Consolidated Financial Statements and accompanying Notes thereto
appearing elsewhere in this Form 10-K/A.
The operating results of the Company and its underlying business segments are
comprised of business combinations, which were accounted for as poolings of
interests. Accordingly, all financial information has been restated as if all
of the pooled companies operated as one entity since inception. In addition,
the Company and certain of its business segments also include businesses, which
were acquired and accounted
38
for by the purchase method of accounting. Accordingly, the results of
operations of such acquired companies were included in the consolidated
operating results of the Company from the respective dates of acquisition. See
"Liquidity and Capital Resources - Business Combinations" for a discussion of
the Company's mergers and acquisitions. In the underlying Results of Operations
discussion, operating expenses exclude net interest expense and income taxes.
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 VARIANCE
(IN MILLIONS) ------------- ------------- -----------
CONTINUING OPERATIONS
Revenue ................................... $ 4,240.0 $ 3,237.7 31%
--------- ----------
Operating expenses:
Excluding Unusual Charges .............. 3,228.0 2,580.5 25%
Unusual Charges (1) .................... 704.1 109.4 544%
--------- ----------
Operating income .......................... 307.9 547.8 (44%)
Interest, net ............................ 50.6 14.3 254%
--------- ----------
Pre-tax income before extraordinary
gain and cumulative effect of
accounting change ........................ 257.3 533.5 (52%)
Provision for income taxes ................ 191.0 220.2 (13%)
--------- ----------
Income from continuing operations ......... 66.3 313.3 (79%)
Income (loss) from discontinued
operations, net of taxes ................. (26.8) 16.7 *
Extraordinary gain, net of tax ............ 26.4 -- *
Cumulative effect of accounting
change, net of tax ....................... (283.1) -- *
--------- ---------- ---
Net income (loss) ......................... $ (217.2) $ 330.0 (166%)
========== ==========
- ----------
(1) Merger-related costs and other unusual charges ("Unusual Charges")
* Not meaningful
Operating income from continuing operations decreased $239.9 million (44%)
despite a $1.0 billion (31%) revenue increase and only a $647.5 million (25%)
increase in operating expenses, excluding Unusual Charges. A discussion of
operating income excluding Unusual Charges is included in the segment
discussion to follow. Unusual Charges increased $594.7 million (544%)
representing merger-related costs and other unusual charges incurred primarily
in connection with and coincident to HFS's merger with PHH Corporation (the
"PHH Merger") in April 1997 (the "Second Quarter 1997 Charge") and the Cendant
Merger in December 1997 (the "Fourth Quarter 1997 Merger Charge"). Unusual
Charges primarily represent costs such as irrevocable contributions to
independent trusts, asset impairments as well as exit costs for terminated
personnel, consolidation of office locations and terminated contracts
coincident with the mergers. The Unusual Charges are discussed separately
below.
As a result of the discussion above, pre-tax income from continuing operations
before extraordinary gain and cumulative effect of accounting change decreased
$276.2 million (52%) to $257.3 million. In addition to the decrease in
operating income discussed above, interest, net, increased $36.3 million (254%)
to $50.6 million. The increase in interest, net, resulted primarily from the
February 1997 issuance of $550 million 3% Convertible Subordinated Notes and
interest income earned in 1996 on approximately $420 million of excess proceeds
generated from the $1.2 billion public offering of 46.6 million shares of
Company common stock in May 1996. The increase in interest, net, was partially
offset by a decrease in
39
the weighted average interest rate from 7.5% in 1996 to 6.0% in 1997 as a
result of a greater proportion of fixed rate debt carrying lower interest rates
to total debt.
Income from continuing operations decreased $247.0 million (79%) to $66.3
million. This resulted from the unfavorable variance in pre-tax income and an
increase in the effective income tax rate from 41.2% in 1996 to 74.3% in 1997.
The 1997 effective income tax rate includes an additional 29.1% effective tax
rate on Unusual Charges due to the significant non-deductibility of such costs.
The effective income tax rate on 1997 income from continuing operations
excluding Unusual Charges is 40.6%.
Discontinued operations showed a $26.8 million net loss in 1997 compared to
$16.7 million of net income in 1996. The operating results of discontinued
operations included $15.2 million of extraordinary losses, net of tax, in 1997
and $24.4 million and $24.9 million of Unusual Charges, net of tax, in 1997 and
1996, respectively. Unusual Charges in 1997 primarily consisted of $19.4
million of after tax severance associated with four terminated consumer
software company executives and $5.0 million of after tax compensation expense
incurred in connection with a stock appreciation rights plan paid upon a change
in control associated with the October 1997 merger with Hebdo Mag International
("Hebdo Mag"). The Hebdo Mag merger also resulted in a $15.2 million
extraordinary loss, net of tax, associated with the early extinguishment of
debt. Unusual Charges in 1996 consisted primarily of professional fees incurred
in connection with mergers with Sierra On-Line, Inc. ("Sierra") and Davidson
and Associates, Inc. ("Davidson") in July 1996. Excluding Unusual Charges and
extraordinary items, income from discontinued operations decreased $28.8
million (69%) from $41.6 million in 1996 to $12.8 million in 1997. While
classified advertising net income remained relatively unchanged from 1996, net
income from the consumer software business decreased $28.5 million (72%) to
$11.1 million in 1997. Increased sales in 1997 of $49.2 million (13%) was
offset by increased operating expenses of $93.2 million (29%). The
disproportionate increase in operating expenses results from accelerating
development and marketing costs incurred on titles without a corresponding
revenue increase partially attributable to titles which were not released to
the marketplace as planned in December 1997.
The $26.4 million extraordinary gain represents the after tax gain on the sale
of Interval International, Inc. ("Interval") in December 1997. The Federal
Trade Commission directed the Company to sell Interval in connection with the
Cendant Merger as a result of anti-trust concerns regarding the combined market
share in the timeshare exchange industry of Interval and HFS subsidiary, Resort
Condominiums International, Inc. ("RCI").
The $283.1 million represents a non-cash after-tax charge to account for a
cumulative effect of an accounting change. In August 1998, in connection with
the Company's cooperation with the Securities and Exchange Commission's ("SEC")
investigation of accounting irregularities discovered in the former CUC
business units, the SEC Staff concluded that if membership fees are fully
refundable during the entire membership period, membership revenue should be
recognized at the end of the membership period upon the expiration of the
refund offer. The SEC Staff further concluded that non-refundable solicitation
costs should be expensed as incurred since such costs are not recoverable if
membership fees are refunded. The Company previously recognized revenue and
expenses associated with the selling of memberships over the term of the
membership period. While the Company believed that its prior accounting
policies were appropriate and consistent with industry practice, it agreed to
change its accounting for membership revenue and expenses effective January 1,
1997.
1997 MERGER RELATED COSTS AND OTHER UNUSUAL CHARGES
In 1997, the Company incurred merger-related costs and other unusual charges
("Unusual Charges") of $738.0 million of which $704.1 million ($504.7 million
after tax or $.58 per diluted share) was related to continuing operations and
$33.9 million was associated with businesses which are discontinued. Charges
incurred during the fourth quarter of 1997 of $454.9 million were substantially
associated with and/or coincident to the Cendant Merger and the merger with
Hebdo Mag (collectively, the "Fourth Quarter 1997 Charge"). Unusual Charges of
$283.1 million, comprised of $295.4 million of charges incurred in the second
quarter of 1997 reduced by $12.3 million of changes in estimates recorded in
the fourth quarter of 1997, were substantially associated with the PHH Merger
(the "Second Quarter 1997 Charge"). The Unusual Charges recorded during 1997
related to the aforementioned mergers and the utilization of such liabilities
is summarized by charge below.
40
FOURTH QUARTER 1997 CHARGE
The Company incurred Unusual Charges in the fourth quarter of 1997 totaling
$454.9 million substantially associated with the Cendant and Hebdo Mag mergers.
In addition to $170.0 million of professional fees and executive compensation
expense incurred directly as a result of the mergers, the Company incurred
$284.9 million of costs resulting from reorganization plans formulated prior to
and implemented as a result of the merger.
The Company determined to streamline its corporate organization functions and
eliminate several office locations in overlapping markets. Management initiated
a plan in 1997 to consolidate European call centers in Cork, Ireland in 1998
and upgrade the quality standards of its hotel franchise businesses, which
resulted in planned terminations of franchise properties commencing in January
1998. In December 1997, the Company irrevocably contributed $70.0 million to
independent technology trusts which made technology investments for the direct
benefit of hotel and real estate franchisees. Management also approved a plan
to terminate a contract, which may restrict the Company from maximizing
opportunities afforded by the merger of HFS and CUC.
Following is a description of costs by type of expenditure and reduction of
corresponding liabilities through December 31, 1997.
Unusual Charges include $93.0 million of estimated professional fees primarily
consisting of investment banking, legal and accounting fees incurred in
connection with the mergers. Approximately $43.4 million of invoices were paid
in the fourth quarter of 1997 leaving a $49.6 million balance to be paid in
1998. The Company also incurred $170.7 million of personnel related costs
including $73.3 million of retirement and employee benefit plan costs, $23.7
million of restricted stock compensation, $61.4 million of severance resulting
from consolidations of corporate functions and nine European call centers and
$12.3 million of other personnel related costs. Total employees to be
terminated, including seven corporate employees, approximated 474 with limited
terminations in 1997. The $170.7 million of personnel related liabilities were
reduced in 1997 by $35.2 million of non-cash reductions primarily including
$23.7 and $9.5 million of costs associated with restricted stock and stock
option compensation, respectively, and $8.9 million of personnel related
payments. Approximately $45.3 million of retirement plan costs were paid in
January 1998. Unusual Charges include $78.3 million of business termination
costs which consists of a $48.3 million impairment of hotel franchise agreement
assets associated with a quality upgrade program and $30.0 million of contract
termination costs. Of the $78.3 million of business termination liabilities,
$30.0 million was paid in December 1997 and $48.3 million of non-cash
reductions of intangible assets were recorded. Facility related and other
unusual charges of $112.9 million include $70.0 million of irrevocable
contributions to independent technology trusts for the direct benefit of
lodging and real estate franchisees, $16.4 million of building lease
termination costs and a $22.0 million reduction in intangible assets associated
with the Company's wholesale annuity business for which impairment was
determined in accordance with SFAS 121 in the fourth quarter of 1997.
Approximately $70.0 million was paid for these obligations in December 1997 and
the remaining $21.2 million is anticipated to be paid over the earlier of lease
buy-out or lease term.
SECOND QUARTER 1997 CHARGE
The $295.4 million of Unusual Charges in the second quarter of 1997 was
primarily associated with the PHH Merger. During the fourth quarter, as a
result of changes in estimates, the Company adjusted certain merger-related
liabilities which resulted in a $12.3 million credit to Unusual Charges. In
addition to $125.8 million of professional fees and executive compensation
expenses incurred directly as a result of the merger, the Company incurred
$157.3 million of expenses resulting from reorganization plans formulated prior
to and implemented as of the merger date. The merger afforded the combined
Company an opportunity to rationalize its combined corporate, real estate and
travel segment businesses, and corresponding support and service functions to
gain organizational efficiencies and maximize profits. Such initiatives
included 500 job reductions including the virtual elimination of all PHH
Corporate functions and facilities in Hunt Valley, Maryland. Management
initiated a plan prior to the merger to close hotel reservation call centers,
combine travel agency operations and continue the downsizing of fleet
operations
41
by reducing headcount and eliminating unprofitable products. With respect to
the real estate segment, management initiated plans to integrate its
relocation, franchise and mortgage origination businesses to capture additional
revenue through the referral of one business unit's customers to another.
Management also formalized a plan to centralize the management and headquarters
functions of the world's largest, second largest and other company owned
corporate relocation business unit subsidiaries. The real estate segment
initiatives resulted in approximately 380 planned job reductions, write-offs of
abandoned systems and leasehold assets commencing in the second quarter 1997.
Following is a description of costs by type of expenditure and reduction of
corresponding liabilities through December 31, 1997:
Unusual Charges included $154.1 million of personnel related costs associated
with employee reductions necessitated by the planned and announced
consolidation of the Company's several corporate relocation service businesses,
including the previous two largest relocation businesses worldwide as well as
the consolidation of corporate activities. Personnel related charges also
include termination benefits such as severance, medical and other benefits.
Personnel related charges also include retirement benefits pursuant to
pre-existing contracts resulting from a change in control. Several grantor
trusts were established and funded by the Company in November 1996 to pay such
benefits in accordance with the terms of the PHH merger agreement. The
Company's restructuring plan resulted in the termination of approximately 560
employees (principally corporate employees located in North America), of which
364 were terminated by December 31, 1997. Approximately $102.4 million of
personnel related costs were paid in 1997 and $9.8 million of non-cash stock
compensation was recognized. Unusual Charges also include professional fees of
$30.3 million of which $29.2 million was paid in 1997 and is primarily
comprised of investment banking, accounting and legal fees incurred in
connection with the PHH Merger. Unusual Charges also include business
termination charges of $55.6 million, which are comprised of $38.8 million of
costs to exit certain activities primarily within the Company's fleet
management business, a $7.3 million termination fee associated with a joint
venture that competed with PHH Mortgage Services business and $9.6 million of
costs to terminate a marketing agreement with a third party in order to replace
the function with internal resources. In connection with the business
termination charges, approximately $16.0 million was paid in 1997 and $35.7
million of assets associated with discontinued activities were written off.
Facility related and other net charges totaling $43.1 million include costs
associated with contract and lease terminations, asset disposals and other
charges incurred in connection with the consolidation and closure of excess
office space. Approximately $2.6 million was paid and $11.3 million of assets
were written off in 1997. The remaining facility related obligations will be
paid or are otherwise anticipated to be extinguished in 1998.
The Company had substantially completed the aforementioned restructuring
activities by the the second quarter of 1998. The $76.1 million of liabilities
remaining at December 31, 1997 primarily consist of $41.9 million of severance
and benefit plan payments and $29.2 million related to contract, leasehold and
lease termination obligations.
1996 UNUSUAL CHARGES
The Company incurred Unusual Charges of approximately $134.3 million in 1996 in
connection with its August 1996 merger with Ideon Group, Inc. ("Ideon") and its
July 1996 mergers with Davidson and Associates, Inc. ("Davidson") and Sierra
On-Line, Inc. ("Sierra"). Unusual charges of $109.4 million related to
continuing operations (substantially Ideon) and $24.9 million was associated
with businesses that are discontinued (Davidson and Sierra). Unusual Charges
include $80.4 million of litigation related liabilities associated with the
Company's determination to settle acquired Ideon litigation upon the August
1996 merger date. The primary obligation consists of litigation with the
co-founder of SafeCard Services, Incorporated ("SafeCard") which was acquired
by Ideon in 1995. The Company entered into a settlement agreement in June 1997
requiring $70.5 million of payments through 2003. The Company paid $14.4
million for litigation related charges in 1997.
The balance of the Unusual Charges consists of $27.5 million of professional
fees incurred and paid in connection with the mergers, $7.5 million of
severance incurred and paid in connection with employee terminations and $18.9
million of facility related and other obligations for which $6.9 million of
payments and $9.7 million of leaseheld improvement write-offs were made through
December 31, 1997.
42
SEGMENT DISCUSSION -- 1997 VS. 1996
The underlying discussion of each segment's continuing operating results
focuses on profits from continuing operations, excluding interest, taxes,
Unusual Charges, extraordinary gain and cumulative effect of a change in
accounting ("Operating Income"). Management believes such discussion is the
most informative representation of recurring, non-transactional related
operating results of the Company's business segments.
TRAVEL SERVICES SEGMENT
The Company operates business units that provide a spectrum of services
necessary to domestic and international travelers. The Company is the world's
largest franchisor of nationally recognized hotel brands and car rental
operations (Avis), which are responsible for 16% of all hotel rooms sold and
25% of all cars rented in the United States, respectively. Royalty revenue is
received from franchisees under contracts that generally range from 10 to 50
years in duration. The Company is the world's largest provider of timeshare
exchange services (RCI) to timeshare owners under one to three year membership
programs which require both exchange fees for swapping vacation weeks and
recurring and renewal membership fees. In addition, the Company is a leading
provider of corporate fleet management and leasing services and is also the
largest value added tax processor worldwide.
YEAR ENDED DECEMBER 31,
-------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
1997 1996 1996 VARIANCE VARIANCE
(IN MILLIONS) --------------- ------------ -------------- ------------ ----------
Net revenues $ 1,337.2 $ 802.4 $ 1,226.9 67% 9%
Operating expenses 878.6 548.1 874.1 60% 1%
------------ ---------- -----------
Operating income $ 458.6 $ 254.3 $ 352.8 80% 30%
============ ========== ===========
HISTORICAL DISCUSSION
Operating income increased $204.3 million (80%) as a result of growth from
businesses owned and/or consolidated in both 1997 and 1996 and from car rental
franchise (Avis) and timeshare (RCI) operations each acquired during the fourth
quarter of 1996. Timeshare business operations contributed incremental revenue
and operating income in 1997 of $315.5 million and $77.2 million, respectively,
and the car rental franchise business accounted for incremental revenues and
operating income of $140.2 million and $75.7 million, respectively. Lodging
franchise revenue increased $38.4 million (10%) while expenses increased only
$6.9 million (3%). The lodging revenue increase was attributable to 4% system
growth, 2% revenue per available room ("REVPAR") increases at franchised
properties and increased revenue received from preferred alliance partners
seeking access to franchisees and franchisee customers. Expense increases were
minimized due to the significant operating leverage associated with mature
franchise operations and a reduction of corporate overhead allocated to the
Travel Services Segment as the Company leveraged its corporate infrastructure
among more businesses. Fleet management revenue increased $30.6 million (10%)
while expenses only increased $8.2 million (4%). The increase in revenue is
primarily the result of a 24% increase in service fee revenue due to a 20%
increase in number of cards and an 8% increase in asset based revenues due
primarily to a 5% increase in pricing.
PRO FORMA DISCUSSION
On a pro forma basis, as if car rental franchise and timeshare operations were
acquired on January 1, 1996 operating income increased $105.8 million (30%).
The pro forma increase results from a $110.3 million (9%) increase in revenue
while corresponding operating expenses increased $4.5 million (1%). Most travel
business units contributed double digit percentage point growth in pro forma
operating income with timeshare and hotel franchising contributing the most
significant increases at $51.6 million (84%) and $32.1 million (18%),
respectively. Timeshare profits reflected a 22% increase in membership fees
driven by increases in both memberships and pricing. Simultaneously,
approximately $21.1 million of operating expense reductions were achieved
during a post-acquisition reorganization of timeshare operations.
43
REAL ESTATE SERVICES SEGMENT
The Company operates business units that provide a range of services related to
home sales, principally in the United States. The Company is the world's
largest franchisor of real estate brokerage offices through its CENTURY 21
(Registered Trademark) , Coldwell Banker (Registered Trademark) and ERA
(Registered Trademark) franchise brands, which were involved in more than 25%
of homes sold in the United States in 1997. Similar to Travel Services Segment
franchise businesses, the Company receives royalty revenue from approximately
11,500 franchisees under contracts with terms ranging from 5 to 50 years. The
Company operates the world's largest provider of corporate employee relocation
services and receives fees for providing an array of services which include
selling relocating employees' homes (without recourse to the Company),
assisting the relocating employee in finding a home, moving household goods,
expense reporting and other services. The Company also operates the largest
in-bound mortgage telemarketing operation in the United States. Cendant
Mortgage Corporation generates origination profits from the sale of mortgage
notes, generally within 45 days of origination but retains recurring servicing
revenue streams over the life of the mortgage. Each Real Estate Services
business provides customer referrals to other Real Estate Services businesses.
YEAR ENDED DECEMBER 31,
--------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
1997 1996 1996 VARIANCE VARIANCE
(IN MILLIONS) -------------- -------------- -------------- ------------ ----------
Net revenues $ 987.0 $ 782.4 $ 860.9 26% 15%
Operating expenses 641.0 566.4 620.8 13% 3%
----------- ----------- -----------
Operating income $ 346.0 $ 216.0 $ 240.1 60% 44%
=========== =========== ===========
HISTORICAL DISCUSSION
Operating income increased $130.0 million (60%) as a result of growth from
businesses owned and/or consolidated in both 1997 and 1996 and from the
acquisitions of the Coldwell Banker franchise system and Coldwell Banker
Relocation Services Inc. ("CBRS") in May 1996 and the ERA franchise system in
February 1996. Real estate franchise revenue and operating income increased
$98.4 million (42%) and $72.8 million (66%), respectively from 1996 to 1997
primarily due to the aforementioned acquisitions of the Coldwell Banker and ERA
franchise brands which collectively contributed incremental revenues and
operating income of $73.8 million and $69.0 million, respectively. In addition,
the real estate franchise business realized growth in the operating results of
businesses owned in both 1997 and 1996 principally as a result of increases in
both the volume and average price of homes sold. Corporate relocation revenue
and operating income increased $56.7 million (16%) and $30.2 million (56%),
respectively, principally due to the operating results of acquired CBRS
operations which contributed incremental revenues and operating income in 1997
of $47.2 million and $18.4 million, respectively. Mortgage services operating
income increased $28.3 million (69%) due to a $51.5 million (40%) increase in
revenue while expenses increased only $23.2 million (27%). The revenue increase
resulted from a 40% increase in loan origination volume to $11.7 billion, which
accelerated to nearly an $18 billion annual run rate by year-end 1997. Although
the Company generally sells originated notes within 45 days of origination, it
routinely retains servicing rights. Servicing revenue increased $13.4 million
(28%) primarily due to gains on sales of servicing. The increase in expenses
was not only related to processing current year volume, but to preparation for
hiring, training and providing office facilities for increased staff needed to
handle the processing of future origination volume as monthly applications more
than doubled.
PRO FORMA DISCUSSION
On a pro forma basis, as if Coldwell Banker, CBRS and ERA were acquired on
January 1, 1996, operating income in 1997 increased $105.9 million (44%) from
1996. The increase results from a $126.1 million (15%) increase in revenue
while corresponding operating expenses increased only $20.2 million (3%).
Operating income of the real estate franchise, corporate relocation and
mortgage services businesses each increased by more than 30% over 1996 pro
forma results. Real estate franchise operating income increased $59.2 million
(48%) based on revenue growth of $54.8 million (20%) primarily due to a 17%
combined
44
increase in 1997 in home sales and the average price of homes sold. Real estate
franchise operating expenses decreased $4.4 million primarily as a result of
consolidation of certain franchise administration functions of the recently
acquired franchise brands. Corporate relocation operating income increased
$19.7 million (30%) due to a $21.8 million increase in revenue, primarily
relocation referrals, while operating expenses increased only $2.1 million (1%)
due to the consolidation of the PHH Relocation Services Inc. and CBRS into one
operating company, Cendant Mobility Services, Inc. The Pro Forma operating
results for Mortgage Services are the same as the historical results.
ALLIANCE MARKETING SEGMENT
The Company derives its Alliance Marketing revenue principally from membership
fees, insurance premiums and product sales. The Alliance Marketing Segment is
divided into three divisions: individual membership ("Individual Membership");
insurance/wholesale ("Insurance/Wholesale"); and lifestyle ("Lifestyle").
Individual Membership with more than 33 million members, provides customers
with access to a variety of products and services in such areas as retail
shopping, credit information, travel, auto, dining and home improvement.
Insurance/Wholesale with nearly 31 million customers, markets and administers
insurance products, primarily accidental death insurance. Insurance/Wholesale
also provides services such as checking account enhancement packages, various
financial products and discount programs to financial institutions, which in
turn provide these services to their customers. Lifestyle with over 11 million
customers, provides customers with unique products and services that are
designed to enhance a customer's lifestyle.
Alliance Marketing growth is generated primarily from direct marketing to
consumers or by partnering with businesses such as banks, credit card and
travel companies which furnish access to their client base. Commencing with the
Cendant Merger, Alliance Marketing businesses have unfettered access to the
customers of the Company's Travel Segment businesses which account for 1 of 6
U.S. hotel rooms sold, 1 of 4 cars rented in the U.S. and more than 70% of
timeshare resort vacation exchanges worldwide.Alliance Marketing businesses
also have access to customers of the Company's Real Estate Segment business
which participate in more than 25% of U.S. home sales, more than 50% of
corporate employee relocations and more than $25 billion in annual mortgage
originations.
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 VARIANCE
(IN MILLIONS) ---------------- ---------------- ---------
Net revenues $ 1,570.3 $ 1,474.3 7%
Operating expenses 1,432.6 1,316.0 9%
------------- -------------
Operating income $ 137.7 $ 158.3 (13%)
============= =============
Operating income for the Alliance Marketing segment decreased $20.6 million
(13%) to $137.7 million primarily due to a $23.7 million reduction in 1997
operating income due to a change in accounting policy.
Prior to 1997, the Company recorded deferred membership income, net of
estimated cancellations, at the time members were billed (upon expiration of
the free trial period). Such net billings were recognized as revenue ratably
over the membership term and modified periodically based on actual cancellation
experience. In addition, membership acquisition and renewal costs, which
related primarily to membership solicitations were capitalized as direct
response advertising costs due to the Company's ability to demonstrate that the
direct response advertising resulted in future economic benefits. Such costs
were amortized on a straight-line basis as corresponding revenues were
recognized (over the average membership period). The Company believed that
these accounting policies were appropriate and consistent with industry
practice.
In August 1998, in connection with the Company's cooperation with the SEC
Staff's investigation of accounting irregularities discovered in the former CUC
business units, the SEC Staff concluded that when membership fees are fully
refundable during the entire membership period, membership revenue should be
recognized at the end of the membership period upon the expiration of the
refund offer. The SEC Staff further concluded that non-refundable solicitation
costs should be expensed as incurred since such costs are not recoverable if
membership fees are refunded. The Company adopted the new accounting policy
effective January 1, 1997.
45
The Company anticipates a significant increase in costs to solicit new members
in 1998. Since revenue from members solicited in 1998 will not be recognized
under the new accounting policy until 1999, the Company anticipates a negative
impact in 1998 in its individual membership business.
Individual Membership operating income decreased $25.4 million (183%) from a
pro forma 1996 operating income of $13.9 million which was adjusted for the
accounting change applied retroactively. Revenues increased $24.5 million (4%)
due primarily to increased monthly membership billings of $7.1 million (55%)
and a $14.7 million (22%) increase in travel agent commissions. Individual
Membership operating expenses increased $49.9 million (8%) due primarily to
increased call center and other servicing expenses as well as higher general &
administrative expenses.
Insurance/Wholesale operating income increased $12.7 million (13%) to $108.1
million. Revenue increased $34.7 million (8%) to $482.7 million and was
partially offset by an increase in expenses of $22.0 million (6%). Domestic
revenues increased $18.7 million to $394.9 million. This revenue increase
reflected the addition of 1.6 million new customers and was partially offset
primarily by an increase in insurance claims (which are accounted for as a
reduction in revenue) from 27.6% to 29.0% of revenue. Domestic expenses
increased by $8.9 million (3%) due to increased marketing and servicing
expenses. International revenue increased $16.0 million (22%) to $87.8 million
while expenses increased $13.1 million (18%) to $85.2 million. The
international business continued its expansion into new countries and markets,
accounting for growth in both revenue and expenses.
Lifestyle operating income decreased to $41.1 million from $42.1 million in
1996. This reduction was due to revenue increases of $52.5 million (14%) being
offset by expense increases of $53.5 million (17%). Revenues and operating
income at Entertainment Publications, Inc. ("EPub") increased by $14.9 million
(9%) and $3.7 million (23%) respectively reflecting stable coupon book prices
and increased sales through new sales channels. Revenues and operating income
in the Company's dating membership business increased by $13.8 million (65%)
and $5.2 million (95%) respectively due primarily to an additional 210
participating radio stations and the September 1997 acquistion of Match.Com.
The North American Outdoor Group ("NAOG") posted revenue gains of $15.4 million
(19%), but operating income fell $13.9 million (92%). NAOG also adopted the
change in accounting policies for membership revenues and marketing expenses
discussed above resulting in a decrease in revenue of $2.0 million and an
increase in operating expenses of $5.1 million. These changes were due
primarily to increases in book, video and advertising revenues being offset by
higher membership acquisition costs and start-up expenses associated with the
introduction of new Garden and Golf clubs.
OTHER SERVICES SEGMENT
The Company operates a variety of other businesses in addition to those which
comprise each of the Company's core business segments. Such business operations
include (i) information technology and reservation system support services
provided to the car rental and hotel industry ("Wizcom"); (ii) casino credit
information and marketing services ("Casino Marketing") and the equity in
earnings from the Company's investment in the Avis Rent A Car, Inc. ("Avis")
car rental company.
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 VARIANCE
(IN MILLIONS) -------------- -------------- ---------
Net revenues $ 345.5 $ 178.6 93%
Operating expenses 275.8 150.0 84%
----------- -----------
Operating income $ 69.7 $ 28.6 144%
=========== ===========
Operating income increased $41.1 million (144%) primarily from a $41.7 million
incremental increase in the equity in earnings of Avis, which was initially
acquired by the Company in October 1996.
46
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 VARIANCE
(IN MILLIONS) ------------- ------------- ---------
CONTINUING OPERATIONS:
Revenue .............................. $ 3,237.7 $ 2,616.1 24%
Operating expenses:
Excluding Unusual Charges ......... 2,580.5 2,152.2 20%
Unusual Charges (1) ............... 109.4 97.0 13%
---------- ----------
Operating income ..................... 547.8 366.9 49%
Interest, net ....................... 14.3 16.6 (14%)
---------- ----------
Pre-tax income ....................... 533.5 350.3 52%
Provision for income taxes ........... 220.2 143.2 54%
---------- ----------
Income from continuing operations,
net of taxes ........................ 313.3 207.1 51%
Income from discontinued
operations .......................... 16.7 22.7 (26%)
---------- ----------
Net income ........................... $ 330.0 $ 229.8 44%
========== ==========
- ----------
(1) Merger-related costs and other unusual charges
Operating income from continuing operations increased $180.9 million (49%) due
to a $621.6 million (24%) revenue increase and only a $440.7 million (20%)
increase in operating expenses, which includes a $12.4 million increase in
Unusual Charges (see Unusual Charge discussion below). This aggregate net
increase is primarily the result of increases in the Travel and Real Estate
Segments included in separate segment discussions to follow.
Pre-tax income from continuing operations increased $183.2 million (52%).
Exclusive of the increase in operating income discussed above, interest, net
decreased $2.3 million (14%) to $14.3 million. The decrease in interest, net
resulted from incremental interest income in 1996 generated from excess of
proceeds of the May 1996 offering of common stock which raised $1.2 billion of
proceeds and funded the $745 million acquisition of Coldwell Banker in May
1996, and subsequently the cash portions of the Avis and RCI acquisitions which
were completed in October and November of 1996, respectively.
Income from continuing operations increased $106.2 million (51%). This resulted
from the favorable variance in pre-tax income discussed above offset by an
increase in the effective income tax rate from 40.9% in 1995 to 41.2% in 1996.
Income from discontinued operations decreased $6.0 million (26%) to $16.7
million. Net income for 1996 included $24.9 million, after tax, of Unusual
Charges incurred coincident to the July 1996 Davidson and Sierra mergers.
Excluding the Unusual Charges, income from discontinued operations increased
$18.9 million (83%) to $41.6 million. The increase was primarily attributable
to a $19.3 million (95%) increase in software business net income, which was
primarily generated from a $76.1 million (25%) increase in sales of software
titles while operating expenses increased only $41.5 million (16%).
UNUSUAL CHARGE DISCUSSION
1996 UNUSUAL CHARGE
The Company incurred Unusual Charges of approximately $134.3 million in 1996 in
connection with its August 1996 merger with Ideon and its July 1996 mergers
with Davidson and Sierra. Unusual Charges of $109.4 million were related to
continuing operations (substantially Ideon). Unusual Charges include $80.4
million of litigation related liabilities associated with the Company's
determination to settle acquired
47
Ideon litigation upon the August 1996 merger date. The primary obligation
consists of litigation with the co-founder of SafeCard Services, Incorporated
("SafeCard") which was acquired by Ideon in 1995. The Company entered into a
settlement agreement in June 1997 requiring $70.5 million of payments through
2003. The Company paid $14.4 million for litigation related charges in 1997.
The balance of the Unusual Charges consists of $27.5 million of professional
fees incurred and paid in connection with the mergers, $7.5 million of
severance incurred and paid in connection with employee terminations and $18.9
million of facility related and other obligations for which $6.9 million of
payments and $9.7 million of leasehold improvement write-offs were made through
December 31, 1997.
1995 COSTS RELATED TO IDEON PRODUCTS ABANDONED AND RESTRUCTURING
During the year ended December 31, 1995, Ideon incurred special charges
totaling $43.8 million, net of recoveries, related to the abandonment of
certain new product developmental efforts and the related impairment of certain
assets and the restructuring of the SafeCard division of Ideon and the Ideon
corporate infrastructure as discussed below. The original charge of $45.0
million was composed of accrued liabilities of $36.2 million and asset
impairments of $8.8 million. In December 1995, Ideon recovered $1.2 million of
costs in the above charges. Also included in costs related to products
abandoned are marketing and operational costs incurred of $53.2 million. During
the year ended December 31, 1996, all remaining amounts that had been
previously accrued were paid.
During 1995, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA TOUR
Partners program that provided various benefits to members and consumer
response rates after the launch were significantly less than Ideon management's
expectations. The product as configured was deemed not economically viable and
a charge of $18 million was incurred. Costs associated with the abandonment of
the product marketing included employee severance payments (approximately 130
employees), costs to terminate equipment and facilities leases, costs for
contract impairments and write-downs taken for asset impairments. In September
1995, after a period of product redesign and test marketing, Ideon discontinued
its PGA TOUR Partners credit card servicing role and recorded a charge of $3.6
million for costs associated with the abandonment of this role, including
employee severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain commitments. In
April 1995, Ideon launched a nationwide child registration and missing child
search program. Consumer response rates after the launch were significantly
less than Ideon management's expectations and a charge of $9.0 million was
incurred to cover severance payments (approximately 100 employees), costs to
terminate equipment and facilities leases and write-down taken for asset
impairments. As a result of the discontinuance of these products, Ideon
undertook an overall restructuring of its operations and incurred charges of
$7.2 million to terminate operating leases and write-down assets to realizable
value, $3.0 million for restructuring its SafeCard division and $4.2 million
for restructuring its corporate infrastructure.
SEGMENT DISCUSSION -- 1996 VS. 1995
The underlying discussion of each segment's financial results focuses on
profits from continuing operations, excluding interest, taxes and Unusual
Charges ("Operating Income"). Management believes such discussion is the most
informative representation of recurring, non-transactional related operating
results of the Company's business segments.
TRAVEL SERVICES SEGMENT
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 VARIANCE
(IN MILLIONS) -------------- -------------- ---------
Net revenues $ 802.4 $ 684.4 17%
Operating expenses 548.1 488.2 12%
----------- -----------
Operating income $ 254.3 $ 196.2 30%
=========== ===========
Operating income increased as a result of growth from businesses owned in both
1996 and 1995 and profits from car rental franchise and timeshare operations
acquired in the fourth quarter of 1996. Net revenues
48
increased $118.0 million (17%) to $802.4 million while expenses increased only
$59.9 million (12%). The increase in operating income was generated primarily
from $25.2 million and $22.0 million increases in the lodging franchise and
fleet management services businesses, respectively, as well as $3.8 million of
increases from acquired company operations. Lodging franchise operating income
increased 21% to $145.8 million as a result of a $50.0 million (15%) increase
in revenue and only a $24.9 million (12%) increase in expenses. The revenue
increase resulted from a 13% increase in royalty fees and a 41% increase in
fees from preferred alliance partners. As a result of high operating leverage,
more than 50% of the revenue increase resulted in incremental operating income.
PHH fleet management services operating income increased $19.3 million (34%) to
$76.2 million as a result of an increase in fee-based services and an $11.7
million gain on the sale of a truck fuel management business in January 1996.
REAL ESTATE SERVICES SEGMENT
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 VARIANCE
(IN MILLIONS) --------------- --------------- ---------
Net revenues $ 782.4 $ 504.3 55%
Operating expenses 566.4 390.2 45%
------------ ------------
Operating income $ 216.0 $ 114.1 89%
============ ============
Operating income increased as a result of acquired real estate franchise system
operations and growth from businesses owned in both 1996 and 1995. Real estate
franchise operating income increased $91.2 million (472%) in 1996 to $110.5
million which was primarily driven from the incremental operating results of
Century 21, ERA and Coldwell Banker which were acquired in August 1995,
February 1996 and May 1996, respectively. The increase in operating income was
comprised of incremental revenue, including $162.8 million of royalty and $12.2
million of preferred alliance revenue offset by $97.2 million of incremental
operating expenses. Corporate relocation operating income increased $12.6
million as a result of $23.5 million of operating income from acquired
operations offset by a $10.9 million net decrease in relocation business
operating profits associated with the development of an expanded full service
infrastructure that supports a greater range of client services.
ALLIANCE MARKETING SEGMENT
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 VARIANCE
(IN MILLIONS) -------------- ------------- ---------
Net revenues $ 1,474.3 $ 1,302.3 13%
Operating expenses 1,316.0 1,166.5 13%
----------- ----------
Operating income $ 158.3 $ 135.8 17%
=========== ==========
Operating income increased $22.5 million (17%) to $158.3 million due to a
$172.0 million (13%) revenue increase being partially offset by an increase of
$149.5 million (13%) in operating expenses.
Individual Membership operating income increased $2.7 million (15%) to $20.7
million. Revenue increased $48.8 million (8%) due primarily to a $21.9 million
(4%) increase in annual billings while monthly billings increased by $10.7
million (510%). The annual billing increase was primarily due to increases of
$21.1 million for the Travelers Advantage product and $14.8 million for the
Privacy Guard product but was partially offset by decreases of $9.2 million and
$6.5 million for the Shopping and Auto Advantage products, respectively.
Cancellation rates remained relatively constant in both years. Individual
membership operating expenses increased $45.9 million (8%) to $642.5 million due
primarily as a result of increases in annual membership acquisition costs of
$44.9 million (14%). As a percentage of annual revenues, membership acquisition
costs increased from 57% in 1995 to 63% in 1996.
Insurance/Wholesale operating income increased $36.5 million (62%) to $95.4
million. Revenues increased $93.9 million (27%) to $448.0 million and were
partially offset by an increase in expenses of $57.4 million (19%). Domestic
revenue increased $57.1 million (18%) to $376.2 million reflecting the addition
of 1.7 million new customers, 1996 acquisitions and a reduction in insurance
claims and premiums
49
(which are accounted for as a reduction in revenues) from 30.3% to 27.6% of
revenue. Domestic expenses increased $23.9 million (9%) due to 1996
acquisitions and increased marketing and servicing expenses associated with
additional revenue. International revenue increased $36.8 million (105%) to
$71.8 million while expenses increased $33.5 million (87%) to $72.1 million.
The small prior year base of international revenue coupled with continued
expansion into new countries and markets accounted for accelerated growth in
both revenue and expenses.
Lifestyle operating income decreased to $42.1 million from $59.0 million in
1995. This reduction was due to revenue increases of $29.4 million (9%) being
offset by expense increases of $46.2 million (17%). Revenue and operating
income at EPub decreased by $23.9 million (12%) and $20.4 million (56%)
respectively due primarily to revenue declines resulting from a decrease in
coupon book prices. Revenue and operating income at the Company's dating
membership business increased by $17.5 million (477%) and $4.9 million
respectively due primarily to the addition of 70 new participating radio
stations. The NAOG generated revenue and operating income increases of $18.2
million (28%) and $9.2 million (154%) respectively due primarily to increased
book/video sales and increased membership in the Handyman Club. Revenues at
NUMA Corporation increased by $16.9 million (33%) but were more than offset by
operating expense increases of $24.6 million (66%) due primarily to an increase
in advertising costs from 27% to 34% of sales.
OTHER SERVICES SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 VARIANCE
(IN MILLIONS) -------------- -------------- ---------
Net revenues $ 178.6 $ 125.1 43%
Operating expenses 150.0 107.3 40%
----------- -----------
Operating income $ 28.6 $ 17.8 61%
=========== ===========
The increase in operating income primarily includes $9.5 million in
consideration received during 1996 for the termination of a corporate services
agreement and $9.5 million from the equity in earnings of Avis, representing
the Company's proportionate share of Avis's car rental operating results since
the October 1996 acquisition date, partially offset by incremental corporate
related expenses due to infrastructure growth in 1996.
LIQUIDITY AND CAPITAL RESOURCES
BUSINESS COMBINATIONS
1997 Poolings
Cendant. The Cendant Merger was completed on December 17, 1997 pursuant to
which CUC issued approximately 440.0 million shares of its common stock for all
of the outstanding common stock of HFS. Pursuant to the agreement and plan of
merger, HFS stockholders received 2.4031 shares of CUC common stock for each
share of HFS common stock.
On December 17, 1997, as directed by the Federal Trade Commission in connection
with the Cendant Merger, the Company sold all of the outstanding shares of one
of its timeshare exchange businesses Interval for net proceeds of $240.0
million in cash less transaction related costs. The Company is precluded from
soliciting any of Interval's employees, customers or clients for a period of
two years from the closing date of the transaction. Also in conjunction with
the sale, the Company agreed to continue to provide services to certain of
Interval's customers for a specified period, guarantee performance of certain
responsibilities to third parties (i.e., lease payments and certain other
contracts) and absorb certain additional transitional costs related to the
transaction.
PHH. On April 30, 1997, the Company issued 72.8 million shares of Company
common stock in exchange for all of the outstanding common stock of PHH. PHH
operates the world's largest provider of corporate relocation services and also
is a leading provider of mortgage and fleet management services.
Numa. In February 1997, the Company issued 3.0 million shares of its common
stock for all the outstanding capital stock of Numa Corporation ("Numa"). Numa
publishes and markets personalized heritage publications.
50
1996 Poolings
Ideon. In August 1996, the Company acquired all of the outstanding capital
stock of Ideon, principally a provider of credit card enhancement services, for
a purchase price approximating $393 million, which was satisfied by the
issuance of 16.6 million shares of Company common stock.
Other. In 1996, the Company acquired the outstanding stock of certain other
entities by issuing 4.8 million shares of its common stock.
1995 Poolings
Getko, NAOG and Advance Ross. In June 1995, the Company issued 5.6 million
shares of its common stock for all of the outstanding capital stock of Getko
Group Inc. ("Getko"). Getko distributes complimentary welcoming packages to new
homeowners throughout the United States and Canada. In September 1995, the
Company issued 2.3 million shares of its common stock for all of the
outstanding capital stock of North American Outdoor Group, Inc. ("NAOG"). NAOG
owns one of the largest for-profit hunting and general interest fishing
membership organizations in the United States, and also owns various other
membership organizations. In January 1996, the Company issued 8.9 million
shares of its common stock for all of the outstanding capital stock of Advance
Ross Corporation ("Advance Ross"). Advance Ross is the parent company to Global
Refund, a subsidiary which processes value-added tax refunds for travelers in
over 20 European countries.
Pending Acquisitions
American Bankers. On March 23, 1998, the Company entered into a definitive
agreement (the "ABI Merger Agreement") to acquire American Bankers Insurance
Group, Inc. ("American Bankers") for $67 per share in cash and stock, for
aggregate consideration of approximately $3.1 billion. The Company has agreed
to purchase 23.5 million shares of American Bankers at $67 per share through
its pending cash tender offer, to be followed by a merger in which the Company
has agreed to deliver Cendant shares with a value of $67 for each remaining
share of American Bankers common stock outstanding. The Company has received
anti-trust clearance to acquire American Bankers. The tender offer is subject
to the receipt of tenders representing at least 51 percent of the common shares
of American Bankers as well as customary closing conditions, including
regulatory approvals. The Company plans to fund this acquisition with proceeds
received from either its new term loan arrangement, borrowings under other
committed facilities, operating cash flow or a combination of the above. The
Company may also fund a portion of the purchase price with equity or proceeds
from the disposition of its consumer software and classified advertising
businesses. From time to time representatives of the Company and
representatives of American Bankers have discussed possible modifications to
the terms of the ABI Merger Agreement, including a change in the mix of
consideration to increase the cash component and decrease the stock component
and changing the transaction to a taxable transaction. No agreement regarding
any such modification has been reached and there can be no assurance that such
discussion will result in any agreement being reached. If no agreement
regarding the terms of any modification to the terms of the ABI Merger
Agreement is reached, the current ABI Merger Agreement will remain in effect in
accordance with its terms. The transaction is expected to be completed in the
fourth quarter of 1998 or the first quarter of 1999. American Bankers provides
affordable, specialty insurance products and services through financial
institutions, retailers and other entities offering consumer financing.
Providian. On December 10, 1997, the Company announced that it had entered into
a definitive agreement to acquire Providian Auto and Home Insurance Company
("Providian") and its subsidiaries from an Aegon N.V. subsidiary for
approximately $219 million in cash. Providian sells automobile insurance to
consumers through direct response marketing in 45 states and the District of
Columbia. The closing of this transaction is subject to customary conditions,
including regulatory approval and no assurances can be made that the
acquisition will be completed. Prior to the acquisition the name of Providian
will be changed to Cendant Auto Insurance Company ("Cendant Auto"). The Company
intends to expand Cendant Auto's marketing channels to the Company's existing
distribution channels, while also providing the Company's existing customer
base with a new product offering.
51
RAC Motoring Services. On May 21, 1998, the Company announced that it has
reached a definitive agreement with the Board of Directors of Royal Automobile
Club Limited ("RACL") to acquire their RAC Motoring Services subsidiary for
approximately $735 million in cash. The sale of RAC Motoring Services has
subsequently been approved by its shareholders. Closing is subject to certain
conditions, regulatory approval. Although no assurances can be made, the
Company currently anticipates that the transaction will be completed in the
spring of 1999. The Company plans to fund this acquisition with proceeds from
either its new term loan arrangement, borrowings under other committed
facilities, operating cash flow or a combination of the above.
Completed Acquisitions
National Parking Corporation. On April 27, 1998, the Company acquired National
Parking Corporation ("NPC") for $1.6 billion in cash, which included the
repayment of approximately $227.0 million of outstanding NPC debt. NPC is
substantially comprised of two operating subsidiaries. National Car Parks is
the largest private (non-municipal) single car park operator in the UK with
approximately 500 locations. Green Flag operates the third largest roadside
assistance group in the UK and offers a wide-range of emergency support and
rescue services to approximately 3.5 million members. The Company funded the
NPC acquisition with borrowings under its revolving credit facilities.
Harpur Group. On January 20, 1998, the Company completed the acquisition of
Harpur, a leading fuel card and vehicle management company in the UK, from
privately held H-G Holdings, Inc. for approximately $186 million in cash plus
future contingent payments of up to $20.0 million over the next two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition of
Jackson Hewitt Inc. for approximately $480.0 million in cash. Jackson Hewitt
operates the second largest tax preparation service franchise system in the
United States. The Jackson Hewitt franchise system specializes in computerized
preparation of federal and state individual income tax returns.
Other Completed 1998 Acquisitions. Subsequent to December 31, 1997, the Company
acquired certain entities for an aggregate purchase price of $348.5 million in
cash.
1997 Purchase Acquisitions and Investments
Investment in NRT. During the third quarter of 1997, the Company executed an
agreement with NRT Incorporated ("NRT") (a corporation created to acquire
residential real estate brokerage firms) and the principal stockholders' of
NRT, which permitted the Company, at its discretion, to acquire up to $263.3
million of NRT preferred stock and $446.0 million of intangible assets of
real estate brokerage firms acquired by NRT. During the third quarter of 1997,
the Company acquired $182.0 million of NRT preferred stock and through
June 30, 1998 the Company had also acquired $359.3 million of certain
intangible assets including trademarks associated with real estate brokerage
firms acquired by NRT which are subject to a 50 year franchise agreement.
In September 1997, NRT acquired the real estate brokerage business and
operations of the National Realty Trust (the "Trust"), and two other regional
real estate brokerage businesses. The Trust is an independent trust to which
the Company contributed the brokerage offices formerly owned by Coldwell Banker
in connection with the Company's acquisition of Coldwell Banker in 1996. NRT is
the largest residential brokerage firm in the United States.
Other. The Company acquired certain entities in 1997 for an aggregate purchase
price of $289.5 million, comprised of $267.9 million in cash and $21.6 million
in Company common stock (0.9 million shares).
1996 Purchase Acquisitions and Investments
RCI. In November 1996, the Company completed the acquisition of all the
outstanding common stock of RCI for $487.1 million comprised of $412.1 million
in cash and $75.0 million (approximately 2.4 million shares) in Company common
stock plus future contingent payments of up to $200.0 million over the next
five years. The Company made a contingent payment of $100.0 million during the
first quarter of 1998. RCI is the world's largest provider of timeshare
exchange.
52
Avis. In October 1996, the Company completed the acquisition of all of the
outstanding capital stock of Avis Inc. ("Avis"), including payments under
certain employee stock plans of Avis and the redemption of certain series of
preferred stock of Avis for $806.5 million. The purchase price was comprised of
approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4
million (approximately 11.1 million shares) in Company common stock.
Subsequently, the Company made contingent cash payments of $26.0 million in
1996 and $60.8 million in 1997. The contingent payments made in 1997
represented the incremental amount of value attributable to Company common
stock as of the stock purchase agreement date in excess of the proceeds
realized upon subsequent sale of such Company common stock.
Prior to the consummation of the acquisition, the Company announced its
strategy to dilute its interest in the Avis car rental operations while
retaining assets that are consistent with its service provider business
profile, including the trademark, franchise agreements, reservation system and
information technology system assets. In September 1997, ARAC (the company
which operated the rental car operations of Avis) completed an initial public
offering ("IPO") resulting in a 72.5% dilution of the Company's equity interest
in ARAC. Net proceeds of $359.3 million were retained by ARAC. The Company's
interest in ARAC was further diluted to 20.4% due to a primary offering by ARAC
and a secondary offering of common stock in March 1998.
Coldwell Banker. In May 1996, the Company acquired by merger Coldwell Banker
Corporation, the largest gross revenue producing residential real estate
company in North America and a leading provider of corporate relocation
services. The Company paid $640.0 million in cash for all of the outstanding
capital stock of Coldwell Banker and repaid $105.0 million of Coldwell Banker
indebtedness. The aggregate purchase price for the transaction was financed
through the May 1996 sale of an aggregate 46.6 million shares of Company common
stock generating $1.2 billion of proceeds pursuant to a public offering.
Other. During 1996, the Company acquired certain other entities for an
aggregate purchase price of $281.5 million comprised of $224.0 million in cash,
$52.5 million of Company common stock (2.5 million shares) and $5.0 million of
notes.
1995 Purchase Acquisitions
Century 21. In August 1995, a majority owned (87.5%) subsidiary of the Company,
C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation
("Century 21"), the world's largest residential real estate brokerage
franchisor. The Aggregate purchase price of $245.0 million for the acquisition
consisted of $100.2 million in cash, $64.8 million in Company common stock (9.6
million shares), and $80.0 million of preferred stock. Pursuant to an
agreement, as amended, between the Company and a management group of Holding,
the Company acquired the remaining 12.5% interest in Holding for $52.8 million
in 1997.
Other. The Company acquired certain other entities for an aggregate purchase
price of $163.3 million comprised of $122.5 million in cash and $40.8 million
in Company common stock (6.0 million shares).
DISCONTINUED OPERATIONS
Classified Advertising Acquisition. In October 1997, the Company issued 14.2
million shares of its common stock for all of the outstanding capital stock of
Hebdo Mag International ("Hebdo Mag"). Hebdo Mag is a publisher and distributor
of international classified advertising information.
Software Acquisitions. In July 1996, the Company issued 45.1 million shares and
38.4 million shares of Company common stock for all of the outstanding capital
stock of Davidson and Sierra, respectively. Davidson and Sierra develop,
publish and distribute educational and entertainment software for home and
school use and comprise the majority of the Company's wholly owned subsidiary,
Cendant Software Corporation ("Cendant Software").
Divestitures. On August 12, 1998, the Company announced that its Executive
Committee of the Board of Directors committed to discontinue the Company's
classified advertising and consumer software
53
businesses by disposing of Hebdo Mag and Cendant Software, respectively. The
Company has since entered into a definitive agreement to sell Hebdo Mag to its
former 50% owners for 7.1 million shares of Company common stock and
approximately $400 million in cash. The transaction is expected to consummate
in the fourth quarter of 1998 and is subject to certain conditions, including
regulatory approval and financing by the purchaser. The Company expects to
recognize a gain of approximately $250 million upon the disposal of Hebdo Mag
assuming a Company stock price of $15.66 per share. In addition, the Company
has engaged investment bankers to analyze various strategic alternatives in
regard to the disposition of Cendant Software. The Company anticipates that the
disposition of Cendant Software will also result in a significant gain. The
Company believes that the divesting of its Hebdo Mag and Cendant Software
subsidiaries will generate significant proceeds, thereby increasing equity
while reducing debt.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
The Company believes 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. The Company is unable to access equity and
public debt markets until the filing of restated financial statements with the
Securities and Exchange Commission. Accordingly, the Company has secured
additional liquidity through other sources including a 364-day, $3.25 billion
term loan facility and committed revolving credit facilities of $2.65 billion,
including a bank commitment to provide a $650 million, 364-day revolving
facility, which is available to partially fund the American Bankers
acquisition.
On May 29, 1998 the Company entered into a 364-day term loan facility with a
syndicate of financial institutions which provides for borrowings of up to
$3.25 billion (the "Term Loan Facility"). The Term Loan Facility bears interest
at LIBOR plus the applicable LIBOR spread, as defined. The Company intends to
repay all outstanding borrowings under the Term Loan Facility as soon as
practicable. Upon the execution of the Term Loan Facility, temporary credit
agreements, which provided for $1.0 billion of borrowings, were terminated. The
Term Loan Facility contains certain restrictive covenants, which are
substantially similar to and consistent with the covenants in effect for the
Company's existing revolving credit agreements. At June 30, 1998, the full
amount of the committment under the Term Loan Facility was drawn. The Company
used $2 billion of the proceeds from the Term Loan Facility to refinance the
outstanding borrowings under its revolving credit facilities and intends to use
the remainder for the acquisition of American Bankers, RAC Motors Services (See
Note 26) and for general corporate purposes.
The Company's primary credit facility consists of (i) a $750.0 million, five
year revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $1.25 billion, 364 day revolving credit facility (the "364 Day Revolving
Credit Facility") (collectively, the "Revolving Credit Facilities"). The 364
Day Revolving Credit Facility will mature on October 31, 1998 but may be
renewed on an annual basis for an additional 364 days upon receiving lender
approval. The Company has submitted an extension request to the lenders under
the 364 Day Revolving Credit Facility and anticipates that approximately $1.0
billion will be renewed. The Five Year Revolving Credit Facility will mature on
October 1, 2001. Borrowings under the Revolving Credit Facilities, at the
option of the Company, bear interest based on competitive bids of lenders
participating in the facilities, at prime rates or at LIBOR, plus a margin of
approximately 22 basis points. The Company is required to pay a per annum
facility fee of .08% and .06% of the average daily unused commitments under the
Five Year Revolving Credit Facility and 364 Day Revolving Credit Facility,
respectively. The interest rates and facility fees are subject to change based
upon credit ratings of the Company's senior unsecured long-term debt by
nationally recognized debt rating agencies. The Revolving Credit Facilities
contain certain restrictive covenants including restrictions on indebtedness,
mergers, liquidations and sale and leaseback transactions and requires the
maintenance of certain financial ratios, including a 3:1 minimum interest
coverage ratio and a 3.5:1 maximum debt coverage ratio, as defined.
Long-term debt increased $465.2 million to $1.2 billion at December 31, 1997
when compared to amounts outstanding at December 31, 1996, primarily as a
result of the $550 million issuance of 3% Notes in February 1997, the proceeds
of which were used to repay outstanding revolving credit facility borrowings
54
at the Cendant Merger date. The Company's debt was $4.0 billion at June 30,
1998 which primarily consisted of $3.25 billion of borrowings under the
Company's Term Loan Facility and $700 million of publicly issued fixed rate
debt.
The Company filed an amended shelf registration statement (the "Shelf
Registration Statement") on February 6, 1998 with the Securities and Exchange
Commission for the issuance of up to an aggregate $4.0 billion of debt and
equity securities. Pursuant to the Shelf Registration Statement, the Company
issued 29.9 million FELINE PRIDESSM and 2.3 million trust preferred securities
on March 2, 1998 and received approximately $1.4 billion in gross proceeds
therefrom. The issuance of the FELINE PRIDES resulted in the utilization of
approximately $3 billion of availability under the Shelf Registration
Statement. The FELINE PRIDES consist of 27.6 million Income PRIDES and 2.3
million Growth PRIDES, each with a face amount of $50 per PRIDE. The Income
PRIDES consist of trust preferred securities and stock purchase contracts under
which the holders will purchase common stock from the Company in February of
2001. The Growth PRIDES consist of stock purchase contracts under which the
holders will purchase common stock from the Company in February of 2001 and
zero coupon U.S. Treasury securities. The trust preferred securities will bear
interest at the annual rate of 6.45 percent, and the forward purchase contract
forming a part of the Income PRIDE will pay 1.05 percent annually in the form
of a contract adjustment payment. The forward purchase contract forming a part
of the Growth PRIDES will pay 1.3 percent annually in the form of a contract
adjustment payment. The forward purchase contracts call for the holder to
purchase a minimum of 1.0395 shares and a maximum of 1.3514 shares of Company
common stock per PRIDES security, depending upon the average of the closing
price per share of Company common stock for a 20 consecutive trading day period
ending in mid-February of 2001.
The Company filed a shelf registration statement with the Securities and
Exchange Commission which has not yet become effective for the aggregate
issuance of up to $3.0 billion of debt and equity securities.
On May 4, 1998, the Company redeemed all of the outstanding ($144.5 million
principal amount) of 4 3/4% Convertible Senior Notes due 2003 at a price of
103.393% of the principal amount, together with interest accrued to the
redemption date. Prior to May 4, 1998, $90.5 million of such notes were
exchanged for 2.5 million shares of Company common stock.
On April 8, 1998, the Company exercised its option to call its 6 1/2%
Convertible Subordinated Notes (the "6 1/2% Notes") for redemption on May 11,
1998, in accordance with the provisions of the indenture relating to the 6 1/2%
Notes. Prior to the redemption date, all of the outstanding 6 1/2% Notes were
converted into 2.1 million shares of Company common stock.
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH operates their mortgage services, fleet management services and relocation
services businesses as a separate public reporting entity and supports
purchases of leased vehicles and originated mortgages primarily by issuing
commercial paper and medium term notes. Financial covenants related to such
debt are designed to ensure the self-sufficient liquidity status of PHH.
Accordingly, PHH's publicly filed financial statements and underlying publicly
issued debt were not impacted by the accounting irregularities previously
disclosed and PHH continues to issue debt securities in public markets. Such
borrowings are not classified based on contractual maturities, but rather are
included in liabilities under management and mortgage programs rather than
long-term debt since such debt corresponds directly with high quality related
assets. Additionally, PHH continues to pursue opportunities to reduce its
borrowing requirements by securitizing increasing amounts of its high quality
assets. In May 1998, PHH commenced a program to sell originated mortgage loans
to an unaffiliated buyer, at the option of the Company, up to the buyer's asset
limit of $1.5 billion. The buyer may sell or securitize such mortgage loans
into the secondary market, however, servicing rights are retained by the
Company.
PHH debt is issued without recourse to the Company. PHH 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
55
continue to utilize the public and private debt markets as sources of
financing. Augmenting these sources, PHH will continue to manage outstanding
debt with the potential sale or transfer of managed assets to third parties
while retaining fee-related servicing responsibility. At June 30, 1998, PHH's
outstanding debt was comprised of commercial paper, medium-term notes and other
borrowings of $3.2 billion, $3.4 billion and $.2 billion, respectively. PHH's
aggregate borrowings at the underlying balance sheet dates were as follows
($ billions):
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
Commercial paper $ 2.6 $ 3.1
Medium-term notes 2.7 1.7
Other 0.3 0.3
------- -------
$ 5.6 $ 5.1
======= =======
PHH filed a shelf registration statement with the Securities and Exchange
Commission, which became effective March 2, 1998, for the aggregate issuance of
up to $3 billion of debt securities. These securities may be offered from time
to time, together or separately, based on terms to be determined at the time of
sale. The proceeds will be used to finance assets PHH manages for its clients
and for general corporate purposes. As of July 31, 1998, PHH had issued $795
million of medium-term notes under this shelf registration statement.
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 March 1999, which may
be extended upon receiving lender approval, $1.25 billion maturing in the year
2000 and a $200 million facility maturing in June 1999. In addition, PHH has
approximately $186 million of uncommitted lines of credit with various
financial institutions which were unused at June 30, 1998. Management closely
evaluates not only the credit of the banks but also the terms of the various
agreements to ensure ongoing availability. The full amount of PHH's committed
facilities at June 30, 1998 was undrawn and available. Management believes that
its current policy provides adequate protection should volatility in the
financial markets limit PHH's access to commercial paper or medium-term notes
funding.
PHH minimizes its exposure to interest rate and liquidity risk by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities.
On July 10, 1998, the Company entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with The First National Bank of Chicago, as trustee,
under the Senior Indenture dated as of June 5, 1997, which formalizes the
policy for PHH of limiting the payment of dividends and the outstanding
principal balance of loans to the Parent Company to 40% of consolidated net
income (as defined in the Supplemental Indenture) for each fiscal year. The
Supplemental Indenture prohibits PHH from paying dividends or making loans to
the Parent Company if upon giving effect to such dividends and/or loan, PHH's
debt to equity ratio exceeds 8 to 1.
CREDIT RATINGS
The Company's long-term debt credit ratings from S&P, Duff & Phelps ("Duff")
and Moody's remain at A, A and A3, respectively; however such ratings are being
reviewed by such agencies with negative implications following the Company's
March 23, 1998 announcements relating to the Company's agreements to acquire
American Bankers and NPC and its April 15, 1998 announcement regarding
accounting irregularities discovered at the former CUC business units. PHH's
present long term and short term debt ratings are A+/A1, A2/P1, A+/F1, A+/D1
with Standard & Poor's (S&P), Moody's Investor Service (Moody's), Fitch IBCA
and Duff & Phelps Credit Rating Co. (Duff), respectively. Presently, the
56
ratings of both S&P and Moody's related to PHH debt are on watch with negative
implications. While this negative watch period has caused PHH to incur a
marginal increase in its cost of funds, management believes its sources of
liquidity continue to be adequate. (A security rating is not a recommendation
to buy, sell or hold securities and is subject to revision or withdrawal at any
time).
CASH FLOWS (1997 VS. 1996)
The Company generated $1.2 billion of cash flows from operations in 1997
representing a $312.6 million decrease from 1996. The decrease in cash flows
from operations was primarily due to a $314.7 million increase in mortgage
loans held for sale due to increased mortgage loan origination volume.
The Company used $2.3 billion of cash flows for investing activities in 1997,
consisting of approximately $1.5 billion of a net investment in assets under
management and mortgage programs and $568.2 million for acquisition costs,
including ARAC and RCI. In 1996, the Company used $3.1 billion for investing
activities including a $1.3 billion net investment in assets under management
and mortgage programs and $1.6 billion of acquisition costs. In 1997, cash
flows from financing activities of approximately $900.1 million, primarily
consisted of net borrowings totaling $435.9 million including net proceeds of
$543.2 million from the issuance of the 3% Convertible Notes in February 1997
and management and mortgage program financing consisting of $509.9 million of
net borrowings which funded the Company's purchases of assets under management
and mortgage programs. In 1996, cash flows from financing activities of
approximately $1.8 billion consisted of public offerings of common stock that
resulted in $1.2 billion of net proceeds and $241.9 million of net borrowings
which funded the Company's purchase of assets under management and mortgage
programs.
Deferred membership income at December 31, 1997 of $1.3 billion primarily
represents fees collected for the sale of one year memberships to individual
consumers. In accordance with the Company's membership agreement, members have
the right to a full refund at any time during the active membership period.
Based on the Company's experience, approximately 45% of fees billed will be
refunded to new members prior to expiration of the membership term. Deferred
membership income at December 31, 1996 of $900.9 million primarily represents
the estimated unamortized portion of the aggregate membership fees billed
primarily in 1996 net of estimated cancellation refunds. Such deferral was
calculated prior to the change in accounting for memberships. Deferred
membership acquisition costs of $269.9 million at December 31, 1996 represents
direct member solicitation costs which were amortized to expense over the
membership period prior to the Company adopting the new policy for accounting
for memberships effective January 1, 1997. Solicitation costs were expensed as
incurred in 1997.
SEVERANCE AGREEMENT
On July 28, 1998, the Company announced that Walter A. Forbes resigned as
Chairman of the Company and as a member of the Board of Directors. The
severance agreement reached with Mr. Forbes gives him the benefits required by
his employment contract relating to a termination of Mr. Forbes' employment
with the Company for reasons other than for cause. Those benefits total
$35 million in cash and include the granting of approximately 1.3 million
stock options. The benefits to Mr. Forbes will result in the Company recording
an unusual expense of approximately $47.5 million in the third quarter of 1998.
REPRICING OF STOCK OPTIONS
On July 28, 1998, the Compensation Committee of the Board of Directors
approved, in principle, a program to reprice certain Company stock options
granted to employees of the Company, other than executive officers, during
December 1997 and the first quarter of 1998. The new option price for such
stock options is to be the market price of the Company's common stock as
reported on the New York Stock Exchange shortly after the filing of the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1997. On
September 23, 1998, the Compensation Committee extended such repricing program
to certain executive officers and senior managers of the Company subject to
certain conditions including revocation of a portion of existing options plus
repricing of other portions at prices at and above fair market value at the
time of repricing. Additionally, a management equity ownership program was
adopted that requires these executive officers and senior managers to acquire
Company common stock at various levels commensurate with such manager's
compensation.
57
LITIGATION
As a result of the aforementioned accounting irregularities, which were
discovered in the former CUC business units, numerous purported class action
lawsuits, a purported derivative lawsuit and an individual lawsuit have been
filed against the Company and, among others, its predecessor HFS, and certain
current and former officers and directors of the Company and HFS, asserting
various claims under the federal securities laws and certain state statutory
and common laws. In addition, the staff of the SEC and the United States
Attorney for the District of New Jersey are conducting investigations relating
to the accounting issues. The SEC staff has advised the Company that its
inquiry should not be construed as an indication by the SEC or its staff that
any violations of law have occurred.
While it is not feasible to predict or determine the final outcome of these
proceedings or to estimate the amounts or potential range of loss with respect
to these matters, management believes that an adverse outcome with respect to
such proceedings could have a material impact on the financial condition,
results of operations and cash flows of the Company. See "ITEM 3. LEGAL
PROCEEEDINGS."
CAPITAL EXPENDITURES
The Company anticipates investing approximately $250 million in capital
expenditures in 1998, representing approximately 6% of 1997 consolidated
revenue. Such capital expenditures are primarily associated with the
development of integrated corporate relocation business systems in accordance
with the merger plan developed upon the PHH merger date, mortgage services
office and system additions to support the rapid growth in origination volume
and the consolidation of internationally-based call centers.
YEAR 2000 COMPLIANCE
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after
January 1, 2000.
To minimize or eliminate the effect of the year 2000 risk on the Company's
business systems and applications, the Company is continually identifying,
evaluating, implementing and testing changes to its computer systems,
applications and software necessary to achieve Year 2000 compliance. The
Company's predecessor implemented a Year 2000 initiative in March 1996 that has
now been adopted by all business units of the Company. As part of such
initiative, the Company has selected a team of managers to identify, evaluate
and implement a plan to bring all of the Company's critical business systems
and applications into Year 2000 compliance prior to December 31, 1999. The Year
2000 initiative consists of four phases: (i) identification of all critical
business systems subject to Year 2000 risk (the "Identification Phase"); (ii)
assessment of such business systems and applications to determine the method of
correcting any Year 2000 problems (the "Assessment Phase"); (iii) implementing
the corrective measures (the "Implementation Phase"); and (iv) testing and
maintaining system compliance (the "Testing Phase"). The Company has
substantially completed the Identification and Assessment Phases and has
identified and assessed five areas of risk: (i) internally developed business
applications; (ii) third party vendor software, such as business applications,
operating systems and special function software; (iii) computer hardware
components; (iv) electronic data transfer systems between the Company and its
customers; and (v) embedded systems, such as phone switches, check writers and
alarm systems. Although no assurances can be made, the Company believes that it
has identified substantially all of its systems, applications and related
software that are subject to Year 2000 compliance risk and has either
implemented or initiated the implementation of a plan to correct such systems
that are not Year 2000 compliant. The Company has targeted December 31, 1998
for completion of the Implementation Phase. Although the Company has begun the
Testing Phase, it does not anticipate completion of the Testing Phase until
sometime prior to December 1999.
The Company relies on third party service providers for services such as
telecommunications, internet service, utilities, components for its embedded
and other systems and other key services. Interruption of those services due to
Year 2000 issues could affect the Company's operations. The Company has
initiated an evaluation of the status of such third party service providers'
efforts and to determine alternative and contingency requirements. While
approaches to reducing risks of interruption of business operations vary
58
by business unit, options include identification of alternative service
providers available to provide such services if a service provider fails to
become Year 2000 compliant within an acceptable timeframe prior to December 31,
1999.
The total cost of the Company's Year 2000 compliance plan is anticipated to be
$53 million. Approximately $17 million of these costs had been incurred through
August 31, 1998, and the Company expects to incur the balance of such costs to
complete the compliance plan. The Company has been expensing and capitalizing
the costs to complete the compliance plan in accordance with appropriate
accounting policies. Variations from anticipated expenditures and the effect
on the Company's future results of operations are not anticipated to be
material in any given year. However, if Year 2000 modifications and conversions
are not made, or are not completed in time, the Year 2000 problem could have a
material impact on the operations and financial condition of the Company.
THE ESTIMATES AND CONCLUSIONS HEREIN ARE FORWARD-LOOKING STATEMENTS AND ARE
BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS OF COMPLETING THE
PLAN INCLUDE THE AVAILABILITY OF RESOURCES, THE ABILITY TO DISCOVER AND CORRECT
THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A SEROUS IMPACT ON
CERTAIN OPERATIONS AND THE ABILITY OF THE COMPANY'S SERVICE PROVIDERS TO BRING
THEIR SYSTEMS INTO YEAR 2000 COMPLIANCE.
IMPACT OF INFLATION AND SEASONALITY
To date, inflation has not had a material impact on Company operations. The
third quarter represented 27% of annual revenue as a result of peak leisure
travel and real estate sales in summer months.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and display of
an alternative income measurement and its components in the financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. The Company adopted SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" effective for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about their operating segments in their
annual and interim financial statements. It also requires public enterprises to
disclose company-wide information regarding products and services and the
geographic areas in which they operate. The Company will adopt SFAS No. 131 in
1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" effective for periods beginning
after December 15, 1997. The Company will adopt SFAS No. 132 effective in the
1998 calendar year end.
The aforementioned recently issued accounting pronouncements establish
standards for disclosures only and therefore will have no impact on the
Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective for the 2000 calendar year
end. The Company has not yet determined the impact SFAS No. 133 will have on
its financial position or results of operations when such statement is adopted.
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forward looking
statements" within the meaning of the Private Securities
59
Litigation Reform Act of 1995. Such forward 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 forward looking statements. These forward 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 forward looking statements. Important assumptions and other
factors that could cause actual results to differ materially from those in the
forward looking statements, include, but are not limited to: the outcome of the
pending litigation relating to the previously announced accounting
irregularities, 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 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, the ability
of the Company and its vendors to complete the necessary actions to achieve a
year 2000 conversion for its computer systems and applications and other
factors. Other factors and assumptions not identified above were also involved
in the derivation of these forward 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 forward looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In recurring operations, the Company must deal with effects of changes in
interest rates and currency exchange rates. The following discussion presents
an overview of how such changes are managed and a view of their potential
effects.
The Company uses various financial instruments, particularly interest rate
and currency swaps and currency forwards, to manage its respective interest
rate and currency risks. The Company is exclusively an end user of these
instruments, which are commonly referred to as derivatives. The Company does
not engage in trading, market-making or other speculative activities in the
derivatives markets. Established practices require that derivative financial
instruments relate to specific asset, liability or equity transactions or to
currency exposures. More detailed information about these financial
instruments, as well as the strategies and policies for their use, is provided
in Notes 15 and 16 to the financial statements.
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates and currency
exchange in their financial statements. Although the rules offer alternatives
for presenting this information, none of the alternatives is without
limitations. The following discussion is based on so-called "shock tests,"
which model effects of interest rate and currency shifts on the reporting
company. Shock tests, while probably the most meaningful analysis permitted,
are constrained by several factors, including the necessity to conduct the
analysis based on a single point in time and by their inability to include the
extraordinarily complex market reactions that normally would arise from the
market shifts modeled. While the following results of shock tests for interest
rate and currencies may have some limited use as benchmarks, they should not be
viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical 10% change (decrease) in interest rates
across all maturities (sometimes referred to as a "parallel shift in the
yield curve"). Under this model, it is estimated that, all else constant,
such a decrease would not adversely impact the 1998 net earnings of the
Company based on year-end 1997 positions.
o One means of assessing exposure to changes in currency exchange rates
is to model effects on future earnings using a sensitivity analysis.
Year-end 1997 consolidated currency exposures, including financial
instruments designated and effective as hedges, were analyzed to identify
the
60
Company's assets and liabilities denominated in other than their relevant
functional currency. Net unhedged exposures in each currency were then
remeasured assuming a 10% change (decrease) in currency exchange rates
compared with the U.S. dollar. Under this model, it is estimated that,
all else constant, such a decrease would not adversely impact the 1998
net earnings of the Company based on year-end 1997 positions.
The categories of primary market risk exposure of the Company are: (i)
long-term U.S. interest rates due to mortgage loan origination commitments and
an investment in mortgage loans held for resale; (ii) short-term interest rates
as they impact vehicle and relocation receivables; and (iii) LIBOR and
commercial paper interest rates due to their impact on variable rate
borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement Schedule Index commencing
on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountants
(i) On January 20, 1998, in connection with the Company's previously
announced plan to name a successor independent auditor following the
Merger, the Company replaced Ernst & Young LLP, which served as the
Company's independent accountants, and engaged Deloitte & Touche LLP, the
independent auditor of HFS Incorporated prior to the Merger, as its new
independent accountants. As of January 20, 1998, Ernst & Young LLP was to
continue to audit and report on the Company's former CUC businesses as of
and for the year ended December 31, 1997. However, on May 11, 1998, the
Company dismissed Ernst & Young LLP.
(ii) The reports of Ernst & Young LLP on the financial statements for the
past two fiscal years of the Company contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope of accounting principles.
(iii) The Audit Committee of the Company's Board of Directors
participated in and approved the decision to change independent
accountants.
(iv) In connection with its audit for the two most recent fiscal years
and through May 11, 1998, there were no disagreements with Ernst & Young
LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements
if not resolved to the satisfaction of Ernst & Young LLP would have caused
Ernst & Young LLP to make reference thereto in their report on the
financial statements for such years.
(v) During the two most recent fiscal years and through May 11, 1998,
there were no reportable events as that term is defined in Item
304(a)(1)(v) of Regulation S-K. However, as previously reported, the Audit
Committee of the Board of Directors of the Company conducted an
investigation into accounting irregularities at former CUC business units
which were audited by Ernst & Young LLP. The results of such investigation
required a restatement of previously reported financial statements of the
Company. Such investigation may result in disagreements by the Company with
Ernst & Young LLP in the future with respect to previously reported
financial statements of the Company which were audited by Ernst & Young
LLP.
(vi) The Company requested that Ernst & Young LLP furnish it with letters
addressed to the Commission stating whether or not it agrees with the above
statements. A copy of a letter, dated January 22, 1998, is filed as Exhibit
16 to the Current Report on Form 8-K of the Company dated January 27, 1998
and a copy of a letter, dated May 11, 1998, is filed as Exhibit 16 to the
Annual Report on Form 8-K of the Company dated May 18, 1998.
(b) New independent accountants
As stated above, the Company engaged Deloitte & Touche LLP as its new
independent accountants as of January 20, 1998. Such engagement was approved by
the Audit Committee of the Company's Board of Directors on January 20, 1998.
During the two most recent fiscal years and through January 20, 1998, the
Company has not consulted with Deloitte & Touche LLP regarding either:
61
(i) The application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements, and neither a written report
was provided to the registrant nor oral advice was provided that Deloitte &
Touche concluded was an important factor considered by the registrant in
reaching a decision as to the accounting, auditing or financial reporting
issue; or
(ii) Any matter that was either the subject of a disagreement, as that
term is defined in Item 304(a)(1)(iv) of Regulation S-K, and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as that
term is defined in Item 304(a)(1)(v) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Proxy Statement under the
sections titled "Proposal 1: Election of Directors" and "Executive Officers" is
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's Proxy Statement under the
section titled "Executive Compensation and Other Information" is incorporated
herein by reference in response to this item, except that the information
contained in the Proxy Statement under the sub-headings "Pre-Merger
Compensation Committee Report on Executive Compensation" and "Performance
Graph" is not incorporated herein by reference and is not to be deemed "filed"
as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained in the Company's Proxy Statement under the
section titled "Security Ownership of Certain Beneficial Owners and Management"
is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's Proxy Statement under the
section titled "Certain Relationships and Related Transactions" is incorporated
herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)(1) FINANCIAL STATEMENTS
See Financial Statements and Financial Statements Index commencing on page
F-1 hereof.
ITEM 14(A)(3) EXHIBITS
See Exhibit Index commencing on page E-1 hereof.
ITEM 14(B) REPORTS ON FORM 8-K
On October 31, 1997, the Company filed a Current Report on Form 8-K to
report the execution of a Stock Purchase Agreement to sell all of the
outstanding stock of Interval Holdings, Inc. and CUC Vacation Exchange. Inc.
On November 4, 1997, the Company filed a Current Report on Form 8-K to
report the post-merger financial results relating to the acquisition of Hebdo
Mag International Inc.
On December 18, 1997, the Company filed a Current Report on Form 8-K to
report the completion of the Merger.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENDANT CORPORATION
By: /s/ James E. Buckman
------------------------------------
James E. Buckman
Senior Executive Vice President
and General Counsel
Date: September 28, 1998
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Henry R. Silverman Chairman of the Board, President, September 28 , 1998
- ------------------------ Chief Executive Officer and Director
(Henry R. Silverman)
/s/ Michael P. Monaco Vice Chairman, Chief Financial Officer September 28, 1998
- ------------------------ and Director (Principal Financial
(Michael P. Monaco) Officer)
/s/ Scott E. Forbes Executive Vice President -- Finance September 28, 1998
- ------------------------ (Principal Accounting Officer)
(Scott E. Forbes)
/s/ Stephen P. Holmes Vice Chairman and Director September 28, 1998
- ------------------------
(Stephen P. Holmes)
/s/ Robert D. Kunisch Vice Chairman and Director September 28, 1998
- ------------------------
(Robert D. Kunisch)
/s/ Christopher K. McLeod Vice Chairman and Director September 28, 1998
- ------------------------
(Christopher K. McLeod)
/s/ James E. Buckman Senior Executive Vice President, September 28, 1998
- ------------------------ General Counsel and Director
(James E. Buckman)
/s/ John D. Snodgrass Director September 28, 1998
- ------------------------
(John D. Snodgrass)
/s/ Leonard S. Coleman Director September 28, 1998
- ------------------------
(Leonard S. Coleman)
/s/ Martin L. Edelman Director September 28, 1998
- ------------------------
(Martin L. Edelman)
/s/ Dr. Carole G. Hankin Director September 28, 1998
- ------------------------
(Dr. Carole G. Hankin)
63
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Brian Mulroney Director September 28, 1998
- ------------------------
(The Rt. Hon. Brian Mulroney,
P.C., LL.D)
/s/ Robert W. Pittman Director September 28, 1998
- ------------------------
(Robert W. Pittman)
/s/ E. John Rosenwald, Jr. Director September 28, 1998
- ------------------------
(E. John Rosenwald, Jr.)
/s/ Robert P. Rittereiser Director September 28, 1998
- ------------------------
(Robert P. Rittereiser)
/s/ Leonard Schutzman Director September 28, 1998
- ------------------------
(Leonard Schutzman)
/s/ Robert F. Smith Director September 28, 1998
- ------------------------
(Robert F. Smith)
/s/ Craig R. Stapleton Director September 28, 1998
- ------------------------
(Craig R. Stapleton)
/s/ Robert E. Nederlander Director September 28, 1998
- ------------------------
(Robert E. Nederlander)
64
EXHIBITS:
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, dated March 23, 1998 among the Company, Season
Acquisition Corp. and American Bankers Insurance Group, Inc. (incorporated by
reference to Exhibit C-2 to the Schedule 14-D-1 (Amendment 31), dated March 23,
1998, filed by the Company and Season Acquisition Corp.)*
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 4.1 to the Company's Post-Effective Amendment No. 2 on
Form S-8 to the Registration Statement on Form S-4, No. 333-34517, dated
December 17, 1997)*
3.2 Amended and Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated August 4, 1998)*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's Registration
Statement, No. 33-44453, on Form S-4 dated December 19, 1991)*
4.2 Indenture dated as of February 11, 1997, between CUC International Inc. and Marine
Midland Bank, as trustee (filed as Exhibit 4(a) to the Company's Report on Form 8-K
filed February 13, 1997)*
4.3 Indenture between HFS Incorporated and Continental Bank, National Association, as
trustee (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-71736), Exhibit No. 4.1)*
4.4 Indenture dated as of February 28, 1996 between HFS Incorporated and First Trust of
Illinois, National Association, as trustee (Incorporated by reference to HFS
Incorporated's Current Report on Form 8-K dated March 8, 1996, Exhibit 4.01)*
4.5 Supplemental Indenture No. 1 dated as of February 28, 1996 between HFS
Incorporated and First Trust of Illinois, National Association, as trustee (Incorporated
by reference to HFS Incorporated's Current Report on Form 8-K dated March 8, 1996,
Exhibit 4.02)*
4.6 Indenture, dated as of February 24, 1998, between the Company and The Bank of
Novia Scotia Trust Company of New York, as Trustee (incorporated by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K dated March 6, 1998)*
4.7 First Supplemental Indenture dated February 24, 1998, between the Company and The
Bank of Novia Scotia Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.5 to the Company's Current Report on Form 8-K, dated
March 6, 1998)*
4.8 Amended and Restated Declaration of Trust of Cendant Capital I. (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated
March 6, 1998)*
4.9 Preferred Securities Guarantee Agreement dated March 2, 1998, between by Cendant
Corporation and Wilmington Trust Company. (incorporated by reference to Exhibit 4.2
to the Company's Current Report on Form 8-K dated March 6, 1998)*
4.10 Purchase Contract Agreement (including as Exhibit A the form of the Income PRIDES
and as Exhibit B the form of the Growth PRIDES), dated March 2, 1998, between
Cendant Corporation and The First National Bank of Chicago (incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated
March 6, 1998)*
10.1--10.47 Material Contracts, Management Contracts, Compensatory Plans and Arrangements
65
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Agreement with E. Kirk Shelton, dated as of May 27, 1997 (filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-4, Registration No. 333-34571,
July 31, 1996)*
10.2 Agreement with Christopher K. McLeod, dated as of May 27, 1997 (filed as
Exhibit 10.2 to the Company's Registration Statement on Form S-4, Registration
No. 333-34571)*
10.3 Restated Employment Contract with Walter A. Forbes, dated as of May 27, 1997 (filed
as Exhibit 10.3 to the Company's Registration Statement on Form S-4, Registration
No. 333-34571)*
10.3(a) Agreement, dated July 28, 1998, between Cendant Corporation and Walter A. Forbes
(filed as Exhibit 10.2 to the Company's Form 8-K, dated July 29, 1998)*
10.4 Agreement with Henry R. Silverman, dated May 27, 1997 (filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.5 Agreement with Stephen P. Holmes, dated May 27, 1997 (filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.6 Agreement with Michael P. Monaco, dated May 27, 1997 (filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.7 Agreement with James E. Buckman, dated May 27, 1997 (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.8 1987 Stock Option Plan, as amended (filed as Exhibit 10.16 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.9 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.17 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.10 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.18 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.11 1994 Directors Stock Option Plan, as amended (filed as Exhibit 10.19 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.12 Restricted Stock Plan and Form of Restricted Stock Plan Agreement (filed as Exhibit
10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1991, as amended December 12, 1991, and December 19, 1991.)*
10.13 1997 Stock Option Plan (filed as Exhibit 10.23 to the Company's Form 10-Q for the
period ended April 30, 1997)*
10.14 1996 Executive Retirement Plan (filed as Exhibit 10.22 to the Company's Form 10-Q
for the period ended April 30, 1997)*
10.15 1997 Stock Incentive Plan (filed as Appendix E to the Joint Proxy Statement/
Prospectus included as part of the Company's Registration Statement, No. 333-34517,
on Form S-4 dated August 28, 1997)*
10.16 HFS Incorporated's Amended and Restated 1993 Stock Option Plan (Incorporated by
reference to HFS Incorporated's Registration Statement on Form S-8 (Registration
No. 33-83956), Exhibit 4.1)*
10.17(a) First Amendment to the Amended and Restated 1993 Stock Option Plan dated May 5,
1995. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-8 (Registration No. 33094756), Exhibit 4.1)*
66
EXHIBIT NO. DESCRIPTION
----------- -----------
10.17(b) Second Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual Report
on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(b))*
10.17(c) Third Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual Report
on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(c))*
10.17(d) Fourth Amendment to the Amended and Restated 1993 Stock Option Plan dated
May 20, 1996. (Incorporated by reference to HFS Incorporated's Registration
Statement on Form S-8 (Registration No. 333-06733), Exhibit 4.5)*
10.17(e) Fifth Amendment to the Amended and Restated 1993 Stock Option Plan dated
July 24, 1996 (Incorporated by reference to the HFS Incorporated's Annual Report on
Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(e))*
10.17(f) Sixth Amendment to the Amended and Restated 1993 Stock Option Plan dated
September 24, 1996 (Incorporated by reference to the HFS Incorporated's Annual
Report on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(e))*
*10.17(g) Seventh Amendment to the Amended and Restated 1993 Stock Option Plan dated as
of April 30, 1997
*10.17(h) Eighth Amendment to the Amended and Restated 1993 Stock Option Plan dated as of
May 27, 1997
10.18 Chicago Agreement and Plan of Merger, by and among HFS Incorporated, HJ
Acquisition Corp. and Jackson Hewitt, Inc., dated as of November 19, 1997.
(Incorporated by reference to Exhibit 10.1 to HFS Incorporated's Current Report on
Form 8-K dated August 14, 1997, File No. 1-11402)*
10.19 Agreement and Plan of Merger, dated as of July 19, 1996, by and among Ideon Group,
Inc., CUC International Inc. and IG Acquisition Corp. (filed as Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1996)*
10.20 Form of U.S. Underwriting Agreement dated October 1996, among CUC International
Inc., certain selling stockholders and the U.S. Underwriters (filed as Exhibit 1.1(a) to
the Company's Registration Statement on Form S-3, Registration No. 333-13537, filed
on October 9, 1996)*
10.21 Form of International Underwriting Agreement dated October 1996, among CUC
International Inc., certain selling stockholders and the International Underwriters (filed
as Exhibit 1.1 (b) to the Company's Registration Statement on Form S-3, Registration
No. 333-13537, filed on October 9, 1996)*
10.22 Registration Rights Agreement dated as of February 11, 1997, between CUC
International Inc. and Goldman, Sachs & Co. (for itself and on behalf of the other
purchasers party thereto) (filed as Exhibit 4(b) to the Company's Report on Form 8-K
filed February 13, 1997)*
10.23 Agreement and Plan of Merger between CUC International Inc. and HFS
Incorporated, dated as of May 27, 1997 (filed as Exhibit 2.1 to the Company's Report
on Form 8-K filed on May 29, 1997)*
10.24 Plan for Corporate Governance of CUC International Inc. following the Effective Time
(filed as Exhibit 99.2 to the Company's Report on Form 8-K filed on May 29, 1997)*
67
EXHIBIT NO. DESCRIPTION
----------- -----------
10.25 $750,000,000 Five Year Revolving Credit and Competitive Advance Facility Agreement,
dated as of October 2, 1996, among the Company, the several banks and other financial
institutions from time to time parties thereto and The Chase Manhattan Bank, as
Administrative Agent and CAF Agent (Incorporated by reference to Exhibit (b)(1) to
the Schedule 14D-1 filed by the Company on January 27, 1998, File No. 5-31838)*
10.26(a) $1,250,000 364-Day Revolving Credit and Competitive Advance Facility Agreement,
dated October 2, 1996 among the Company, the several banks and other financial
institutions from time to time parties thereto, and The Chase Manhattan Bank, as
Administrative Agent and CAF Advance Agent. (Incorporated by reference to
Exhibit (b)(2) to the Schedule 14D-1 filed by the Company on January 27, 1998,
File No. 5-31838).*
10.26(b) Amendment and Waiver, dated as of April 15, 1998, to the Five Year Competitive
Advance and Revolving Credit Agreement and the 364-Day Competitive Advance
and Revolving Credit Agreement, each of which is dated as of October 2, 1996, by
and among the Company and the financial institutions parties thereto (Incorporated
by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, dated
May 5, 1998).*
10.26(c) Amendment, dated as of May 6, 1998, to the Five Year Competitive Advance and
Revolving Credit Agreement and the 364-Day Competitive Advance and the Revolving
Credit Agreement, each of which is dated October 2, 1998, by and among the
Company and the financial institutions parties thereto (Incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K, dated June 4, 1998).*
10.26(d) Amendment and Waiver, dated as of August 26, 1998, to the Five Year Competitive
Advance and Revolving Credit Agreement and the 364-Day Competitive Advance and
Revolving Credit Agreement by and among the Company and the financial institutions
parties thereto.
10.26(e) Extension Agreement, dated as of August 31, 1998, under the 364-Day Competitive
Advance and Revolving Credit Agreement among the Company and the financial
institutions parties thereto.
10.26(f) Amendment, dated September 28, 1998, to the Five Year Competitive Advance and
Revolving Credit Agreement and the 364-Day Competitive Advance and Revolving
Credit Agreement by and among the Company and the financial institutions parties
thereto.
10.27 Cendant Corporation Acquisition Revolving Credit Facility Commitment Letter, dated
January 23, 1998, among Chase Securities Inc., The Chase Manhattan Bank and
Cendant Corporation (Incorporated by reference to exhibit (b)(3) to the Schedule
14D-1 filed by the Company on January 27, 1998, File No. 5-31838)*
10.28 Distribution Agreement, dated March 5, 1998, among the Company, Bear, Stearns &
Co., Inc., Chase Securities Inc., Lehman Brothers and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to the
Company's Current Report on Form 8-K, dated March 10, 1998)*
10.29(a) 364-Day Credit Agreement Among the Company, PHH Vehicle Management Services,
Inc., the Lenders, the Chase Manhattan Bank, as Administrative Agent and the Chase
Manhattan Bank of Canada, as Canadian Agent, Dated March 4, 1997, filed as
Exhibit 10.1 to Registration Statement 333-27715*
10.29(b) Five-year Credit Agreement among the Company, the Lenders, and Chase Manhattan
Bank, as Administrative Agent, dated March 4, 1997 filed as Exhibit 10.2 to
Registration Statement 333-27715*
68
EXHIBIT NO. DESCRIPTION
----------- -----------
10.29(c) Second Amendment to PHH Credit Agreements (incorporated by reference to PHH
Incorporated's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, Exhibit 10.1)*
10.29(d) Third Amendment to PHH Credit Agreements (incorporated by reference to PHH
Incorporated's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, Exhibit 10.1)*
10.30 Indenture between the Company and Bank of New York, Trustee, dated as of May 1,
1992, filed as Exhibit 4(a)(iii) to Registration Statement 33-48125*
10.31 Indenture between the Company and First National Bank of Chicago, Trustee, dated as
of March 1, 1993, filed as Exhibit 4(a)(i) to Registration Statement 33-59376*
10.32 Indenture between the Company and First National Bank of Chicago, Trustee, dated as
of June 5, 1997, filed as Exhibit 4(a) to Registration Statement 333-27715*
10.33 Indenture between the Company and Bank of New York, Trustee dated as of June 5,
1997, filed as Exhibit 4(a)(11) to Registration Statement 333-27715*
10.34 Distribution Agreement between the Company and CS First Boston Corporation;
Goldman, Sachs & Co.; Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith,
Incorporated; and J.P. Morgan Securities, Inc. dated November 9, 1995, filed as
Exhibit 1 to Registration Statement 33-63627*
10.35 Distribution Agreement between the Company and Credit Suisse; First Boston
Corporation; Goldman Sachs & Co. and Merrill Lynch & Co., dated June 5, 1997 filed
as Exhibit 1 to Registration Statement 333-27715*
10.36 Distribution Agreement, dated March 2, 1998, among PHH Corporation, Credit Suisse
First Boston Corporation, Goldman Sachs & Co., Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated and J.P. Morgan Securities, Inc., filed as
Exhibit 1 to Form 8-K dated March 3, 1998, File No. 1-07797*
10.37 Agreement and Plan of Merger dated as of May 1, 1996 among HFS Incorporated,
CBC Acquisition Corp., Fremont Investors, Inc. and Coldwell Banker Corporation.
(Incorporated by reference to HFS Incorporated's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1996, Exhibit 2.4)*
10.38 Agreement and Plan of Merger dated as of August 23, 1996 among HFS Incorporated,
Avis Acquisition Corp., U.S. Trust Company of California, N.A. as Trustee of the Trust
forming a part of the Avis, Inc. Employee Stock Ownership Plan and Avis, Inc.
(Incorporated by reference to HFS Incorporated's Registration Statement on Form S-3
Registration No. 333-11029, Exhibit 2.1)*
10.39 Stock Purchase Agreement dated as of October 6, 1996 by and among HFS
Incorporated, Ms. Christel DeHaan and Resort Condominiums International, Inc.
(Incorporated by reference to HFS Incorporated's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1996, Exhibit 2.1)*
10.40 Registration Rights Agreement, dated as of November 12, 1996, by and between HFS
Incorporated and Ms. Christel DeHaan (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-3 (Registration No. 333-17371),
Exhibit 2.2)*
10.41 Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS
Incorporated, PHH Corporation and Mercury Acquisition Corp. (Incorporated by
reference to HFS Incorporated's Current Report on Form 8-K dated November 14,
1996, Exhibit 2.1)*
69
EXHIBIT NO. DESCRIPTION
----------- -----------
10.42 License Agreement dated as of September 18, 1989 amended and restated as of
July 15, 1991 between Franchise System Holdings, Inc. and Ramada Franchise Systems,
Inc. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.2)*
10.43 Restructuring Agreement dated as of July 15, 1991 by and among New World
Development Co., Ltd., Ramada International Hotels & Resorts, Inc. Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and Ramada Franchise Systems,
Inc. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.3)*
10.44 License Agreement dated as of November 1, 1991 between Franchise Systems
Holdings, Inc. and Ramada Franchise Systems, Inc. (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit No. 10.4)*
10.45 Amendment to License Agreement, Restructuring Agreement and Certain Other
Restructuring Documents dated as of November 1, 1991 by and among New World
Development Co., Ltd., Ramada International Hotels & Resorts, Inc., Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and Ramada Franchise Systems,
Inc. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.5)*
10.46 Master License Agreement dated July 30, 1997, among HFS Car Rental, Inc., Avis
Rent A Car System, Inc. and Wizard Co. (incorporated by reference to HFS
Incorporated Form 10-Q for the quarter ended June 30, 1997, Exhibit 10.1)*
10.47 HFS Incorporated's 1992 Incentive Stock Option Plan and Form of Stock Option
Agreement. (Incorporated by reference to HFS Incorporated's Registration Statement
on Form S-1 (Registration No. 33-51422), Exhibit No. 10.6)*
10.48(a)* Term Loan Agreement, dated as of May 29, 1998, among Cendant Corporation, as
Borrower, the Lenders referred therein, Bank of America NT & SA, as Syndication
Agent, Barclays Bank PLC, The Bank of Nova Scotia, Credit Lyonnais New York
Branch, NationsBank, N.A., as Co-Documentation Agents, CIBC Inc., First Union
National Bank, The Industrial Bank of Japan, Limited, New York Branch, as Managing
Agents, Bank of Tokyo Mitsubishi Trust Company, Credit Suisse, First Boston, Fleet
National Bank, The Sumitomo Bank, Limited, New York Branch, Banque Paribas, as
Co-Agents and The Chase Manhattan Bank, as Administrative Agent (incorporated by
reference to Cendant Corporation's Form 8-K dated June 4, 1998 (File No. 1-10308)).
10.48(b) Amendment, dated as of August 26, 1998, to the Term Loan Agreement among the
Company and the financial institutions parties thereto.
10.48(c) Amendment, dated as of September 28, 1998, to the Term Loan Agreement among the
Company and the financial institutions parties thereto.
12 Statement Re: Computation of Consolidated Ratio to Earnings to Combined Fixed
Charges and Preferred Stock Dividends
16.1 Letter re: change in certifying accountant (Incorporated by reference to the Company's
Form 8-K dated January 27, 1998)*
16.2 Letter re: change in certifying accountant of a significant subsidiary (Incorporated by
reference to the Company's Form 8-K dated May 18, 1998)*
18 Letter regarding change in accounting principles
21 Subsidiaries of Registrant**
23.1 Consent of Deloitte & Touche LLP related to the financial statements of Cendant
Corporation
70
EXHIBIT NO. DESCRIPTION
----------- -----------
23.2 Consent of KPMG Peat Marwick LLP relating to the financial statements of PHH
Corporation
23.3 Consent of KPMG Peat Marwick LLP relating to the financial statements of Davidson
& Associates, Inc.
23.4 Consent of PricewaterhouseCoopers LLP relating to the financial statements of Ideon
Group, Inc.
27 Financial data schedule
- ----------
* Incorporated by reference
** Previously filed
71
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports ............................................................ F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-6
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................. F-7
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997,
1996 and 1995 ........................................................................... F-9
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995 .................................................................................... F-12
Notes to Consolidated Financial Statements ............................................... F-14
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the consolidated balance sheets of Cendant Corporation and
subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. We did not audit the balance sheet of
PHH Corporation (a consolidated subsidiary of Cendant Corporation) as of
December 31, 1996, or the related statements of income, shareholders' equity,
and cash flows of PHH Corporation for the years ended December 31, 1996 and
January 31, 1996, which statements reflect total assets of $6.6 billion as of
December 31, 1996, and net income of $87.7 million and $78.1 million for the
years ended December 31, 1996 and January 31, 1996, respectively. Nor did we
audit the statements of operations, stockholder's equity or cash flows of Ideon
Group, Inc. (a consolidated subsidiary of Cendant Corporation) for the year
ended December 31, 1995, which statements reflect a net loss of $49.4 million
for the year ended December 31, 1995. Nor did we audit the statements of
earnings, shareholders' equity or cash flows of Davidson & Associates, Inc. (a
consolidated subsidiary of Cendant Corporation) for the year ended December 31,
1995, which statements reflect net income of $13.6 million for the year ended
December 31, 1995. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
the amounts included for PHH Corporation, Ideon Group, Inc. and Davidson &
Associates, Inc. for such periods, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cendant Corporation and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 3, the accompanying consolidated balance sheets as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997 have been restated. Additionally, as
discussed in Note 17 to the consolidated financial statements, the Company is
involved in certain litigation related to the discovery of accounting
irregularities in certain former CUC International Inc. business units.
As discussed in Notes 2 and 3, in 1997 the Company changed its method of
recognizing revenue and membership solicitation costs for its membership
businesses.
Deloitte & Touche LLP
Parsippany, New Jersey
September 28, 1998
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHH Corporation
We have audited the consolidated balance sheet of PHH Corporation and
subsidiaries as of December 31, 1996, and the related consolidated statements
of income, shareholders' equity, and cash flows for the years ended December
31, 1996 and January 31, 1996, before the restatement related to the merger of
Cendant Corporation's relocation business with the Company and
reclassifications to conform to the presentation used by Cendant Corporation,
not presented separately herein. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements (before restatement and
reclassifications) referred to above present fairly, in all material respects,
the financial position of PHH Corporation and subsidiaries as of December 31,
1996, and the results of their operations and their cash flows for the years
ended December 31, 1996 and January 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
April 30, 1997
F-3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Davidson & Associates, Inc.
We have audited the consolidated statements of earnings, shareholders' equity
and cash flows of Davidson & Associates, Inc. and subsidiaries for the year
ended December 31, 1995 not presented seperately herein. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Davidson & Associates, Inc. and subsidiaries for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Long Beach, California
February 21, 1996
F-4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity of Ideon Group, Inc. (formerly known as
SafeCard Services, Incorporated), and its subsidiaries (not presented
separately herein), present fairly, in all material respects, the results of
operations and cash flows of Ideon Group, Inc. and its subsidiaries for the
year ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of Ideon Group, Inc. for any period subsequent to December 31, 1995.
/s/ Price Waterhouse LLP
Tampa, Florida
February 2, 1996
F-5
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
AS RESTATED (NOTE 3)
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
REVENUES
Membership and service fees -- net $ 3,988.7 $ 3,138.0 $ 2,522.1
Fleet leasing (net of depreciation and interest costs of $1,205.2,
$1,132.4 and $1,089.0) 59.5 56.7 52.1
Other 191.8 43.0 41.9
--------- --------- ---------
Net revenues 4,240.0 3,237.7 2,616.1
--------- --------- ---------
EXPENSES
Operating 1,322.3 1,183.2 1,024.9
Marketing and reservation 1,031.8 910.8 743.6
General and administrative 636.2 341.0 283.3
Depreciation and amortization 237.7 145.5 100.4
Interest -- net 50.6 14.3 16.6
Merger-related costs and other unusual charges 704.1 109.4 97.0
--------- --------- ---------
Total expenses 3,982.7 2,704.2 2,265.8
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, EXTRAORDINARY
GAIN AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 257.3 533.5 350.3
Provision for income taxes 191.0 220.2 143.2
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 66.3 313.3 207.1
Income (loss) from discontinued operations,
net of taxes (Note 6) (26.8) 16.7 22.7
---------- --------- ---------
INCOME BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 39.5 330.0 229.8
Extraordinary gain, net of tax (Note 22) 26.4 -- --
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 65.9 330.0 229.8
Cumulative effect of accounting change, net of tax (Note 3) (283.1) -- --
---------- ---------- ----------
Net income (loss) $ (217.2) $ 330.0 $ 229.8
========== ========== ==========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before extaordinary gain and
cumulative effect of accounting change $ 0.08 $ 0.41 $ 0.30
Income (loss) from discontinued operations, net (0.03) 0.03 0.03
Extraordinary gain, net 0.03 -- --
Cumulative effect of accounting change, net (0.35) -- --
---------- ---------- ----------
NET INCOME (LOSS) $ (0.27) $ 0.44 $ 0.33
========== ========== ==========
DILUTED
Income from continuing operations before extraordinary gain and
cumulative effect of accounting change $ 0.08 $ 0.39 $ 0.28
Income (loss) from discontinued operations, net (0.03) 0.02 0.03
Extraordinary gain, net 0.03 -- --
Cumulative effect of accounting change, net (0.35) -- --
---------- ---------- ----------
NET INCOME (LOSS) $ (0.27) $ 0.41 $ 0.31
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
AS RESTATED (NOTE 3)
-------------------------------
DECEMBER 31,
-------------------------------
1997 1996
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 67.0 $ 448.1
Receivables, (net of allowance for doubtful accounts
of $61.5 and $61.0) 1,170.7 994.1
Deferred membership acquisition costs -- 269.9
Deferred income taxes 311.9 136.9
Other current assets 767.2 525.0
Net assets of discontinued operations 273.3 120.1
----------- -----------
Total current assets 2,590.1 2,494.1
----------- -----------
Franchise agreements -- net 890.3 995.9
Goodwill -- net 2,148.2 2,080.3
Other intangibles -- net 897.5 634.5
Other assets 1,103.6 828.5
----------- -----------
Total assets exclusive of assets under programs 7,629.7 7,033.3
----------- -----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,659.1 3,418.7
Relocation receivables 775.3 773.3
Mortgage loans held for sale 1,636.3 1,248.3
Mortgage servicing rights 373.0 288.9
----------- -----------
6,443.7 5,729.2
----------- -----------
TOTAL ASSETS $ 14,073.4 $ 12,762.5
=========== ===========
See accompanying notes to consolidated financial statements.
F-7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
AS RESTATED (NOTE 3)
-----------------------------
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,492.4 $ 1,602.9
Deferred income 1,042.0 573.0
----------- -----------
Total current liabilities 2,534.4 2,175.9
----------- -----------
Deferred income 292.1 327.9
Long-term debt 1,246.0 780.8
Deferred income taxes 70.9 62.4
Other noncurrent liabilities 110.3 88.0
----------- -----------
Total liabilities exclusive of liabilities under programs 4,253.7 3,435.0
----------- -----------
Liabilities under management and mortgage programs
Debt 5,602.6 5,089.9
----------- -----------
Deferred income taxes 295.7 281.9
----------- -----------
Commitments and contingencies (Note 17)
Shareholders' equity
Preferred stock, $.01 par value -- authorized 10 million shares; none
issued and outstanding -- --
Common stock, $.01 par value -- authorized 2 billion shares; issued
838,333,800 and 807,654,321 shares 8.4 8.1
Additional paid-in capital 3,088.4 2,871.2
Retained earnings 940.6 1,186.7
Net unrealized gain on marketable securities 0.2 4.4
Currency translation adjustment (38.4) (10.8)
Restricted stock, deferred compensation (3.4) (28.2)
Treasury stock, at cost, 6,545,362 and 6,911,757 shares (74.4) (75.7)
----------- -----------
Total shareholders' equity 3,921.4 3,955.7
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,073.4 $ 12,762.5
=========== ===========
See accompanying notes to consolidated financial statements.
F-8
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
AS RESTATED (NOTE 3)
---------------------------------------------
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- -------- ------------ ------------
BALANCE, JANUARY 1, 1995 687.7 $ 6.9 $ 711.5 $ 718.7
Issuance of common stock 21.1 .3 186.8 --
Exercise of stock options by
payment of cash and common
stock 12.5 .1 67.1 --
Tax benefit from exercise of
stock options -- -- 54.8 --
Amortization of ESOP
obligation -- -- 3.0 --
Exercise of stock warrants 2.4 -- 14.9 --
Cash dividends declared and
other equity distributions -- -- .2 (43.4)
Conversion of convertible notes 2.1 -- 13.7 --
Net unrealized loss on
marketable securities -- -- -- --
Purchase of common stock -- -- -- --
Retirement of treasury stock (.6) -- (10.1) --
Currency translation adjustment -- -- -- --
Net income -- -- -- 229.8
------ ------ --------- ---------
BALANCE, DECEMBER 31, 1995 725.2 $ 7.3 $ 1,041.9 $ 905.1
AS RESTATED (NOTE 3)
-----------------------------------------------------------
NET UNREALIZED
LOSS ON CURRENCY RESTRICTED
MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SECURITIES ADJUSTMENT COMPENSATION STOCK
--------------- ------------- ----------------- -----------
BALANCE, JANUARY 1, 1995 $ (.7) $ (20.8) $ -- $ (10.5)
Issuance of common stock -- -- -- --
Exercise of stock options by
payment of cash and common
stock -- -- -- (20.5)
Tax benefit from exercise of
stock options -- -- -- --
Amortization of ESOP
obligation -- -- -- --
Exercise of stock warrants -- -- -- --
Cash dividends declared and
other equity distributions -- -- -- --
Conversion of convertible notes -- -- -- --
Net unrealized loss on
marketable securities (1.4) -- -- --
Purchase of common stock -- -- -- (10.1)
Retirement of treasury stock -- -- -- 10.1
Currency translation adjustment -- (2.2) -- --
Net income -- -- -- --
------- --------- ---- ---------
BALANCE, DECEMBER 31, 1995 $ (2.1) $ (23.0) $ -- $ (31.0)
See accompanying notes to consolidated financial statements.
F-9
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
AS RESTATED (NOTE 3)
----------------------------------------------
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- -------- ------------ -------------
BALANCE, JANUARY 1, 1996 725.2 $ 7.3 $ 1,041.9 $ 905.1
Issuance of common stock 63.3 .6 1,627.9 --
Exercise of stock options by
payment of cash and common
stock 14.0 .1 74.6 --
Restricted stock issuance 1.4 -- 30.5 --
Amortization of restricted stock -- -- -- --
Tax benefit from exercise of
stock options -- -- 78.9 --
Cash dividends declared and
other equity distributions -- -- -- (41.3)
Adjustment to reflect change in
fiscal years pooled entities -- -- (.6) (7.1)
Conversion of convertible notes 3.8 .1 18.0 --
Net unrealized gain on
marketable securities -- -- -- --
Purchase of common stock -- -- -- --
Currency translation adjustment -- -- -- --
Net income -- -- -- 330.0
----- ------ ---------- ----------
BALANCE, DECEMBER 31, 1996 807.7 $ 8.1 $ 2,871.2 $ 1,186.7
AS RESTATED (NOTE 3)
------------------------------------------------------------
NET UNREALIZED
GAIN (LOSS) ON CURRENCY RESTRICTED
MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SECURITIES ADJUSTMENT COMPENSATION STOCK
---------------- ------------- ----------------- -----------
BALANCE, JANUARY 1, 1996 $ (2.1) $ (23.0) $ -- $ (31.0)
Issuance of common stock -- -- -- --
Exercise of stock options by
payment of cash and common
stock -- -- -- (25.5)
Restricted stock issuance -- -- (30.5) --
Amortization of restricted stock -- -- 2.3 --
Tax benefit from exercise of
stock options -- -- -- --
Cash dividends declared and
other equity distributions -- -- -- --
Adjustment to reflect change in
fiscal years pooled entities -- 2.4 -- --
Conversion of convertible notes -- -- -- --
Net unrealized gain on
marketable securities 6.5 -- -- --
Purchase of common stock -- -- -- (19.2)
Currency translation adjustment -- 9.8 -- --
Net income -- -- -- --
------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 4.4 $ (10.8) $ (28.2) $ (75.7)
See accompanying notes to consolidated financial statements.
F-10
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
AS RESTATED (NOTE 3)
----------------------------------------------
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- -------- ------------ -------------
BALANCE, JANUARY 1, 1997 807.7 $ 8.1 $ 2,871.2 $ 1,186.7
Issuance of common stock 6.2 -- 46.3 --
Exercise of stock options by
payment of cash and common
stock 11.4 .1 132.8 --
Restricted stock issuance .2 -- 3.7 --
Amortization of restricted stock -- -- -- --
Tax benefit from exercise of
stock options -- -- 93.5 --
Cash dividends declared -- -- -- (6.6)
Adjustment to reflect taxable
poolings -- -- 41.2 --
Adjustment to reflect change in
CUC fiscal year -- -- -- (22.3)
Post-closing payment made in
connection with shares issued
to acquire Avis Inc. -- -- (60.8) --
Conversion of convertible notes 20.2 .2 150.9 --
Net unrealized loss on
marketable securities -- -- -- --
Purchase of common stock -- -- -- --
Retirement of treasury stock (7.4) -- (190.4) --
Currency translation adjustment -- -- -- --
Net loss -- -- -- (217.2)
------ ------ ---------- ----------
BALANCE, DECEMBER 31, 1997 838.3 $ 8.4 $ 3,088.4 $ 940.6
====== ====== ========== ==========
AS RESTATED (NOTE 3)
-------------------------------------------------------------
NET UNREALIZED
GAIN (LOSS) ON CURRENCY RESTRICTED
MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SECURITIES ADJUSTMENT COMPENSATION STOCK
---------------- ------------- ----------------- ------------
BALANCE, JANUARY 1, 1997 $ 4.4 $ (10.8) $ (28.2) $ (75.7)
Issuance of common stock -- -- -- --
Exercise of stock options by
payment of cash and common
stock -- -- -- (17.8)
Restricted stock issuance -- -- (3.7) --
Amortization of restricted stock -- -- 28.5 --
Tax benefit from exercise of
stock options -- -- -- --
Cash dividends declared -- -- -- --
Adjustment to reflect taxable
poolings -- -- -- --
Adjustment to reflect change in
CUC fiscal year -- -- -- --
Post-closing payment made in
connection with shares issued
to acquire Avis Inc. -- -- -- --
Conversion of convertible notes -- -- -- --
Net unrealized loss on
marketable securities (4.2) -- -- --
Purchase of common stock -- -- -- (171.3)
Retirement of treasury stock -- -- -- 190.4
Currency translation adjustment -- (27.6) -- --
Net loss -- -- -- --
------ --------- --------- ----------
BALANCE, DECEMBER 31, 1997 $ 0.2 $ (38.4) $ (3.4) $ (74.4)
====== ========= ========= ==========
See accompanying notes to consolidated financial statements.
F-11
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
AS RESTATED (NOTE 3)
--------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES ------------ ------------- -------------
Net income (loss) $ (217.2) $ 330.0 $ 229.8
(Income) loss from discontinued operations, net of taxes 26.8 (16.7) (22.7)
Extraordinary gain on sale of subsidiary, net of tax (26.4) -- --
Cumulative effect of accounting change, net of tax 283.1 -- --
Merger-related costs and other unusual charges 704.1 109.4 97.0
Merger-related payments (317.7) (61.3) (36.2)
Adjustments to reconcile net income to net cash provided by
continuing operations
Depreciation and amortization 237.7 145.5 100.4
Membership acquisition costs (26.0) (512.1) (442.9)
Amortization of membership costs -- 492.3 390.2
Effect of changes in fiscal years of pooled entities (22.3) (7.1) --
Deferred income taxes (23.8) 68.8 54.2
Change in operating assets and liabilities from continuing operations:
Receivables (95.6) (122.1) (82.6)
Accounts payable and other current liabilities (87.0) 47.7 122.4
Deferred income 134.0 43.9 12.0
Other (90.6) 58.8 (98.7)
---------- ---------- ----------
NET CASH PROVIDED BY CONTINUING OPERATIONS EXCLUSIVE OF
MANAGEMENT AND MORTGAGE PROGRAMS 479.1 577.1 322.9
---------- ---------- ----------
Management and mortgage programs:
Depreciation and amortization 1,121.9 1,021.8 960.9
Mortgage loans held for sale (388.0) (73.3) (139.5)
---------- ---------- ----------
733.9 948.5 821.4
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 1,213.0 1,525.6 1,144.3
---------- ---------- ----------
INVESTING ACTIVITIES
Property and equipment additions (154.5) (101.2) (100.4)
Proceeds from sales of marketable securities 506.1 72.4 164.2
Purchases of marketable securities (458.1) (125.6) (51.3)
Loans and investments (272.5) (12.7) (33.8)
Net assets acquired, exclusive of cash acquired and
acquisition-related payments (568.2) (1,608.6) (145.8)
Net proceeds from sale of subsidiary 224.0 -- --
Funding of grantor trusts -- (89.9) --
Other (108.7) 33.7 (23.4)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (831.9) (1,831.9) (190.5)
---------- ---------- ----------
Management and mortgage programs:
Investment in leases and leased vehicles (2,068.8) (1,901.2) (2,008.5)
Payments received on investment in leases and leased vehicles 589.0 595.9 576.6
Proceeds from sales and transfers of leases and leased vehicles to
third parties 186.4 162.8 109.8
Equity advances on homes under management (6,844.5) (4,308.0) (6,238.5)
Repayment of advances on homes under management 6,862.6 4,348.9 6,070.5
Additions to originated mortgage servicing rights (270.4) (164.4) (130.1)
Proceeds from sales of mortgage servicing rights 49.0 7.1 21.7
---------- ---------- ----------
(1,496.7) (1,258.9) (1,598.5)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (2,328.6) (3,090.8) (1,789.0)
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-12
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
AS RESTATED (NOTE 3)
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
FINANCING ACTIVITIES
Proceeds from borrowings $ 66.7 $ 459.1 $ 6.0
Principal payments on borrowings (174.0) (3.5) (50.0)
Issuance of convertible debt 543.2 -- --
Issuance of common stock 132.2 1,223.8 100.2
Purchases of common stock (171.3) (19.2) (10.1)
Payments of dividends and other equity distributions by
pooled entities (6.6) (41.3) (39.1)
Other -- (80.0) 15.0
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM 390.2 1,538.9 22.0
---------- ---------- ----------
Management and mortgage programs:
Proceeds from debt issuance or borrowings 2,816.3 1,656.0 1,858.8
Principal payments on borrowings (1,692.9) (1,645.9) (1,237.0)
Net change in short-term borrowings (613.5) 231.8 17.4
---------- ---------- ----------
509.9 241.9 639.2
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS 900.1 1,780.8 661.2
---------- ---------- ----------
Effect of changes in exchange rates on cash and cash
equivalents 15.4 (46.2) 6.5
Cash provided by (used in) discontinued operations (181.0) 53.6 (1.8)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (381.1) 223.0 21.2
Cash and cash equivalents, beginning of period 448.1 225.1 203.9
---------- ---------- ----------
Cash and cash equivalents, end of period $ 67.0 $ 448.1 $ 225.1
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 374.9 $ 291.7 $ 284.9
========== ========== ==========
Taxes $ 264.5 $ 89.4 $ 90.7
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-13
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Cendant Corporation, together with its subsidiaries and its joint ventures
("Cendant" or the "Company") is a leading global provider of consumer and
business services. The Company was created through the merger (the "Cendant
Merger") of HFS Incorporated ("HFS") and CUC International Inc. ("CUC") on
December 17, 1997 with the merged company being renamed Cendant Corporation.
The Company provides all the services formerly provided by each of HFS and
CUC including travel services, real estate services and membership-based
consumer services. See Note 24 for a description of the Company's industry
segments and the services provided within its underlying businesses.
On April 15, 1998, as a result of the discovery of accounting irregularities
in the former CUC business units, the Audit Committee of the Company's Board
of Directors initiated an investigation into such matters. The Audit
Committee's investigation has since been completed and, as a result of its
findings, the Company has restated its previously reported financial results
for 1995 through 1997. The accompanying consolidated financial statements
and footnotes thereto for the years ended December 31, 1997, 1996 and 1995
set forth herein incorporates all relevant information obtained from the
investigation, and reflects the correction of accounting policies which were
changed as a result of the findings. Accordingly, the restated consolidated
financial statements presented herein are the Company's primary historical
financial statements for the periods presented. See Note 3 for a
reconciliation of the Company's financial position and results of operations
from financial statements previously filed prior to restatement, to the
restated financial statements, as presented in this Form 10-K/A.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
transactions of the Company together with its wholly owned and majority
owned subsidiaries. The accompanying consolidated financial statements have
been restated for the business combinations accounted for as poolings of
interests (see Note 5) as if such combined companies had operated as one
entity since inception. All intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method over the
estimated useful lives of the related assets.
FRANCHISE AGREEMENTS
Franchise agreements are recorded at their estimated fair values upon
acquisition and are amortized on a straight-line basis over the estimated
periods to be benefited, ranging from 12 to 40 years. At December 31, 1997
and 1996, accumulated amortization amounted to $125.3 million and $87.9
million, respectively.
F-14
GOODWILL
Goodwill, which represents the excess of cost over fair value of net assets
acquired is being amortized on a straight-line basis over the estimated
useful lives, ranging from 5 to 40 years. At December 31, 1997 and 1996,
accumulated amortization amounted to $177.2 million and $141.4 million,
respectively.
ASSET IMPAIRMENT
The Company periodically evaluates the recoverability of its long-lived
assets, comparing the respective carrying values to the current and
expected future cash flows, on an undiscounted basis, to be generated from
such assets. Property and equipment is evaluated separately within each
business. The recoverability of goodwill and franchise agreements are
evaluated on a separate basis for each acquisition and each respective
franchise brand. Management believes that as of December 31, 1997, the
carrying values and remaining lives of goodwill and franchise agreements
are appropriate.
CORE BUSINESS OPERATIONS AND REVENUE RECOGNITION
Franchising. Franchise revenue principally consists of royalty, marketing
and reservation fees, which are based on a percentage of franchisee
revenue. Royalty, marketing and reservation fees are accrued as the
underlying franchisee revenue is earned. Franchise revenue also includes
initial franchise fees which are recorded as revenue when the lodging
property, car rental location or real estate brokerage office opens as a
franchised unit.
Timeshare. Timeshare exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscriber. Timeshare
subscription revenue is deferred upon receipt and recorded as revenue as the
contractual services (delivery of publications) are provided to subscribers.
Fleet management. Revenues from fleet management services other than leasing
are recognized over the period in which services are provided and the
related expenses are incurred. The Company records the cost of leased
vehicles as an "investment in leases and leased vehicles". Amounts charged
to lessees for interest on the unrecovered investment are credited to income
on a level yield method which approximates the contractual terms.
Relocation. Relocation services provided by the Company include facilitating
the purchase and resale of the transferee's residence, providing equity
advances on the transferee's residence and home management services. The
home is purchased under a contract of sale and the Company obtains a deed to
the property, however, it does not generally record the deed or transfer of
title. Transferring employees are provided equity on their home based on an
appraised value determined by independent appraisers, after deducting any
outstanding mortgages. The mortgage is generally retired concurrently with
the advance of the equity and the purchase of the home. Based on its client
agreements, the Company is given parameters under which it negotiates for
the ultimate sale of the home. The gain or loss on resale is generally borne
by the client corporation.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at a floating rate based on various indices. Direct
costs of managing the home during the period the home is held for resale,
including property taxes and repairs and maintenance are generally borne by
the client. All such costs are generally guaranteed by the client
corporation. The client normally advances funds to cover a portion of such
carrying costs. When the home is sold, a settlement is made with the client
corporation netting actual costs with any advanced funding.
Revenues and related costs associated with the purchase and resale of a
residence are recognized over the period in which services are provided.
Relocation services revenue is recorded net of costs reimbursed by client
corporations and interest expenses incurred to fund the purchase of a
transferee's residence. Under the terms of contracts with clients, the
Company is generally protected against losses from changes in real estate
market conditions. The Company also offers fee-based programs such as home
marketing assistance, household goods moves, destination services, and
property dispositions for financial institutions and government agencies.
Revenues from these fee-based services are taken into income over the
periods in which the services are provided and the related expenses are
incurred.
F-15
Mortgage. Loan origination fees, commitment fees paid in connection with the
sale of loans, and direct loan origination costs associated with loans held
for resale, are deferred until the loan is sold. Fees received for servicing
loans owned by investors are based on the difference between the weighted
average yield received on the mortgages and the amount paid to the investor,
or on a stipulated percentage of the outstanding monthly principal balance
on such loans. Servicing fees are credited to income when received. Costs
associated with loan servicing are charged to expense as incurred.
Sales of mortgage loans are generally recorded on the date a loan is
delivered to an investor. Sales of mortgage securities are recorded on the
settlement date. The Company acquires mortgage-servicing rights by
originating or purchasing mortgage loans and selling those loans with
servicing retained, or it may purchase mortgage-servicing rights separately.
The carrying value of mortgage-servicing rights is amortized over the
estimated life of the related loan portfolio. Such amortization is recorded
as a reduction of loan servicing fees in the consolidated statements of
operations. Gains or losses on the sale of mortgage servicing rights are
recognized when title and all risks and rewards have irrevocably passed to
the buyer and there are no significant unresolved contingencies. Gains or
losses on sales of mortgage loans are recognized based upon the difference
between the selling price and the carrying value of the related mortgage
loans sold. Such gains and losses are also increased or decreased by the
amount of deferred mortgage-servicing fees recorded.
Lifestyle product sales. Product sale revenue primarily represents the sale
of entertainment books, gift wrapping and other products to schools,
churches and other charitable organizations on a consignment basis. Revenue
is recognized when the consignee generates a sale to the ultimate consumer.
Insurance. Insurance premiums received for the sale of accidental death and
dismemberment insurance ("AD&D") are recognized upon execution of underlying
agreements with consumers. The Company transfers the risk of insurance,
administration of claims and balance of premiums to third party insurance
companies. Also, the Company recognizes its percentage share of the excess
of premiums transferred over claims costs and insurance company
administrative retention, based on actual and actuarially determined future
claims costs.
Membership. Prospective club members receive a free three month trial
membership for which they are under no obligation to commit to purchase nor
pay for such membership. Memberships are generally billed to credit cards
upon expiration of the trial period. Memberships are cancellable for a full
refund of the membership fee during the entire membership period, generally
1 year. Membership revenue is recognized upon the expiration of the
membership period (See ACCOUNTING CHANGE FOR MEMBERSHIPS).
ACCOUNTING CHANGE FOR MEMBERSHIPS
Prior to 1997, the Company recorded deferred membership income, net of
estimated cancellations, at the time members were billed (upon expiration
of the free trial period), which was recognized as revenue ratably over the
membership term and modified periodically based on actual cancellation
experience. In addition, membership acquisition and renewal costs, which
related primarily to membership solicitations were capitalized as direct
response advertising costs due to the Company's ability to demonstrate that
the direct response advertising resulted in future economic benefits. Such
costs were amortized on a straight-line basis as revenues were recognized
(over the average membership period). The Company believed that such
accounting policies were appropriate and consistent with industry practice.
In August 1998, in connection with the Company's cooperation with the
Securities and Exchange Commission ("SEC") investigation of accounting
irregularities discovered in the former CUC business units, the SEC
concluded that when membership fees are fully refundable during the entire
membership period, membership revenue should be recognized at the end of
the membership period upon the expiration of the refund offer. The SEC
Staff further concluded that non-refundable solicitation costs should be
expensed as incurred since such costs are not recoverable if membership
fees are refunded.
F-16
The Company agreed to adopt such accounting policies effective January 1,
1997 and recorded a cumulative adjustment on such date for the cumulative
impact of the accounting change (see Note 3--Restatement--Accounting
Change).
ADVERTISING EXPENSES
The Company formerly expensed all advertising costs, other than direct
response advertising costs, in the period incurred. As a result of the
change in accounting for memberships (see Accounting change for
memberships), the Company's policy is to expense all advertising costs in
the period incurred. Advertising expenses for the years ended December 31,
1997, 1996 and 1995 were $898.2 million, $805.6 million and $653.9 million,
respectively.
INCOME TAXES
The provision for income taxes includes deferred income taxes resulting
from items reported in different periods for income tax and financial
statement purposes. Deferred tax assets and liabilities represent the
expected future tax consequences of the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The effects of changes in tax rates on deferred tax
assets and liabilities are recognized in the period that includes the
enactment date. No provision has been made for U.S. income taxes on
approximately $199.6 million of cumulative undistributed earnings of
foreign subsidiaries at December 31, 1997 since it is the present intention
of management to reinvest the undistributed earnings indefinitely in
foreign operations. The determination of unrecognized deferred U.S. tax
liability for unremitted earnings is not practicable.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates as of the balance sheet dates, equity accounts are
translated at historical exchange rates and revenues, expenses and cash
flows are translated at the average exchange rates for the periods
presented. Translation gains and losses are included as a component of
shareholders' equity.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" for fiscal years beginning after June
15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective for the 2000 calendar
year end. The Company has not yet determined the impact SFAS No. 133 will
have on its financial position or results of operations when such statement
is adopted.
3. RESTATEMENT
As publicly announced on April 15, 1998, the Company discovered accounting
irregularities in certain business units of CUC. The Audit Committee of the
Company's Board of Directors initiated an investigation into such matters
(See Note 17). As a result of the findings of the Audit Committee
investigation and Company investigation, the Company has restated
previously reported annual results including the 1997, 1996 and 1995
financial information set forth herein. The 1997 annual results have also
been restated for a change in accounting, effective January 1, 1997,
related to revenue and expense recognition for memberships (see "Accounting
Change").
While management has made all adjustments considered necessary as a result
of the investigation into accounting irregularities and the preparation and
audit of the restated financial statements for 1997, 1996 and 1995,
there can be no assurances that additional adjustments will not be required
as a result of the SEC investigation.
The following statements of operations and balance sheets reconcile
previously reported and restated financial information.
F-17
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1997
---------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES,
AS PREVIOUSLY AND ACCOUNTING
REPORTED CHANGE
--------------- -----------------
Net revenues $ 5,314.7 $ (432.5)
--------- --------
Expenses
Operating 1,555.5 115.9
Marketing and reservation 1,266.3 (114.2)
General and administrative 727.2 7.4
Depreciation and amortization 256.8 16.3
Interest-net 66.3 (0.2)
Merger-related costs and other unusual
charges 1,147.9 (409.9)
--------- --------
Total expenses 5,020.0 (384.7)
--------- --------
Income from continuing operations before
income taxes, extraordinary gain and
cumulative effect of accounting change 294.7 (47.8)
Provision for income taxes 239.3 (47.1)
--------- --------
Income from continuing operations before
extraordinary gain and cumulative effect of
accounting change 55.4 (0.7)
Loss from discontinued operations, net of
taxes -- --
---------- --------
Income before extraordinary gain and
cumulative effect of accounting change 55.4 (0.7)
Extraordinary gain, net of tax -- 11.2
---------- --------
Income before cumulative effect of accounting
change 55.4 10.5
Cumulative effect of accounting change, net of
tax -- (283.1)
---------- --------
Net income (loss) $ 55.4 $ (272.6)
========== ========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.07
Loss from discontinued operations, net --
Extraordinary gain, net --
Cumulative effect of accounting change, net --
----------
Net income (loss) $ 0.07
==========
DILUTED
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.06
Loss from discontinued operations, net --
Extraordinary gain, net --
Cumulative effect of accounting change, net --
----------
Net income (loss) $ 0.06
==========
WEIGHTED AVERAGE SHARES
Basic 811.2
Diluted 851.7
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
RESTATED BEFORE RECLASSIFICATION
DISCONTINUED FOR DISCONTINUED AS
OPERATIONS OPERATIONS RESTATED
----------------- ------------------ -------------
Net revenues $ 4,882.2 $ (642.2) $ 4,240.0
--------- -------- ---------
Expenses
Operating 1,671.4 (349.1) 1,322.3
Marketing and reservation 1,152.1 (120.3) 1,031.8
General and administrative 734.6 (98.4) 636.2
Depreciation and amortization 273.1 (35.4) 237.7
Interest-net 66.1 (15.5) 50.6
Merger-related costs and other unusual
charges 738.0 (33.9) 704.1
--------- -------- ---------
Total expenses 4,635.3 (652.6) 3,982.7
--------- -------- ---------
Income from continuing operations before
income taxes, extraordinary gain and
cumulative effect of accounting change 246.9 10.4 257.3
Provision for income taxes 192.2 (1.2) 191.0
--------- -------- ---------
Income from continuing operations before
extraordinary gain and cumulative effect of
accounting change 54.7 11.6 66.3
Loss from discontinued operations, net of
taxes -- (26.8) (26.8)
--------- -------- ----------
Income before extraordinary gain and
cumulative effect of accounting change 54.7 (15.2) 39.5
Extraordinary gain, net of tax 11.2 15.2 26.4
--------- -------- ----------
Income before cumulative effect of accounting
change 65.9 -- 65.9
Cumulative effect of accounting change, net of
tax (283.1) -- (283.1)
--------- -------- ----------
Net income (loss) $ (217.2) $ -- $ (217.2)
========== ======== ==========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.08
Loss from discontinued operations, net (0.03)
Extraordinary gain, net 0.03
Cumulative effect of accounting change, net (0.35)
----------
Net income (loss) $ (0.27)
==========
DILUTED
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.08
Loss from discontinued operations, net (0.03)
Extraordinary gain, net 0.03
Cumulative effect of accounting change, net (0.35)
----------
Net income (loss) $ (0.27)
==========
WEIGHTED AVERAGE SHARES
Basic 811.2
Diluted 851.7
F-18
BALANCE SHEET
(IN MILLIONS)
AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY AND ACCOUNTING DISCONTINUED FOR DISCONTINUED AS
REPORTED CHANGE OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ -------------
ASSETS
Current assets
Cash and cash equivalents $ 149.5 $ (64.0) $ 85.5 $ (18.5) $ 67.0
Receivables, net 1,648.8 (309.8) 1,339.0 (168.3) 1,170.7
Deferred membership
acquisition costs 424.5 (424.5) -- -- --
Net assets of discontinued
operations -- -- -- 273.3 273.3
Other assets 777.0 383.0 1,160.0 (80.9) 1,079.1
----------- -------- ---------- -------- ----------
Total current assets 2,999.8 (415.3) 2,584.5 5.6 2,590.1
----------- -------- ---------- -------- ----------
Goodwill -- net 2,467.0 (95.0) 2,372.0 (223.8) 2,148.2
Other assets 2,940.7 33.1 2,973.8 (82.4) 2,891.4
----------- -------- ---------- -------- ----------
Total assets exclusive of assets
under programs 8,407.5 (477.2) 7,930.3 (300.6) 7,629.7
----------- -------- ---------- -------- ----------
Assets under management and
mortgage programs 6,443.7 -- 6,443.7 -- 6,443.7
----------- -------- ---------- -------- ----------
TOTAL ASSETS $ 14,851.2 $ (477.2) $ 14,374.0 $ (300.6) $ 14,073.4
=========== ======== ========== ======== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and other $ 1,742.8 $ (80.1) $ 1,662.7 $ (170.3) $ 1,492.4
Deferred income 1,197.2 136.9 1,334.1 -- 1,334.1
Long-term debt 1,348.3 3.0 1,351.3 (105.3) 1,246.0
Other liabilities 187.1 19.1 206.2 (25.0) 181.2
----------- -------- ---------- -------- ----------
Total liabilities exclusive of
liabilities under programs 4,475.4 78.9 4,554.3 (300.6) 4,253.7
----------- -------- ---------- -------- ----------
Liabilities under management
and mortgage programs 5,898.3 -- 5,898.3 -- 5,898.3
----------- -------- ---------- -------- ----------
Total shareholders' equity 4,477.5 (556.1) 3,921.4 -- 3,921.4
----------- -------- ---------- -------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 14,851.2 $ (477.2) $ 14,374.0 $ (300.6) $ 14,073.4
=========== ======== ========== ======== ==========
F-19
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------------
ACCOUNTING RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY ERRORS AND DISCONTINUED FOR DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ -------------
Net revenues $ 3,908.8 $ (160.2) $ 3,748.6 $ (510.9) $ 3,237.7
--------- -------- ---------- -------- ---------
Expenses
Operating 1,392.8 35.8 1,428.6 (245.4) 1,183.2
Marketing and reservation 1,089.5 (92.5) 997.0 (86.2) 910.8
General and administrative 339.6 62.4 402.0 (61.0) 341.0
Depreciation and
amortization 167.9 12.0 179.9 (34.4) 145.5
Interest-net 25.4 2.2 27.6 (13.3) 14.3
Merger-related costs and
other unusual charges 179.9 (45.6) 134.3 (24.9) 109.4
--------- -------- ---------- -------- ---------
Total expenses 3,195.1 (25.7) 3,169.4 (465.2) 2,704.2
--------- -------- ---------- -------- ---------
Income from continuing
operations before income
taxes 713.7 (134.5) 579.2 (45.7) 533.5
Provision for income taxes 290.1 (40.9) 249.2 (29.0) 220.2
--------- -------- ---------- -------- ---------
Income from continuing
operations 423.6 (93.6) 330.0 (16.7) 313.3
Income from discontinued
operations, net of taxes -- -- -- 16.7 16.7
---------- -------- ---------- -------- ---------
Net income $ 423.6 $ (93.6) $ 330.0 $ -- $ 330.0
========== ======== ========== ======== =========
INCOME PER SHARE
BASIC
Income from continuing
operations $ 0.56 $ 0.41
Income from discontinued
operations, net -- 0.03
---------- ----------
Net income $ 0.56 $ 0.44
========== ==========
DILUTED
Income from continuing
operations $ 0.52 $ 0.39
Income from discontinued
operations, net -- 0.02
---------- ----------
Net income $ 0.52 $ 0.41
========== ==========
WEIGHTED AVERAGE SHARES
Basic 754.4 757.4
Diluted 818.6 821.6
F-20
BALANCE SHEET
(IN MILLIONS)
AT DECEMBER 31, 1996
-----------------------------------------------------------------------------------
ACCOUNTING RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY ERRORS AND DISCONTINUED FOR DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ -------------
ASSETS
Current assets
Cash and cash equivalents $ 633.9 $ (156.1) $ 477.8 $ (29.7) $ 448.1
Receivables, net 1,290.6 (172.0) 1,118.6 (124.5) 994.1
Deferred membership
acquisition costs 401.6 (131.7) 269.9 -- 269.9
Net assets of discontinued
operations -- -- -- 120.1 120.1
Other assets 605.1 114.6 719.7 (57.8) 661.9
----------- -------- ---------- -------- ----------
Total current assets 2,931.2 (345.2) 2,586.0 (91.9) 2,494.1
----------- -------- ---------- -------- ----------
Goodwill -- net 2,302.2 (29.9) 2,272.3 (192.0) 2,080.3
Other assets 2,625.7 (82.4) 2,543.3 (84.4) 2,458.9
----------- -------- ---------- -------- ----------
Total assets exclusive of assets
under programs 7,859.1 (457.5) 7,401.6 (368.3) 7,033.3
----------- -------- ---------- -------- ----------
Assets under management and
mortgage programs 5,729.2 -- 5,729.2 -- 5,729.2
----------- -------- ---------- -------- ----------
TOTAL ASSETS $ 13,588.3 $ (457.5) $ 13,130.8 $ (368.3) $ 12,762.5
=========== ======== ========== ======== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and other $ 1,680.4 $ 59.5 $ 1,739.9 $ (137.0) $ 1,602.9
Deferred income 1,099.4 (198.5) 900.9 -- 900.9
Long-term debt 1,004.6 (9.2) 995.4 (214.6) 780.8
Other liabilities 124.9 42.2 167.1 (16.7) 150.4
----------- -------- ---------- -------- ----------
Total liabilities exclusive of
liabilities under programs 3,909.3 (106.0) 3,803.3 (368.3) 3,435.0
----------- -------- ---------- -------- ----------
Liabilities under management
and mortgage programs 5,371.8 -- 5,371.8 -- 5,371.8
----------- -------- ---------- -------- ----------
Total shareholders' equity 4,307.2 (351.5) 3,955.7 -- 3,955.7
----------- -------- ---------- -------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,588.3 $ (457.5) $ 13,130.8 $ (368.3) $ 12,762.5
=========== ======== ========== ======== ==========
F-21
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------------
ACCOUNTING RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY ERRORS AND DISCONTINUED FOR DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ -------------
Net revenues $ 2,992.1 $ 34.6 $ 3,026.7 $ (410.6) $ 2,616.1
--------- -------- ---------- -------- ---------
Expenses
Operating 1,110.9 137.0 1,247.9 (223.0) 1,024.9
Marketing and reservation 875.2 (75.3) 799.9 (56.3) 743.6
General and administrative 279.5 73.0 352.5 (69.2) 283.3
Depreciation and
amortization 112.9 5.4 118.3 (17.9) 100.4
Interest-net 13.3 9.4 22.7 (6.1) 16.6
Merger-related costs and
other unusual charges 97.0 -- 97.0 -- 97.0
--------- -------- ---------- -------- ---------
Total expenses 2,488.8 149.5 2,638.3 (372.5) 2,265.8
--------- -------- ---------- -------- ---------
Income from continuing
operations before income
taxes 503.3 (114.9) 388.4 (38.1) 350.3
Provision for income taxes 200.5 (41.9) 158.6 (15.4) 143.2
--------- -------- ---------- -------- ---------
Income from continuing
operations 302.8 (73.0) 229.8 (22.7) 207.1
Income from discontinued
operations, net of taxes -- -- -- 22.7 22.7
---------- -------- ---------- -------- ---------
Net income $ 302.8 $ (73.0) $ 229.8 $ -- $ 229.8
========== ========= ========== ======== =========
INCOME PER SHARE
BASIC
Income from continuing
operations $ 0.45 $ 0.30
Income from discontinued
operations, net -- 0.03
---------- ----------
Net income $ 0.45 $ 0.33
========== ==========
DILUTED
Income from continuing
operations $ 0.42 $ 0.28
Income from discontinued
operations, net -- 0.03
---------- ----------
Net income $ 0.42 $ 0.31
========== ==========
WEIGHTED AVERAGE SHARES
Basic 670.5 692.4
Diluted 741.8 763.7
F-22
Following are the primary categories of adjustments to revenue which appear on
the reconciliation of previously reported and restated statements of operations:
DESCRIPTION OF NET REVENUE ADJUSTMENTS
YEARS ENDED DECEMBER 31,
ADJUSTMENTS TO REVENUE: ----------------------------------------
1997 1996 1995
(IN MILLIONS) ----------- ------------ -----------
Net revenue:
Improper revenue recognition .......................... $ (91.7) $ (110.2) $ (31.2)
Improper reversal of merger liabilities ............... (167.7) -- --
Revenue associated with pooled entities--not previously
reported ............................................. 14.2 108.4 197.3
Elimination of intercompany transactions and contra
revenue .............................................. (180.0) (158.3) (124.3)
Other errors .......................................... (2.4) (0.1) (7.2)
Accounting change ..................................... (4.9) -- --
-------- -------- --------
Adjustment to net revenue ............................. $ (432.5) $ (160.2) $ 34.6
-------- -------- --------
IMPROPER REVENUE RECOGNITION
The Company made adjustments to correct the misapplication of generally
accepted accounting principles resulting in improper revenue recognition.
These errors include: the understatement of estimated membership fees to be
refunded to members; the immediate recognition of revenue which should have
been deferred and recognized over the membership term; the recording of
fictitious revenue; other accounting errors.
IMPROPER REVERSAL OF MERGER LIABILITIES
The Company recorded adjustments to correct the reduction of liabilities
previously established primarily for merger transactions and a corresponding
inappropriate entry to record revenue.
REVENUE ASSOCIATED WITH POOLED ENTITIES--NOT PREVIOUSLY RECORDED
The Company recorded adjustments to consolidate the financial statements of
acquired entities which were accounted for as poolings of interest as
required by generally accepted accounting principles. Previous consolidated
financial statements did not reflect certain acquired company financial
statements for periods required.
ELIMINATION OF INTERCOMPANY TRANSACTIONS AND CONTRA-REVENUE
The Company made adjustments to eliminate intercompany revenue not
previously eliminated and properly classify certain expenses as
contra-revenue resulting in reductions to revenue.
ACCOUNTING CHANGE
The Company adopted a change in accounting for memberships revenue and
expenses effective January 1, 1997 (See Note 2--Accounting change for
memberships.) Accordingly, the Company recorded a non-cash after-tax charge
on such date of $283.1 million or $.35 per diluted share, to account for the
cumulative effect of the accounting change. The cumulative effect adjustment
also impacted the Company's financial position which included reductions in
deferred membership acquisition costs and accrued expenses of $278.4 and
$47.8 million, respectively and increases in deferred income and prepaid
expenses (commissions) of $363.9 million and $148.1 million, respectively.
The effect of adopting the change in accounting for memberships on the
Company's 1997 operating results, before the cumulative effect adjustment,
was additional after-tax expense of $15.3 million or $.02 per diluted share
comprised of a reduction in revenues of $4.7 million with an increase in
operating expenses of $19.0 million and a tax benefit of $8.4 million.
The underlying pro forma information assumes the aforementioned accounting
change has been applied retroactively. For comparative purposes, such pro
forma information is presented with actual results.
F-23
YEAR ENDED DECEMBER 31,
-------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
----------- ---------- ----------
Income before extraordinary gain:
As restated $ 39.5 $330.0 $229.8
Pro forma 39.5 322.6 200.7
Net income:
As restated 65.9 330.0 229.8
Pro forma 65.9 322.6 200.7
PER SHARE INFORMATION
BASIC
Income before extraordinary gain:
As restated $ .05 $ .44 $ .33
Pro forma .05 .43 .29
Net income:
As restated .08 .44 .33
Pro forma .08 .43 .29
DILUTED
Income before extraordinary gain:
As restated .05 .41 .31
Pro forma .05 .40 .27
Net income:
As restated .08 .41 .31
Pro forma .08 .40 .27
4. EARNINGS PER SHARE ("EPS")
Basic EPS is computed based solely on the weighted average number of common
shares outstanding during the period. Diluted EPS reflects all potential
dilution of common stock. Basic and Diluted EPS from continuing operations
is calculated as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ---------- ----------- -----------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 66.3 $ 313.3 $ 207.1
Convertible debt interest -- 5.8 6.7
------- ------- -------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change, as
adjusted $ 66.3 $ 319.1 $ 213.8
======= ======= =======
Weighted average shares -- basic 811.2 757.4 692.4
Potential dilution of common stock:
Stock options 40.5 40.1 44.3
Convertible debt -- 24.1 27.0
------- ------- -------
Weighted average shares -- diluted 851.7 821.6 763.7
======= ======= =======
EPS -- CONTINUING OPERATIONS BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
BASIC $ .08 $ .41 $ .30
======= ======== ========
DILUTED $ .08 $ .39 $ .28
======= ======== ========
5. BUSINESS COMBINATIONS
In connection with the underlying pooling of interests business
combinations, the accompanying consolidated financial statements have been
prepared as if the Company and all such pooled companies had operated as one
entity since inception.
F-24
1997 POOLINGS
Cendant. On December 17, 1997, HFS merged with CUC to form Cendant. The
Cendant Merger was consummated with CUC issuing 440.0 million shares of its
common stock in exchange for all of the outstanding common stock of HFS.
Pursuant to the terms of the agreement and plan of merger, HFS stockholders
received 2.4031 shares of CUC common stock for each share of HFS common
stock. Upon consummation of the Cendant Merger, CUC changed its name to
Cendant Corporation. Effective with the Cendant Merger, the Company's
shareholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock
and preferred stock to 2 billion shares and 10 million shares,
respectively.
In connection with the Cendant Merger, the Company determined that it will
use a calendar year end and, accordingly, CUC changed its fiscal year end
from January 31 to December 31. Prior to the Cendant Merger, HFS reported on
a calendar year basis. The HFS statements of income for the years ended
December 31, 1996 and 1995 have been combined with the CUC statements of
income for the years ended January 31, 1997, and 1996 respectively. As a
result of CUC's change in fiscal year, the operating results of CUC for
January 1997, were duplicated in the Company's consolidated statement of
operations for the year ended December 31, 1997. Accordingly, an adjustment
has been made to 1997 retained earnings for the duplication of net income of
$22.3 million for such one-month period.
PHH. On April 30, 1997, the Company and PHH Corporation ("PHH") merged (the
"PHH Merger") which was satisfied by the issuance of 72.8 million shares of
Company common stock in exchange for all of the outstanding common stock and
stock options of PHH. PHH operates the world's largest corporate relocation
services business and also provides mortgage services and fleet management
services. Prior to the PHH Merger, PHH reported on an April 30 fiscal year
basis. To conform to a calendar year end, PHH prepared financial statements
for the twelve month periods ended December 31, 1996 and January 31, 1996
which were combined with the Company's statements of income for the years
ended December 31, 1996 and 1995, respectively. In combining PHH's twelve
month periods, the consolidated statement of income for the year ended
December 31, 1996 included one month (January 1996) of PHH's operating
results which was also included in the consolidated statement of operations
for the year ended December 31, 1995. Accordingly, an adjustment has been
made to 1996 retained earnings for the duplication of net income of $8.3
million and cash dividends declared of $5.9 million for such one-month
period.
Numa. During February 1997, the Company issued 3.0 million shares of its
common stock for all the outstanding common stock of Numa Corporation
("Numa"). Numa publishes personalized heritage publications and markets and
sells personalized merchandise.
1996 POOLINGS
Ideon. In August 1996, the Company issued 16.6 million shares of its
common stock for all of the outstanding capital stock of Ideon Group, Inc.
("Ideon"). Ideon is principally a provider of credit card enhancement
services. Ideon previously reported on a fiscal year ended December 31, for
its financial reporting. To conform to CUC's former fiscal year end of
January 31, Ideon's operating results for January 1996 have been excluded
from the Company's year ended December 31, 1996 operating results.
Accordingly, a $1.1 million credit was recorded to 1996 retained earnings
for such excluded period.
Other. In 1996, the Company acquired the outstanding stock of certain
other entities by issuing 4.8 million shares of its common stock.
1995 POOLINGS
Getko, NAOG and Advance Ross. In June 1995, the Company issued 5.6 million
shares of its common stock for all of the outstanding capital stock of
Getko Group Inc. ("Getko"). Getko distributes complimentary welcoming
packages to new homeowners throughout the United States and Canada. In
September 1995, the Company issued 2.3 million shares of its common stock
for all of the outstanding capital stock of North American Outdoor Group,
Inc. ("NAOG"). NAOG owns one of the largest for-profit hunting and general
interest fishing membership organizations in the United States, and also
owns various other membership organizations. In January 1996, the Company
F-25
issued 8.9 million shares of its common stock for all of the outstanding
capital stock of Advance Ross Corporation ("Advance Ross"). Advance Ross is
the parent company to Global Refund, a subsidiary which processes
value-added tax refunds for travelers in over 20 European countries.
The following table presents the historical results of the pooled Cendant
entities for the last complete interim periods prior to their respective
mergers:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
(IN MILLIONS) -------------- ------------- ------------
Net revenues
Cendant (1) $ 1,100.2 $ -- $ --
CUC 1,390.3 1,571.7 1,165.0
HFS 1,570.9 786.0 446.1
PHH 178.6 650.5 610.8
NUMA -- 68.0 51.1
1996 Pooled Entities -- 161.5 256.0
1995 Pooled Entities -- -- 87.1
---------- ---------- ----------
$ 4,240.0 $ 3,237.7 $ 2,616.1
========== ========== ==========
Income (loss) from continuing operations
before extraordinary gain and cumulative effect
of accounting change
Cendant (1) $ (181.1) $ -- $ --
CUC 105.3 35.6 75.5
HFS 109.9 169.5 79.8
PHH 32.2 87.7 78.1
NUMA -- 6.7 14.0
1996 Pooled Entities -- 13.8 (47.4)
1995 Pooled Entities -- -- 7.1
----------- ---------- ----------
$ 66.3 $ 313.3 $ 207.1
=========== ========== ==========
- ----------
(1) Operating results of Cendant for the fourth quarter of 1997.
PURCHASE BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. The operating results of such
acquired companies are reflected in the Company's consolidated statements
of income since the respective dates of acquisition.
F-26
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the Company's acquisitions which were
consummated during the three years ended December 31, 1997.
ACQUIRED IN 1996
(IN MILLIONS) -----------------------------------------------
ACQUIRED COLDWELL
IN 1997 RCI AVIS BANKER OTHER
----------- ----------- ----------- ----------- -----------
Cash paid $ 267.9 $ 412.1 $ 367.2 $ 745.0 $ 224.0
Common stock issued (1) 21.6 75.0 338.4 -- 52.5
Notes issued -- -- 100.9 -- 5.0
-------- -------- -------- -------- --------
Total consideration 289.5 487.1 806.5 745.0 281.5
-------- -------- -------- -------- --------
Assets acquired 230.6 439.1 783.9 541.7 91.5
Liabilities assumed 113.7 429.7 311.4 148.5 48.7
-------- -------- -------- -------- --------
Fair value of identifiable net assets acquired 116.9 9.4 472.5 393.2 42.8
-------- -------- -------- -------- --------
Goodwill $ 172.6 $ 477.7 $ 334.0 $ 351.8 $ 238.7
======== ======== ======== ======== ========
(1) Number of shares issued 0.9 2.4 11.1 -- 2.5
======== ======== ======== ======== ========
ACQUIRED IN 1995
(IN MILLIONS) ---------------------------
CENTURY 21 OTHER
------------ ------------
Cash paid $ 100.2 $ 122.5
Common stock issued (2) 64.8 40.8
Preferred stock issued 80.0 --
--------- ---------
Total consideration 245.0 163.3
--------- ---------
Assets acquired 120.6 67.2
Liabilities assumed 75.3 56.2
--------- ---------
Fair value of identifiable net assets acquired 45.3 11.0
--------- ---------
Goodwill $ 199.7 $ 152.3
========= =========
(2) Number of shares issued 9.6 6.0
========= =========
1997 ACQUISITIONS
The Company acquired certain entities for an aggregate purchase price of
$289.5 million.
1996 ACQUISITIONS
Resort Condominiums International, Inc. In November 1996, the Company
completed the acquisition of all the outstanding capital stock of Resort
Condominiums International, Inc. and its affiliates ("RCI") for $487.1
million. The purchase agreement provides for contingent payments of up to
$200.0 million over a five year period which are based on components which
measure RCI's future performance, including EBITDA, net revenues and number
of members, as defined. The Company made a contingent payment of $100.0
million during the first quarter of 1998, which was accounted for as
additional goodwill.
Avis. In October 1996, the Company completed the acquisition of all of the
outstanding capital stock of Avis, Inc. ("Avis"), including payments under
certain employee stock plans of Avis and the redemption of certain series of
preferred stock of Avis for an aggregate $806.5 million. Subsequently, the
Company made contingent cash payments of $26.0 million in 1996 and $60.8
million in 1997. The contingent payments made in 1997 represented the
incremental amount of value attributable to Company common stock as of the
stock purchase agreement date in excess of the proceeds realized upon the
subsequent sale of such Company common stock.
F-27
In September 1997, the subsidiary of Avis, which controlled the car rental
operations of Avis ("ARAC"), completed an Initial Public Offering ("IPO")
resulting in a 72.5% dilution of the Company's investment in ARAC. Net
proceeds of $359.3 million were retained by ARAC. The Company's interest was
further diluted to 20.4% primarily due to a secondary offering of common
stock in March 1998. See Note 21 for a discussion of the Company's executed
business plan and related accounting treatment regarding Avis.
Coldwell Banker Corporation. In May 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), the largest gross revenue
producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640.0 million
in cash for all of the outstanding capital stock of Coldwell Banker and
repaid $105.0 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the May 1996 sale of
an aggregate 46.6 million shares of Company common stock pursuant to a
public offering.
Other 1996 Acquisitions. The Company acquired certain other entities for an
aggregate purchase price of $281.5 million.
1995 ACQUISITIONS
Century 21. In August 1995, a majority owned (87.5%) subsidiary of the
Company, C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate
Corporation ("Century 21"), the world's largest residential real estate
brokerage franchisor. Aggregate consideration for the acquisition consisted
of $245.0 million. Pursuant to an agreement, as amended, between the
Company and a management group of Holding, the Company acquired the
remaining 12.5% interest in Holding for $52.8 million in 1997.
Other 1995 Acquisitions. The Company acquired certain other entities for an
aggregate purchase price of $163.3 million.
PRO FORMA INFORMATION (UNAUDITED)
The following information reflects pro forma statements of income data for
the year ended December 31, 1996 assuming the aforementioned acquisitions
accounted for using the purchase method of accounting completed during 1996
were consummated on January 1, 1996. The acquisitions completed during 1997
were immaterial to the operating results of the Company. The pro forma
results are not necessarily indicative of the operating results that would
have occurred had the transactions been consummated as indicated nor are
they intended to indicate results that may occur in the future. The
underlying pro forma information includes the amortization expense
associated with the assets acquired, and reflects the Company's financing
arrangements, and the related income tax effects.
YEAR ENDED
DECEMBER 31,
1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -------------
Net revenues $ 3,804.2
Net income(1) 379.8
Net income per share:(1)
Basic $ .48
Diluted .45
Weighted average shares outstanding:
Basic 784.9
Diluted 849.1
------------
(1) Includes operating results of discontinued operations for the year ended
December 31, 1996 (See Note 6--Discontinued Operations)
F-28
6. DISCONTINUED OPERATIONS
Classified Advertising Acquisition. In October 1997, the Company issued
14.2 million shares of its common stock for all of the outstanding capital
stock of Hebdo Mag International, Inc. ("Hebdo Mag"). The transaction was
accounted for as a pooling of interests and therefore, all prior periods
have been restated to include the operations of Hebdo Mag for all periods
prior to the merger. Hebdo Mag is a publisher and distributor of classified
advertising information.
Software Acquisitions. In July 1996, the Company issued 45.1 million shares
and 38.4 million shares of Company common stock for all of the outstanding
capital stock of Davidson and Associates, Inc. ("Davidson") and Sierra
On-Line Inc. ("Sierra"), respectively. Davidson and Sierra develop, publish
and distribute educational and entertainment software for home and school
use. During 1995, prior to being merged into the Company, Davidson and
Sierra acquired all of the outstanding capital stock of various companies
by issuing an aggregate of 0.8 million and 3.9 million equivalent shares of
Company common stock, respectively. Davidson and Sierra previously reported
on fiscal years ended December 31 and March 31, respectively, for their
financial reporting. To conform to CUC's former fiscal year end of January
31, Davidson and Sierra's operating results for January 1996 have been
excluded from the Company's year ended December 31, 1996 operating results.
Accordingly, a $5.8 million charge was recorded to 1996 retained earnings
for such excluded period. In addition Sierra's operating results for the
three months ended March 1995 have been duplicated in the Company's year
ended December 31, 1995 operating results. Such operating results were
immaterial.
In January 1997, the Company issued 3.1 million shares of its common stock
for all of the outstanding capital stock of Knowledge Adventure, Inc.
("KA"). KA develops and markets children's education computer software.
Davidson, Sierra and KA (collectively, the "Software Acquisitions")
substantially comprise the Company's wholly-owned subsidiary, Cendant
Software Corporation ("Cendant Software"). The Software Acquisitions were
accounted for as poolings of interest and therefore, all prior periods have
been restated to include the operations of Davidson, Sierra and KA for all
periods prior to their respective mergers.
Divestitures. On August 12, 1998, the Company announced that its Executive
Committee of the Board of Directors committed to discontinue the Company's
classified advertising and consumer software businesses by disposing of
Hebdo Mag and Cendant Software, respectively. The Company has since entered
into a definitive agreement to sell Hebdo Mag to its former 50% owners for
7.1 million shares of Company common stock and approximately $410 million
in cash. The transaction is subject to certain conditions, including
regulatory approval and financing by the purchaser. In addition, the
Company has engaged investment bankers to analyze various strategic
alternatives in regard to the disposition of Cendant Software within one
year of the measurement date.
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
SOFTWARE
------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
(IN MILLIONS) ------------ ------------ ------------
Net revenues $ 433.7 $ 384.5 $ 308.4
-------- --------- ---------
Income (loss) from operations before income taxes (5.9) 42.0 33.9
Provision for income taxes 2.4 27.3 13.6
-------- --------- ---------
Net income (loss) $ (8.3) $ 14.7 $ 20.3
========= ========= =========
F-29
CLASSIFIED ADVERTISING
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
(IN MILLIONS) ----------- ----------- -----------
Net revenues $ 208.5 $ 126.4 $ 102.2
------- -------- --------
Income (loss) from operations before income taxes
and extraordinary loss (4.5) 3.7 4.2
Provision for (benefit from) income taxes (1.2) 1.7 1.8
Extraordinary loss from early extinguishment of
debt, net of a $4.9 million tax benefit (15.2) -- --
------- -------- --------
Net income (loss) $ (18.5) $ 2.0 $ 2.4
======== ======== ========
BALANCE SHEET DATA:
SOFTWARE CLASSIFIED ADVERTISING
--------------------------- --------------------------
AT DECEMBER 31, AT DECEMBER 31,
--------------------------- --------------------------
1997 1996 1997 1996
(IN MILLIONS) ------------ ------------ ----------- ------------
Current assets $ 209.1 $ 162.0 $ 58.6 $ 50.0
Goodwill 42.2 10.7 181.5 181.3
Other assets 49.2 42.4 33.2 42.0
Total liabilities 127.0 114.2 173.5 254.1
--------- --------- -------- ---------
Net assets of discontinued operations $ 173.5 $ 100.9 $ 99.8 $ 19.2
========= ========= ======== =========
7. MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
1997 POOLING
In 1997, the Company incurred merger-related costs and other unusual charges
("Unusual Charges") of $738.0 million of which $704.1 million ($504.7
million after tax or $.58 per diluted share) was related to continuing
operations and $33.9 million was associated with businesses which are
discontinued. Charges incurred during the fourth quarter of 1997 of $454.9
million were substantially associated with and/or coincident to the Cendant
Merger and the merger with Hebdo Mag (collectively, the "Fourth Quarter 1997
Charge"). Unusual Charges of $283.1 million, comprised of $295.4 million of
charges incurred in the second quarter of 1997, reduced by $12.3 million for
changes in estimates recorded in the fourth quarter of 1997, were
substantially associated with the PHH Merger (the "Second Quarter 1997
Charge"). The collective Unusual Charges recorded during 1997 related to the
aforementioned mergers and the reduction of related liabilities is
summarized below by category of expenditure and by charge as follows:
ADJUSTMENTS
ORIGINAL DUE TO LIABILITIES AT
UNUSUAL CHANGE IN UNUSUAL CASH DECEMBER 31,
CHARGES ESTIMATES CHARGES PAYMENTS NON-CASH 1997
(IN MILLIONS) ---------- ------------ ----------- ---------- ---------- ---------------
Professional fees $ 121.3 $ 2.0 $ 123.3 $ 72.6 $ -- $ 50.7
Personnel related 324.9 (0.1) 324.8 111.3 45.0 168.5
Business terminations 133.9 -- 133.9 46.0 84.0 3.9
Facility related and other 170.2 (14.2) 156.0 72.5 33.1 50.4
-------- -------- -------- ------- ------- -------
Total Unusual Charges $ 750.3 ($ 12.3) $ 738.0 $ 302.4 $ 162.1 $ 273.5
Reclassification for discontinued
operations (33.9) -- (33.9) (8.0) (25.9) --
-------- -------- -------- ------- ------- -------
Total Unusual Charges related
to continuing operations $ 716.4 ($ 12.3) $ 704.1 $ 294.4 $ 136.2 $ 273.5
======== ======== ======== ======= ======= =======
F-30
ADJUSTMENTS
ORIGINAL DUE TO LIABILITIES AT
UNUSUAL CHANGE IN UNUSUAL CASH DECEMBER 31,
CHARGES ESTIMATES CHARGES PAYMENTS NON-CASH 1997
(IN MILLIONS) ---------- ------------ ----------- ---------- ---------- ---------------
Fourth Quarter 1997 Charge $ 454.9 $ -- $ 454.9 $ 152.2 $ 105.3 $ 197.4
Second Quarter 1997 Charge 295.4 (12.3) 283.1 150.2 56.8 76.1
-------- ------- -------- -------- -------- --------
Total Unusual Charges $ 750.3 ($ 12.3) 738.0 $ 302.4 $ 162.1 $ 273.5
Reclassification for discontinued
operations (33.9) -- (33.9) (8.0) (25.9) --
-------- ------- -------- -------- -------- --------
Total Unusual Charges related
to continuing operations $ 716.4 ($ 12.3) $ 704.1 $ 294.4 $ 136.2 $ 273.5
======== ======= ======== ======== ======== ========
FOURTH QUARTER 1997 CHARGE
The Company incurred Unusual Charges in the fourth quarter 1997 totaling
$454.9 million substantially associated with the Cendant and Hebdo Mag
mergers. In addition to $170.0 million of professional fees and executive
compensation expense incurred directly as a result of the mergers, the
Company incurred $284.9 million of costs resulting from reorganization plans
formulated prior to and implemented as a result of the merger.
The Company determined to streamline its corporate organization functions
and eliminate several office locations in overlapping markets. Management
initiated a plan in 1997 to consolidate European call centers in Cork,
Ireland in 1998 and upgrade the quality standards of its hotel franchise
businesses, which resulted in planned terminations of franchise properties
commencing in January 1998. In December 1997, the Company irrevocably
contributed $70.0 million to independent technology trusts which made
technology investments for the direct benefit of hotel and real estate
franchisees. Management also approved a plan to terminate a contract, which
may restrict the Company from maximizing opportunities afforded by the
merger of HFS and CUC.
Following is a description of costs by type of expenditure and reduction of
corresponding liabilities through December 31, 1997.
Unusual Charges include $93.0 million of estimated professional fees
primarily consisting of investment banking, legal and accounting fees
incurred in connection with the mergers. Approximately $43.4 million of
invoices were paid in the fourth quarter of 1997 leaving a $49.6 million
balance to be paid in 1998. The Company also incurred $170.7 million of
personnel related costs including $73.3 million of retirement and employee
benefit plan costs, $23.7 million of restricted stock compensation, $61.4
million of severance resulting from consolidations of corporate functions
and nine European call centers and $12.3 million other personnel related
costs. Total employees to be terminated, including seven corporate
employees, approximated 474 with limited terminations in 1997. The $170.7
million of personnel related liabilities were reduced in 1997 by $35.2
million of non-cash reductions primarily including $23.7 and $9.5 million
of costs associated with restricted stock and stock option compensation,
respectively and $8.9 million of personnel related payments. Approximately
$45.3 million of retirement plan costs were paid in January 1998. Unusual
Charges include $78.3 million of business termination costs which consists
of a $48.3 million impairment of hotel franchise agreement assets
associated with a quality upgrade program and $30.0 million of contract
termination costs. Of the $78.3 million of business termination
liabilities, $30.0 million was paid in December 1997 and $48.3 million of
non-cash reductions of intangible assets were recorded. Facility related
and other unusual charges of $112.9 million include $70.0 million of
irrevocable contributions to independent technology trusts for the direct
benefit of lodging and real estate franchisees, $16.4 million of building
lease termination costs and a $22.0 million reduction in intangible assets
associated with the Company's wholesale annuity business for which
impairment was determined in accordance with SFAS No-121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" in the fourth quarter of 1997. Approximately $70.0 million was
paid for these obligations in December 1997 and the remaining obligations
are anticipated to be paid over the earlier of lease buy-out or lease term.
F-31
SECOND QUARTER 1997 CHARGE
The Company incurred $295.4 million of Unusual Charges in the second quarter
of 1997 primarily associated with the PHH Merger. During the fourth quarter,
as a result of changes in estimates, the Company adjusted certain
merger-related liabilities which resulted in a $12.3 million credit to
Unusual Charges. In addition to $125.8 million of professional fees and
executive compensation expenses incurred directly as a result of the merger,
the Company incurred $157.3 million of expenses resulting from
reorganization plans formulated prior to and implemented as of the merger
date. The merger afforded the combined Company an opportunity to rationalize
its combined corporate, real estate and travel segment businesses, and
corresponding support and service functions to gain organizational
efficiencies and maximize profits. Such initiatives included 500 job
reductions including the virtual elimination of all PHH Corporate functions
and facilities in Hunt Valley, Maryland. Management initiated a plan just
prior to the merger to close hotel reservation call centers, combine travel
agency operations and continue the downsizing of fleet operations by
reducing headcount and eliminating unprofitable products. With respect to
the real estate segment, management initiated plans to integrate its
relocation, franchise and mortgage origination businesses to capture
additional revenue through the referral of one business unit's customers to
another. Management also formalized a plan to centralize the management and
headquarters functions of the world's largest, second largest and other
company owned corporate relocation business unit subsidiaries. The real
estate segment initiatives resulted in approximately 380 planned job
reductions, write-offs of abandoned systems and leasehold assets commencing
in the second quarter 1997.
Following is a description of costs by type of expenditure and reduction of
corresponding liabilities through December 31, 1997:
Unusual Charges include $154.1 million of personnel related costs
associated with employee reductions necessitated by the planned and
announced consolidation of the Company's several corporate relocation
service businesses worldwide as well as the consolidation of corporate
activities. Personnel related charges also include termination benefits
such as severance, medical and other benefits. Personnel related charges
also include retirement benefits pursuant to pre-existing contracts
resulting from a change in control. Several grantor trusts were established
and funded by the Company in November 1996 to pay such benefits in
accordance with the terms of the PHH merger agreement. The Company's
restructuring plan resulted in the termination of approximately 560
employees (principally corporate employees located in North America), of
which approximately 364 were terminated by December 31, 1997. Approximately
$102.4 million of personnel related costs were paid in 1997 and $9.8
million of non-cash stock compensation was recognized. Unusual Charges also
include professional fees of $30.3 million of which $29.2 million was paid
in 1997 and is primarily comprised of investment banking, accounting and
legal fees incurred in connection with the PHH Merger. Unusual Charges also
include business termination charges of $55.6 million, which are comprised
of $38.8 million of costs to exit certain activities primarily within the
Company's fleet management business, a $7.3 million termination fee
associated with a joint venture that competed with PHH Mortgage Services
business and $9.6 million of costs to terminate a marketing agreement with
a third party in order to replace the function with internal resources. In
connection with the business termination charges, approximately $16.0
million was paid in 1997 and $35.7 million of assets associated with
discontinued activities were written off. Facility related and other
charges totaling $43.1 million include costs associated with contract and
lease terminations, asset disposals and other charges incurred in
connection with the consolidation and closure of excess office space.
Approximately $2.6 million was paid and $11.3 million of assets were
written off in 1997. The remaining facility related obligations will be
paid or are otherwise anticipated to be extinguished in 1998.
The Company had substantially completed the aforementioned restructuring
activities by the second quarter of 1998. The $76.1 million of liabilities
remaining at December 31, 1997 primarily consist of $41.9 million of
severance and benefit plan payments and $29.2 million related to contract,
leasehold and lease termination obligations.
F-32
1996 POOLINGS
1996 UNUSUAL CHARGE
In connection with and coincident to the Ideon merger in August 1996 and
the Davidson and Sierra mergers in July 1996, the Company incurred Unusual
Charges of approximately $134.3 million in 1996, of which $109.4 million
($70.0 million, after tax or $.09 per diluted share) was related to
continuing operations (substantially Ideon) and $24.9 million was
associated with businesses that are discontinued (Davidson and Sierra). The
collective Unusual Charges recorded during 1996 related to the
aforementioned mergers and the utilization of such liabilities is
summarized below by category of expenditure as follows:
ORIGINAL LIABILITIES AT
UNUSUAL CASH DECEMBER 31,
CHARGES PAYMENTS NON-CASH 1997
(IN MILLIONS) ---------- ---------- ---------- ---------------
Professional fees ............... $ 27.5 $ (27.5) $ -- $ --
Personnel related ............... 7.5 (7.5) -- --
Facility related ................ 12.4 (.7) (9.7) 2.0
Litigation related .............. 80.4 (14.4) -- 66.0
Other ........................... 6.5 (6.2) -- .3
------- ------- ------ -----
Total Unusual Charges ........... 134.3 (56.3) (9.7) 68.3
Reclassification for discontinued
operations ..................... (24.9) 24.9 -- --
------- ------- ------ -----
Total Unusual Charges related to
continuing operations .......... $ 109.4 $ (31.4) $ (9.7) $ 68.3
======= ======= ====== ======
Costs associated with the Davidson and Sierra mergers were comprised
primarily of professional fees incurred in connection with the
transactions. Costs associated with the Company's merger with Ideon (the
"Ideon Merger") were non-recurring and included transaction and exit costs
as well as a provision relating to certain litigation matters giving
consideration to the Company's intended approach to these matters. In
determining the amount of the provision related to these outstanding
litigation matters, the Company estimated the cost of settling these
litigation matters. In estimating such cost, the Company considered
potential liabilities related to these matters and the estimated cost of
prosecuting and defending them (including out-of-pocket costs, such as
attorneys' fees, and the cost to the Company of having its management
involved in such litigation matters). The Company has since settled all
outstanding litigation matters. The remaining $66.0 million of litigation
related liabilities at December 31, 1997 consists of a present value of
$47.9 million representing settlement payments to be made in annual
installments to Peter Halmos, the co-founder of SafeCard Services
Incorporated ("SafeCard") (see Note 17 -- Commitments and Contingencies --
Ideon Settlement) and $18.1 million of settlements related to certain other
class action lawsuits which were paid in the first quarter of 1998. The
$2.0 million of facility-related liabilities remaining at December 31, 1997
are for lease termination payments. The Company considered
litigation-related costs and liabilities, as well as exit costs and
transaction costs, in determining the agreed upon exchange ratio in respect
to the Ideon Merger.
In determining the amount of the provision related to the Company's
consolidation efforts, the Company estimated the significant severance
costs to be accrued upon the consummation of the Ideon Merger and costs
relating to the expected obligations for certain third-party contracts
(e.g., existing leases and vendor agreements) to which Ideon is a party
and which are neither terminable at will nor automatically terminate upon
a change-in-control of Ideon. As a result of the Ideon Merger, 120
employees were terminated. The Company incurred significant exit costs
because Ideon's credit card registration and enhancement services are
substantially similar to the Company's credit card registration and
enhancement services. All of the business activities related to the
operations performed by Ideon's Jacksonville, Florida office were
transferred to the Company's Comp-U-Card Division in Stamford, Connecticut
upon the consummation of the Ideon Merger.
F-33
COSTS RELATED TO IDEON PRODUCTS ABANDONED AND RESTRUCTURING
During the year ended December 31, 1995, Ideon incurred special charges
totaling $43.8 million, net of recoveries, related to the abandonment of
certain new product developmental efforts and the related impairment of
certain assets and the restructuring of the SafeCard division of Ideon and
the Ideon corporate infrastructure as discussed below. The original charge
of $45.0 million was composed of accrued liabilities of $36.2 million and
asset impairments of $8.8 million. In December 1995, Ideon recovered $1.2
million of costs in the above charges. Also included in costs related to
products abandoned are marketing and operational costs incurred of $53.2
million. During the year ended December 31, 1996, all remaining amounts
that had been previously accrued were paid.
During 1995, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA
TOUR Partners program that provided various benefits to members and consumer
response rates after the launch were significantly less than Ideon
management's expectations. The product as configured was deemed not
economically viable and a charge of $18 million was incurred. Costs
associated with the abandonment of the product marketing included employee
severance payments (approximately 130 employees), costs to terminate
equipment and facilities leases, costs for contract impairments and
write-downs taken for asset impairments. In September 1995, after a period
of product redesign and test marketing, Ideon discontinued its PGA TOUR
Partners credit card servicing role and recorded a charge of $3.6 million
for costs associated with the abandonment of this role, including employee
severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain commitments.
In April 1995, Ideon launched a nationwide child registration and missing
child search program. Consumer response rates after the launch were
significantly less than Ideon management's expectations and a charge of $9.0
million was incurred to cover severance payments (approximately 100
employees), costs to terminate equipment and facilities leases and
write-down taken for asset impairments. As a result of the discontinuance of
these products, Ideon undertook an overall restructuring of its operations
and incurred charges of $7.2 million to terminate operating leases and
write-down assets to realizable value, $3.0 million for restructuring its
SafeCard division and $4.2 million for restructuring its corporate
infrastructure.
PURCHASE BUSINESS COMBINATION LIABILITIES
In connection with the acquisitions of Century 21, Coldwell Banker, RCI and
certain other acquisitions, related business plans were developed to
restructure each of the respective companies. The restructuring plans were
finalized within one year of each respective acquisition based upon
management's assessments of actions to be taken to complete the plans.
Acquisition liabilities recorded in connection with such business plans and
any subsequent adjustments thereto have been included in the respective
purchase price allocations of each acquired company. Acquisition
liabilities include costs associated with restructuring activities such as
planned involuntary termination and relocation of employees, the
consolidation and closing of certain facilities and the elimination of
duplicative operating and overhead activities.
Acquisition liabilities recorded in connection with the Company's
acquisitions accounted for under the purchase method of accounting and the
employees to be terminated in connection with the respective restructuring
plans are summarized as follows:
COLDWELL
CENTURY 21 BANKER RCI OTHER
(Dollars in millions) ------------ --------- ---------- ---------
Personnel related $ 12.6 $ 5.8 $ 14.6 $ 6.5
Facility related 16.5 0.1 12.4 3.1
Other costs 1.0 3.8 1.7 1.4
------- ------ ------- -------
Total $ 30.1 $ 9.7 $ 28.7 $ 11.0
======= ====== ======= =======
Terminated employees 319 87 252 275
======= ====== ======= =======
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.
F-34
Payments charged against the acquisition liabilities are as follows:
COLDWELL
CENTURY 21 BANKER RCI OTHER
(In millions) ------------ --------- ---------- ---------
1997 $ 1.5 $ 1.8 $ 18.8 $ 2.5
1996 11.3 3.9 0.5 7.7
1995 14.3 -- -- --
------- ------ ------- -------
$ 27.1 $ 5.7 $ 19.3 $ 10.2
======= ====== ======= =======
The Company's business plans to restructure the aforementioned acquisitions
have been fully executed. Acquisition liabilities of $17.2 million
remaining at December 31, 1997 pertain primarily to contractual obligations
that existed at the respective acquisition dates, contract terminations and
future lease commitments.
8. OTHER INTANGIBLES -- NET
Other intangibles -- net consisted of:
YEAR ENDED
DECEMBER 31,
BENEFIT PERIODS --------------------------
IN YEARS 1997 1996
(In millions) ---------------- ------------ -----------
Avis trademarks 40 $ 402.0 $ 400.0
Other trademarks 40 262.9 --
Customer lists 6.5 - 10 116.8 114.0
Reservation systems 10 95.0 95.0
Other 2 - 16 123.6 89.0
-------- --------
1,000.3 698.0
Less accumulated amortization 102.8 63.5
-------- --------
Other intangibles -- net $ 897.5 $ 634.5
======== ========
Other intangibles are recorded at their estimated fair values at the dates
acquired and are amortized on a straight-line basis over the periods to be
benefited.
9. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996
(In millions) ------------- -------------
Accounts payable $ 479.5 $ 473.0
Short-term debt -- 250.9
Merger and acquisition obligations 359.0 147.4
Accrued payroll and related 187.3 159.4
Advances from relocation clients 57.2 78.8
Other 409.4 493.4
---------- ----------
Accounts payable and other current liabilities $ 1,492.4 $ 1,602.9
========== ==========
Short-term debt at December 31, 1996 consisted of $150.0 million of
acquired Avis fleet financing, borrowed on behalf of ARAC, which was repaid
upon settlement of the corresponding intercompany loan due from ARAC prior
to the IPO and a $100.9 million note payable issued to 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%.
F-35
10. NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles consisted of:
YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996
(In millions) ------------- -------------
Vehicles under open-end operating leases $ 2,640.1 $ 2,617.3
Vehicles under closed-end operating leases 577.2 443.9
Direct financing leases 440.8 356.7
Accrued interest on leases 1.0 .8
---------- ----------
Net investment in leases and leased vehicles $ 3,659.1 $ 3,418.7
========== ==========
The Company records the cost of leased vehicles as a "net investment in
leases and leased vehicles". The vehicles are leased primarily to corporate
fleet users for initial periods of twelve months or more under either
operating or direct financing lease agreements. Vehicles under operating
leases are amortized using the straight-line method over the expected lease
term. The Company's experience indicates that the full term of the leases
may vary considerably due to extensions beyond the minimum lease term.
Lessee repayments of investments in leases and leased vehicles were $1.6
billion in both 1997 and 1996, and the ratio of such repayments to the
average net investment in leases and leased vehicles was 46.80% and 47.19%,
in 1997 and 1996, respectively.
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
vehicles under this type of lease agreement have consistently been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost and accumulated depreciation of vehicles under this type of
operating lease was $5.0 billion and $2.4 billion, respectively, at December
31, 1997 and $4.6 billion and $2.0 billion, respectively, at December 31,
1996.
Under the other type of operating lease, closed-end operating leases, resale
of the vehicles on termination of the lease is for the account of the
Company. The lessee generally pays for or provides maintenance, vehicle
licenses and servicing. The original cost and accumulated depreciation of
vehicles under these agreements was $754.4 million and $177.2 million,
respectively, at December 31, 1997 and $600.6 million and $156.7 million,
respectively, at December 31, 1996. The Company believes adequate reserves
are maintained in the event of loss on vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee.
Maintenance and repairs of these vehicles are the responsibility of the
lessee.
Gross leasing revenues, which are reflected in fleet leasing on the
consolidated statements of income consist of:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
(In millions) ------------- ------------- -------------
Operating leases $ 1,222.9 $ 1,145.8 $ 1,098.7
Direct financing leases, primarily interest 41.8 43.3 42.4
---------- ---------- ----------
$ 1,264.7 $ 1,189.1 $ 1,141.1
========== ========== ==========
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
F-36
a maximum extent in one of two forms: excess assets transferred, which were
$7.6 million and $7.1 million at December 31, 1997 and 1996, respectively;
or guarantees to a maximum extent. There were no guarantees to a maximum
extent at December 31, 1997 or 1996. All such credit risk has been included
in the Company's consideration of related reserves. The outstanding balances
under such agreements aggregated $224.6 million and $158.5 million at
December 31, 1997 and 1996, respectively.
Other managed vehicles with balances aggregating $75.6 million and $93.9
million at December 31, 1997 and 1996, respectively, are included in a
special purpose entity which is not owned by the Company. This entity does
not require consolidation as it is not controlled by the Company and all
risks and rewards rest with the owners. Additionally, managed vehicles
totaling approximately $69.6 million and $47.4 million at December 31, 1997
and 1996, respectively, are owned by special purpose entities which are
owned by the Company. However, such assets and related liabilities have been
netted in the balance sheet since there is a two-party agreement with
determinable accounts, a legal right of offset exists and the Company
exercises its right of offset in settlement with client corporations.
11. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. Such mortgage loans
are recorded at the lower of cost or market value on an aggregate loan
basis. The Company issues mortgage-backed certificates insured or guaranteed
by various government sponsored entities and private insurance agencies. The
insurance or guaranty is provided primarily on a non-recourse basis to the
Company, except where limited by the Federal Housing Administration and
Veterans Administration and their respective loan programs. As of December
31, 1997, mortgage loans sold with recourse amounted to approximately $58.5
million. The Company believes adequate reserves are maintained to cover any
potential losses.
12. MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights activity was as follows:
MORTGAGE
SERVICING IMPAIRMENT
RIGHTS ALLOWANCE TOTAL
(In millions) ----------- ----------- ----------
BALANCE, JANUARY 1, 1995 $ 97.2 $ -- $ 97.2
Additions 130.1 -- 130.1
Amortization (28.6) -- (28.6)
Write-down/provision (1.6) (1.4) (3.0)
Sales (4.3) -- (4.3)
-------- ------- --------
BALANCE, DECEMBER 31, 1995 192.8 (1.4) 191.4
Less: PHH activity for January
1996 to reflect change in PHH fiscal year (14.0) .2 (13.8)
Additions 164.4 -- 164.4
Amortization (51.8) -- (51.8)
Write-down/provision -- .6 .6
Sales (1.9) -- (1.9)
-------- -------- --------
BALANCE, DECEMBER 31, 1996 289.5 (.6) 288.9
Additions 270.4 -- 270.4
Amortization (95.6) -- (95.6)
Write-down/provision -- (4.1) (4.1)
Sales (33.1) -- (33.1)
Other (53.5) -- (53.5)
-------- -------- --------
BALANCE, DECEMBER 31, 1997 $ 377.7 $ (4.7) $ 373.0
======== ========= ========
F-37
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 (SFAS No. 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The
statement provides criteria for: (i) recognizing the transfer of assets as
sales or secured borrowings; (ii) recognizing servicing assets and other
retained interests in the transferred assets and; (iii) overall guidance for
amortizing servicing rights and measuring such assets for potential
impairment. The servicing right and any other retained interests are
recorded by allocating the previous carrying amount between assets sold and
the retained interests, based on their relative fair values at the date of
the transfer. SFAS No. 125 also eliminated the distinction between the
various classes of servicing rights (purchased, originated, excess). Upon
adoption of the statement, assets previously recognized as excess servicing
rights were classified as mortgage servicing rights to the extent that the
recorded value related to the contractually specified servicing fee. The
remaining recorded asset represents an interest-only strip in the amount of
$48.0 million which is recorded within other assets in the consolidated
balance sheet at December 31, 1997. The impact of adopting SFAS No. 125 was
not material to the Company's financial statements.
The Company stratifies its servicing rights according to the interest rate
bands of the underlying mortgage loans for purposes of impairment
evaluation. The Company measures impairment for each stratum by comparing
estimated fair value to the recorded book value. The Company records
amortization expense in proportion to, and over the period of the projected
net servicing income. Temporary impairment is recorded through a valuation
allowance and amortization expense in the period of occurrence.
13. LONG-TERM DEBT
Long-term debt consisted of:
DECEMBER 31,
---------------------------
1997 1996
(In millions) ------------- -----------
Revolving Credit Facilities $ 276.0 $ 205.0
5 7/8% Senior Notes 149.9 149.8
4 1/2% Convertible Senior Notes -- 146.7
4 3/4% Convertible Senior Notes 240.0 240.0
3% Convertible Subordinated Notes 543.2 --
Other 39.2 42.3
---------- --------
1,248.3 783.8
Less current portion 2.3 3.0
---------- --------
Long-term debt $ 1,246.0 $ 780.8
========== ========
CREDIT FACILITIES
At December 31, 1997, the Company's primary credit facility, as amended,
consisted of (i) a $750.0 million, five year unsecured revolving credit
facility (the "Five Year Revolving Credit Facility") and (ii) a $1.25
billion, 364 day unsecured revolving credit facility (the "364 Day
Revolving Credit Facility" and collectively with the Five Year Revolving
Credit Facility, (the "Revolving Credit Facilities"). The 364-Day Revolving
Credit Facility will mature on October 31, 1998 but may be renewed on an
annual basis for an additional 364 days upon receiving lender approval. The
Five Year Revolving Credit Facility will mature on October 1, 2001.
Borrowings under the Revolving Credit Facilities, at the option of the
Company, bear interest based on competitive bids of lenders participating
in the facilities, at prime rates or at LIBOR, plus a margin of
approximately 22 basis points. The Company is required to pay a per annum
facility fee of .08% and .06% of the average daily availability of the Five
Year Revolving Credit Facility and 364 Day Revolving Credit Facility,
respectively. The interest rates and facility fees are subject to change
based upon credit ratings on the Company's senior unsecured long-term debt
by nationally recognized debt rating agencies. The Revolving Credit
Facilities contain certain restrictive covenants including restrictions on
indebted-
F-38
ness, mergers, liquidations and sale and leaseback transactions and
requires the maintenance of certain financial ratios, including a 3:1
minimum interest coverage ratio and a 3.5:1 maximum coverage ratio, as
defined. Amounts outstanding under all revolving credit facilities as of
December 31, 1997 are classified as long-term, based on the Company's
intent and ability to maintain these loans on a long-term basis.
5 7/8% SENIOR NOTES
The 5 7/8% Senior Notes due December 15, 1998 have been classified as
long-term based upon the Company's intent and ability to refinance such
indebtedness on a long-term basis. (See Note 26 -- "Subsequent
Events--Financing Transactions").
4 1/2% CONVERTIBLE SENIOR NOTES
On September 22, 1997, the Company exercised its option to redeem the
outstanding 4 1/2% Convertible Senior Notes (the "4 1/2% Notes"), effective
on October 15, 1997, in accordance with the provisions of the indenture
under which the 4 1/2% Notes were issued. Prior to the redemption date, all
of the outstanding 4 1/2% Notes were converted into 19.7 million shares of
Company common stock.
4 3/4% CONVERTIBLE SENIOR NOTES
In February 1996, the Company completed a public offering of $240 million
unsecured 4 3/4% Convertible Senior Notes (the "4 3/4% Notes") due 2003,
which are convertible at the option of the holder at any time prior to
maturity into 36.030 shares of Company common stock per $1,000 principal
amount of the 4 3/4% Notes, representing a conversion price of $27.76 per
share. The 4 3/4% Notes were redeemable at the option of the Company, in
whole or in part, at any time on or after March 3, 1998 at redemption
prices decreasing from 103.393% of principal at March 3, 1998 to 100% of
principal at March 3, 2003. However, on or after March 3, 1998 and prior to
March 3, 2000, the 4 3/4% Notes were not redeemable at the option of the
Company unless the closing price of the Company's common stock had exceeded
$38.86 per share (subject to adjustment upon the occurrence of certain
events) for 20 trading days within a period of 30 consecutive trading days
ending within five days prior to notice of redemption. The 4 3/4% Notes
were redeemed on May 4, 1998 and have been classified as long-term based on
the Company's intent and ability to refinance the 4 3/4% Notes on a
long-term basis. (See Note 26 -- "Subsequent Events--Financing
Transactions").
3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company completed a public offering of $550
million 3% Convertible Subordinated Notes (the "3% Notes") due 2002. Each
$1,000 principal amount of 3% Notes is convertible into 32.6531 shares of
Company common stock subject to adjustment in certain events. The 3% Notes
may be redeemed at the option of the Company at any time on or after
February 15, 2000, in whole or in part, at the appropriate redemption
prices (as defined in the indenture governing the 3% Notes) plus accrued
interest to the redemption date. The 3% Notes will be subordinated in right
of payment to all existing and future Senior Debt (as defined in the
indenture governing the 3% Notes) of the Company.
DEBT MATURITIES
Aggregate maturities of debt for each of the next five years commencing in
1998 are as follows:
(In millions)
AMOUNT
YEAR -------------
1998 $ 2.3
1999 4.1
2000 1.0
2001 --
2002 543.2
Thereafter 697.7
----------
Total $ 1,248.3
==========
F-39
14. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs consisted
of:
DECEMBER 31,
-----------------------------
1997 1996
(In millions) ------------- -------------
Commercial paper $ 2,577.5 $ 3,090.8
Medium-term notes 2,747.8 1,662.2
Other 277.3 336.9
---------- ----------
Liabilities under management and mortgage programs $ 5,602.6 $ 5,089.9
========== ==========
Commercial paper, all of which matures within 90 days, is supported by
committed revolving credit agreements described below and short-term lines
of credit. The weighted average interest rates on the Company's outstanding
commercial paper was 5.9% and 5.4% at December 31, 1997 and 1996,
respectively.
Medium-term notes of $2.7 billion primarily represent unsecured loans which
mature in 1998. The weighted average interest rates on such medium-term
notes was 5.9% and 5.7% at December 31, 1997 and 1996, respectively.
Other liabilities under management and mortgage programs are principally
comprised of unsecured borrowings under uncommitted short-term lines of
credit and other bank facilities, all of which matures in 1998. The weighted
average interest rate on such debt was 6.7% and 5.8% at December 31, 1997
and 1996, respectively.
Interest expense is incurred on indebtedness which is used to finance fleet
leasing, relocation and mortgage servicing activities. Interest incurred on
borrowings used to finance fleet leasing activities was $177.0 million,
$161.8 million and $159.7 million for the years ended December 31, 1997,
1996, and 1995, respectively, is included net within fleet leasing revenues
in the Consolidated Statements of Income. Interest related to equity
advances on homes was $32.0 million, $35.0 million and $26.0 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest related
to mortgage servicing activities were $77.6 million, $63.4 million and $49.9
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Interest expenses incurred on borrowings used to finance both equity
advances on homes and mortgage servicing activities are recorded net within
membership and service fee revenue in the Consolidated Statements of Income.
To provide additional financial flexibility, the Company's current policy is
to ensure that minimum committed facilities aggregate 80 percent of the
average amount of outstanding commercial paper. As of December 31, 1997, the
Company maintained a $2.5 billion committed and unsecured credit facility
which was backed by a consortium of domestic and foreign banks. The facility
was comprised of a $1.25 billion credit line maturing in 364 days and a five
year $1.25 billion credit line maturing in the year 2002. Under such credit
facility, the Company paid annual commitment fees of $1.7 million, $2.4
million and $2.3 million for the years ended December 31, 1997, 1996 and
1995, respectively. In addition, the Company has other uncommitted lines of
credit with various banks of which $180.7 million was unused at December 31,
1997. The full amount of the Company's committed facility was undrawn and
available at December 31, 1997 and 1996.
F-40
Although the period of service for a vehicle is at the lessee's option, and
the period a home is held for resale varies, management estimates, by using
historical information, the rate at which vehicles will be disposed and the
rate at which homes will be resold. Projections of estimated liquidations of
assets under management and mortgage programs and the related estimated
repayment of liabilities under management and mortgage programs as of
December 31, 1997, are set forth as follows:
(In millions) ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS (1)
- ---------------- ------------------------- -----------------------------
1998 $ 3,321.3 $ 2,746.6
1999 1,855.2 1,702.6
2000 838.6 766.3
2001 272.8 245.8
2002 92.9 84.4
2003-2007 62.9 56.9
---------- ----------
$ 6,443.7 $ 5,602.6
========== ==========
------------
(1) The projected repayments of liabilities under management and mortgage
programs are different than required by contractual maturities.
15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with fluctuations
in interest rates, foreign currency exchange rates, prices of mortgage loans
held for sale and anticipated mortgage loan closing arising from commitments
issued. The Company performs analyses on an on-going basis to determine that
a high correlation exists between the characteristics of derivative
instruments and the assets or transactions being hedged. As a matter of
policy, the Company does not engage in derivatives activities for trading or
speculative purposes. The Company is exposed to credit-related losses in the
event of non-performance by counterparties to certain derivative financial
instruments. The Company manages such risk by periodically evaluating the
financial position of counterparties and spreading its positions among
multiple counterparties. The Company presently does not expect
non-performance by any of the counterparties.
INTEREST RATE SWAPS
If the interest characteristics of the funding mechanism that the Company
uses does not match the interest characteristics of the assets being
funded, the Company enters into interest rate swap agreements to offset the
interest rate risk associated with such funding. The swap agreements
correlate the terms of the assets to the maturity and rollover of the debt
by effectively matching a fixed or floating interest rate with the
stipulated revenue stream generated from the portfolio of assets being
funded. Amounts to be paid or received under interest rate swap agreements
are accrued as interest rates change and are recognized over the life of
the swap agreements as an adjustment to interest expense. For the years
ended December 31, 1997 and 1996, the Company's hedging activities
increased interest expense $4.0 million and $4.1 million, respectively, and
had no effect on its weighted average borrowing rate. The fair value of the
swap agreements is not recognized in the consolidated financial statements
since they are accounted for as hedges.
F-41
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps related to liabilities under management
and mortgage programs at December 31, 1997:
MATURITIES
(Dollars in millions) ---------------------------------------------------------------------------------
TOTAL 1998 1999 2000 2001 2002 2003
------------- ------------- ----------- ---------- ---------- --------- ---------
UNITED STATES
Commercial Paper:
Pay fixed/receive floating:
Notional value $ 355.7 $ 184.3 $ 110.1 $ 40.6 $ 11.8 $ 3.4 $ 5.5
Weighted average receive rate 5.68% 5.68% 5.68% 5.68% 5.68% 5.68%
Weighted average pay rate 6.25% 6.29% 6.19% 6.28% 6.40% 6.61%
- -----------------------------------------------------------------------------------------------------------------------
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 586.0 500.0 86.0
Weighted average receive rate 6.12% 6.71%
Weighted average pay rate 5.89% 5.89%
Pay floating/receive floating:
Notional value 965.0 965.0
Weighted average receive rate 5.76%
Weighted average pay rate 5.70%
- -----------------------------------------------------------------------------------------------------------------------
CANADA
Commercial Paper:
Pay fixed/receive floating:
Notional value 54.8 29.6 18.4 5.9 .9
Weighted average receive rate 4.53% 4.53% 4.53% 4.53%
Weighted average pay rate 5.36% 5.12% 4.89% 4.93%
Pay floating/receive floating:
Notional value 59.8 31.2 16.7 6.5 5.1 .3
Weighted average receive rate 5.88% 5.88% 5.88% 5.88% 5.88%
Weighted average pay rate 4.91% 4.91% 4.91% 4.91% 4.91%
Pay floating/receive fixed:
Notional value 28.3 28.3
Weighted average receive rate 3.68%
Weighted average pay rate 4.53%
UK
Commercial Paper:
Pay floating/receive fixed:
Notional value 491.4 174.6 167.5 113.9 35.4
Weighted average receive rate 7.22% 7.15% 7.24% 7.28%
Weighted average pay rate 7.69% 7.69% 7.69% 7.69%
- -----------------------------------------------------------------------------------------------------------------------
GERMANY
Commercial Paper:
Pay fixed/receive fixed:
Notional value 9.1 2.5 (5.6) 3.1 9.1
Weighted average receive rate 3.76% 3.76% 3.76% 3.76%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34%
---------- ----------- --------- --------- -------- ------- -------
Total $ 2,550.1 $ 1,915.5 $ 307.1 $ 256.0 $ 62.3 $ 3.7 $ 5.5
========== =========== ========= ========= ======== ======= =======
F-42
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates on a selective basis, the Company enters into foreign
exchange contracts. Such contracts are utilized as hedges of intercompany
loans to foreign subsidiaries. Market value gains and losses on the
Company's foreign currency transaction hedges related to intercompany loans
are deferred and recognized upon maturity of the loan. Such contracts
effectively offset the currency risk applicable to approximately $409.8
million and $329.1 million of obligations at December 31, 1997 and 1996,
respectively.
OTHER FINANCIAL INSTRUMENTS
With respect to both mortgage loans held for sale and anticipated mortgage
loan closings arising from commitments issued, the Company is exposed to
the risk of adverse price fluctuations. The Company uses forward delivery
contracts, financial futures and option contracts to reduce such risk.
Market value gains and losses on such positions used as hedges are deferred
and considered in the valuation of cost or market value of mortgage loans
held for sale.
The value of the Company's mortgage servicing rights is sensitive to changes
in interest rates. The Company has developed and implemented a hedge program
to manage the associated financial risks of loan prepayments. The Company
has acquired certain derivative financial instruments, primarily interest
rate floors, futures and options to administer its hedge program. Premiums
paid or received on the acquired derivative instruments are capitalized and
amortized over the life of the contract. Gains and losses associated with
the hedge instruments are deferred and recorded as adjustments to the basis
of the mortgage servicing rights. Deferrals under the hedge programs are
allocated to each applicable stratum of mortgage servicing rights based upon
its original designation and included in the impairment measurement.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND SERVICING RIGHTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for material financial instruments. The fair
values of the financial instruments presented may not be indicative of their
future values.
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. All securities at December 31, 1997 and 1996 were
classified as available-for-sale and were reported at fair value with the
net unrealized holding gains and losses, net of tax, reported as a
component of shareholders' equity until realized. Fair value was based upon
quoted market prices or investment adviser estimates. Declines in the
market value of available-for-sale securities deemed to be other than
temporary result in charges to current earnings and the establishment of a
new cost basis. Gross unrealized gains and losses on marketable securities
were not material.
MORTGAGE LOANS HELD FOR SALE
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to purchase
loans. These loans are priced to be sold with servicing rights retained.
Gains (losses) on mortgage-related positions, used to reduce the risk of
adverse price fluctuations, for both mortgage loans held for sale and
anticipated mortgage loan closings arising from commitments issued, are
included in the carrying amount of mortgage loans held for sale.
MORTGAGE SERVICING RIGHTS
Fair value is estimated based on market quotes and discounted cash flow
analyses based on current market information including market prepayment
rate consensus. Such market information is subject to change as a result of
changing economic conditions.
LONG-TERM DEBT
The fair values of the Company's Senior Notes, Convertible Notes and
Medium-term Notes are estimated based on quoted market prices or market
comparables.
F-43
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, FUTURES CONTRACTS AND
OPTIONS
The fair values of these instruments are estimated, using dealer quotes, as
the amount that the Company would receive or pay to execute a new agreement
with terms identical to those remaining on the current agreement,
considering interest rates at the reporting date.
The carrying amounts and fair values of the Company's financial instruments
at December 31, are as follows:
1997 1996
------------------------------------------- --------------------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
(In millions) ----------- --------------- ----------- ----------- --------------- ------------
ASSETS
Marketable securities:
Debt securities $ -- $ 21.7 (a) $ 21.7 $ -- $ 69.4 (a) $ 69.4
Equity securities -- -- -- -- 22.5 22.5
Investment in mortgage
related securities -- 48.0 48.0 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Relocation receivables -- 775.3 775.3 -- 773.3 773.3
Mortgage loans held for
sale -- 1,636.3 1,668.1 -- 1,248.3 1,248.3
Mortgage servicing rights -- 373.0 394.6 -- 288.9 324.1
- ---------------------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LONG-TERM DEBT
Foreign exchange
forwards 5.5 -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Debt -- 5,602.6 5,604.2 -- 5,089.9 5,089.9
- ---------------------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LIABILITIES UNDER
MANAGEMENT AND MORTGAGE
PROGRAMS
Interest rate swaps 2,550.1 -- -- 1,670.2 -- --
In a gain position -- -- 5.6 -- -- 2.5
In a loss position -- -- (3.9) -- -- (10.7)
Foreign exchange
forwards 415.5 -- 2.5 329.1 -- 10.0
- ---------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-RELATED POSITIONS
Forward delivery
commitments (b) 2,582.5 19.4 (16.2) 1,703.5 11.4 7.4
Option contracts to sell (b) 290.0 .5 -- 265.0 1.0 .7
Option contracts to buy (b) 705.0 1.1 4.4 350.0 1.3 (.5)
Treasury options used to
hedge
servicing rights (c) 331.5 4.8 4.8 313.9 1.3 .3
Constant maturity treasury
floors (c) 825.0 12.5 17.1 -- -- --
Interest rate swaps (c) 175.0 1.3 1.3 -- -- --
------------
(a) All debt securities mature within one year and are classified as other
current assets in the consolidated balance sheets.
(b) Carrying amounts and gains (losses) on these mortgage-related positions
are already included in the determination of the respective carrying
amounts and fair values of mortgage loans held for sale.
(c) Carrying amounts on these mortgage-related positions are capitalized and
recorded as mortgage servicing rights. Gains (losses) on such positions
are included in the determination of fair value of mortgage servicing
rights.
F-44
17. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various facilities
and equipment, which expire through the year 2004. Rental expense for the
years ended December 31, 1997, 1996 and 1995 was $91.3 million, $75.3
million and $62.5 million respectively. The Company has been granted rent
abatements for varying periods on certain of its facilities. Deferred rent
relating to those abatements is being amortized on a straight-line basis
over the applicable lease terms. Commitments under capital leases are not
significant.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1997 are as follows:
(In millions)
YEAR AMOUNT
- ------------------------------------- ----------
1998 $ 70.3
1999 64.4
2000 55.3
2001 41.2
2002 29.5
Thereafter 78.2
-------
Total minimum lease payments $ 338.9
=======
LITIGATION
Company Investigation and Litigation
On April 15, 1998, as a result of the discovery of accounting
irregularities in former CUC business units and the investigation of the
Audit Committee of the Company's Board of Directors into such matters, the
Company has restated its previously reported financial results for 1997,
1996 and 1995.
Since the Company's announcement of the discovery of such accounting
irregularities on April 15, 1998, and prior to the date hereof, seventy-one
purported class action lawsuits and one individual lawsuit have been filed
against the Company, and certain current and former officers and directors
of the Company and HFS, asserting various claims under the federal
securities laws (the "Federal Securities Actions"). Some of the actions
also name as defendants Merrill Lynch & Co. and, in one case, Chase
Securities, Inc., underwriters for the Company's PRIDES securities
offering; two others also name Ernst & Young LLP, the Company's former
independent accountants. Sixty-four of the Federal Securities Actions were
filed in the United States District Court for the District of New Jersey,
six were filed in the United States District Court for the District of
Connecticut (including the individual action), one was filed in the United
States District Court for the Eastern District of Pennsylvania, and one was
filed in New Jersey Superior Court. The Federal Securities Actions filed in
the District of Connecticut and Eastern District of Pennsylvania have been
transferred to the District of New Jersey. On June 10, 1998, the Company
moved to dismiss or stay the Federal Securities Actions filed in New Jersey
Superior Court on the ground that, among other things, it is duplicative of
the actions filed in federal courts. The court granted that motion on
August 7, 1998, without prejudice to the plaintiff's right to re-file the
case in the District of New Jersey.
Certain of these Federal Securities Actions purport to be brought on behalf
of purchasers of the Company's common stock and/or options on common stock
during various periods, most frequently beginning May 28, 1997 and ending
April 15, 1998 (although the alleged class periods begin as early as March
21, 1995 and end as late as July 15, 1998). Others claim to be brought on
behalf of persons who exchanged HFS common stock for the Company's common
stock in connection with the Merger. Some plaintiffs purport to represent
both of these types of investors. In addition, eight actions pending in the
District of New Jersey purport to be brought, either in their entirety or
in part, on behalf of purchasers of the Company's PRIDES securities. The
complaints in the Federal Securities Actions allege, among other things,
that as a result of accounting irregularities, the Company's
F-45
previously issued financial statements were materially false and misleading
and that the defendants knew or should have known that these financial
statements caused the prices of the Company's securities to be inflated
artificially. The Federal Securities Actions variously allege violations of
Section 10(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 10b-5 promulgated thereunder, Section 14(a) of
the Exchange Act and SEC 14a-9 promulgated thereunder, Section 20(a) of the
Exchange Act, and Sections 11, 12 and 15 of the Securities Act of 1933, as
amended (the "Securities Act"). Certain actions also allege violations of
common law. The individual action also alleges violations of Section 18(a)
of the Exchange Act and the Florida securities law. The class action
complaints seek damages in unspecified amounts. The individual action seeks
damages in the amount of approximately $9 million plus interest and
expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
Order consolidating the 50 Federal Securities Actions that had at that time
been filed in the United States District Court for the District of New
Jersey, under the caption In re: Cendant Corporation Litigation, Master
File No. 98-1664 (WHW). Pursuant to the Order, all related actions
subsequently filed in the District of New Jersey are to be consolidated
under that caption. United States District Court Judge William H. Walls has
selected lead plaintiffs to represent all potential class members in the
consolidated action. He has also ordered that applications seeking
appointment as lead counsel to represent the lead plaintiffs are to be
filed with the Court by September 17, 1998. The selection of lead counsel
is pending.
In addition, on April 27, 1998, a purported shareholder derivative action,
Deutch v. Silverman, et al., No. 98-1998 (WHW), was filed in the District
of New Jersey against certain of the Company's current and former directors
and officers; The Bear Stearns Companies, Inc.; Bear Stearns & Co.; Inc.
and, as a nominal party, the Company. The complaint in the Deutch action
alleges that certain individual officers and directors of the Company
breached their fiduciary duties by selling shares of the Company's stock
while in possession of non-public material information concerning the
accounting irregularities. The complaint also alleges various other
breaches of fiduciary duty, mismanagement, negligence and corporate waste,
and seeks damages on behalf of the Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of Delaware.
The Corwin action is purportedly brought both derivatively, on behalf of
the Company, and as a class action, on behalf of all shareholders of HFS
who exchanged their HFS shares for the Company's shares in connection with
the Merger. The Corwin action names as defendants HFS and twenty-eight
individuals who are and were directors of Cendant and HFS. The complaint in
the Corwin action, as amended on July 28, 1998, alleges that HFS and its
directors breached their fiduciary duties of loyalty, good faith, care and
candor in connection with the Merger, in that they failed to properly
investigate the operations and financial statements of the Company before
approving the Merger at an allegedly inadequate price. The amended
complaint also alleges that the Company's directors breached their
fiduciary duties by entering into an employment agreement with Cendant's
former Chairman, Walter Forbes, in connection with the Merger that
purportedly amounted to corporate waste. The Corwin action seeks, among
other things, recission of the Merger and compensation for all losses and
damages allegedly suffered in connection therewith.
The staff of the Securities and Exchange Commission (the "SEC") and the
United States Attorney for the District of New Jersey are conducting
investigations relating to the matters referenced above. The SEC staff has
advised the Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have
occurred.
In connection with the Merger, certain officers and directors of HFS
exchanged their shares of HFS common stock and options exercisable for HFS
common stock for shares of the Company's common stock and options
exercisable for the Company's common stock, respectively. As a result of the
aforementioned accounting irregularities, such officers and directors have
advised the Company that they believe they have claims against the Company
in connection with such exchange. In addition, certain current and former
officers and directors of the Company would consider themselves to be
members of any class ultimately certified in the Federal Securities Actions
now pending in which the Company is named as a defendent by virtue of their
having been HFS stockholders at the time of the Merger.
F-46
While it is not feasible to predict or determine the final outcome of these
proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material adverse impact on the
financial condition, results of operations and cash flows of the Company.
Ideon settlement. On June 13, 1997, the Company entered into a settlement
agreement (the "Agreement") with Peter Halmos, the co-founder of SafeCard
Services, Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon
and then acquired by the Company in August 1996. The Agreement, which became
effective in July 1997, provided for the settlement of outstanding
litigation matters involving Peter Halmos, SafeCard and Ideon. The Agreement
called for the dismissal with prejudice of such litigation matters and the
payment of $70.5 million to Peter Halmos, over a six-year period comprised
of one up-front payment of $13.5 million and six subsequent annual payments
of $9.5 million. The Company had previously provided a reserve for this
litigation in the charge recorded coincident with the Ideon Merger. (See
Note 7 -- Merger-Related Costs and Other Unusual Charges -- 1996 Poolings --
Ideon Merger Charge.)
Acquired Company Litigation. One of the Company's subsidiaries currently
faces liability to third parties for damages due to property damage
allegedly caused by environmental contamination at four former manufactured
gas plants and one related waterway site located in the States of Washington
and Oregon. Various third parties, including governmental entities and other
potentially responsible parties, have alleged that such subsidiary is
legally obligated to pay damages and/or take actions to investigate or clean
up property damage to surface water, ground water, land or other property
resulting from the purported presence of hazardous substances allegedly
generated or released during the historical operation of the manufactured
gas plants for which such subsidiary allegedly is responsible. Such
subsidiary is currently defending itself vigorously in these matters but
concurrently is seeking to effect an out-of-court settlement that, if
successful, would result in another party providing an indemnification to
such subsidiary for future liabilities relating to these claims.
Messrs. Paul A. Kruger, Warren F. Kruger and Lyle Miller (collectively, the
"Plaintiffs") have sued the Company and its wholly-owned subsidiary,
SafeCard. The complaint alleges that the Company wrongfully controlled,
influenced and dominated SafeCard's affairs and that SafeCard, under the
direction and control of the Company, wrongfully impeded the Plaintiffs'
ability to achieve their contingent payments due under a stock purchase
agreement. The complaint contains, in addition to other counts against the
Company and SafeCard, one count of tortious interference with contract
(against the Company) and one count of intentional interference with
economic opportunity (also against the Company). The complaint seeks actual
damages in an amount of $22 million. The Plaintiffs are also currently
seeking court approval to amend the complaint to claim unspecified punitive
damages. The Company and SafeCard have objected to such amendment and are
awaiting a court decision with respect thereto.
Other pending litigation. The Company is subject to certain other legal
proceedings and claims arising in the ordinary course of its business.
Management does not believe that the outcome of such matters will have a
material adverse effect on the Company's financial position, liquidity or
operating results.
F-47
18. INCOME TAXES
The income tax provision (benefit) consists of:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
(In millions) ----------- ----------- -----------
Current
Federal $ 155.1 $ 101.1 $ 38.4
State 24.4 13.3 14.4
Foreign 28.5 18.1 10.1
-------- -------- --------
208.0 132.5 62.9
-------- -------- --------
Deferred
Federal (16.8) 70.4 73.7
State (3.4) 16.5 2.7
Foreign 3.2 .8 3.9
-------- -------- --------
(17.0) 87.7 80.3
-------- -------- --------
Provision for income taxes $ 191.0 $ 220.2 $ 143.2
======== ======== ========
Net deferred income tax assets and liabilities are comprised of the
following:
DECEMBER 31,
-----------------------------
1997 1996
(In millions) ------------- -------------
CURRENT NET DEFERRED INCOME TAXES
Merger and acquisition-related liabilities $ 102.9 $ 54.6
Accrued liabilities and deferred income 225.8 132.6
Insurance retention refund (19.3) (13.7)
Provision for doubtful accounts 4.0 8.1
Franchise acquisition costs (2.6) (2.6)
Deferred membership acquisition costs 8.6 (40.0)
Other (7.5) (2.1)
--------- ---------
Current net deferred tax asset $ 311.9 $ 136.9
========= =========
NON-CURRENT NET DEFERRED INCOME TAXES
Depreciation and amortization $ (277.1) $ (169.6)
Deductible goodwill -- taxable poolings 44.2 --
Merger and acquisition-related liabilities 35.0 --
Accrued liabilities and deferred income 66.9 46.3
Acquired net operating loss carryforward 59.9 85.9
Other .2 (25.0)
---------- ----------
Non-current net deferred tax asset (liability) $ (70.9) $ (62.4)
========== ==========
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME
TAXES
Depreciation $ (233.1) $ (245.1)
Unamortized mortgage servicing rights (74.6) (51.2)
Accrued liabilities 9.5 1.3
Alternative minimum tax carryforwards 2.5 13.1
---------- ----------
Net deferred tax liabilities under management and
mortgage programs $ (295.7) $ (281.9)
========== ==========
The Company has recorded deferred tax assets of $ 44.2 million primarily
attributed to the difference in book and tax basis of assets acquired and
accounted for using the pooling-of-interests method of accounting. The
deferred tax asset recorded in connection with the above acquisitions,
resulted in a corresponding $44.2 million increase to shareholders' equity.
F-48
Net operating loss carryforwards at December 31, 1997 acquired in connection
with the acquisition of Avis, Inc. expire as follows: 2002, $30.2 million;
2005, $7.2 million; 2009, $17.7 million; and 2010, $116.0 million.
The Company's effective income tax rate differs from the statutory federal
rate as follows:
FOR THE YEAR ENDING DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 5.3% 3.6% 3.2%
Non-deductible merger-related costs 29.1% -- --
Amortization of non-deductible goodwill 4.3% 1.5% 1.2%
Foreign taxes differential .3% .5% .6%
Other .3% .6% .9%
----- ----- -----
Effective tax rate 74.3% 41.2% 40.9%
===== ===== =====
19. STOCK OPTION PLANS
In connection with the Cendant Merger, the Company adopted its 1997 Stock
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the
granting of up to 25 million shares of Company common stock through awards
of stock options (which may include incentive stock options and/or
nonqualified stock options), stock appreciation rights and shares of
restricted Company common stock. All directors, officers and employees of
the Company and its affiliates are eligible to receive awards under the
Incentive Plan. Options granted under the Incentive Plan generally have a
ten year term and are exercisable at 20% per year commencing one year from
the date of grant. During 1997, the Company also adopted two other stock
plans: the 1997 Employee Stock Plan (the "1997 Employee Plan") and the 1997
Stock Option Plan (the "1997 SOP"). The 1997 Employee Plan authorizes the
granting of up to 25 million shares of Company common stock through awards
of nonqualified stock options, stock appreciation rights and shares of
restricted Company common stock to employees of the Company and its
affiliates. The 1997 SOP provides for the granting of up to 10 million
shares of Company common stock to key employees (including employees who are
directors and officers) of the Company and its subsidiaries through awards
of incentive and/or nonqualified stock options. Options granted under the
1997 Employee Plan and the 1997 SOP generally have ten year terms and are
exercisable at 20% per year commencing one year from the date of grant.
The Company also grants options to employees pursuant to three additional
stock option plans under which the Company may grant options to purchase in
the aggregate up to 70.8 million shares of Company common stock. Annual
vesting periods under these plans range from 20% to 33%, all commencing one
year from the respective grant dates. At December 31, 1997, there were 35.5
million shares outstanding collectively under these plans.
F-49
The table below summarizes the annual activity of Cendant's pooled stock
option plans:
WEIGHTED
OPTIONS AVG. EXERCISE
OUTSTANDING PRICE
(Shares in millions) ------------- --------------
BALANCE AT DECEMBER 31, 1994 92.7 $ 6.20
Granted 21.1 10.74
Canceled (2.7) 8.48
Exercised (12.4) 5.39
------
BALANCE AT DECEMBER 31, 1995 98.7 7.21
Granted 36.1 22.14
Canceled (2.8) 18.48
Exercised (14.0) 5.77
------
BALANCE AT DECEMBER 31, 1996 118.0 11.68
Granted 78.8 27.94
Canceled (6.4) 27.29
Exercised (14.0) 7.20
PHH conversion (1) (4.4) --
------
BALANCE AT DECEMBER 31, 1997 172.0 18.66
======
----------
(1) In connection with the PHH Merger, all unexercised PHH stock options were
canceled and converted into 1.8 million shares of Company common stock.
The Company utilizes the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and applies Accounting Principle
Board Opinion ("APB") No. 25 and related interpretations in accounting for
its stock option plans. Under APB No. 25, because the exercise prices of
the Company's employee stock options are equal to the market prices of the
underlying Company stock on the date of grant, no compensation expense is
recognized.
Had the Company elected to recognize compensation cost for its stock option
plans based on the calculated fair value at the grant dates for awards under
such plans, consistent with the method prescribed by SFAS No. 123, net
income (loss) per share would have reflected the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997(1) 1996 1995
(In millions, except per share data) ----------------- ----------- -----------
Net income (loss):
as reported $ (217.2) $ 330.0 $ 229.8
pro forma (663.9)(3) 245.1 201.8
Net income (loss) per share:
Basic as reported $ (.27) $ .44 $ .33
pro forma (2) (.82)(3) .32 .29
Diluted as reported (.27) .41 .31
pro forma (2) (.82)(3) .31 .27
----------
(1) Includes an after-tax charge of $283.1 million or $.35 per share, to
account for the cumulative effect of a change in accounting related to
revenue and expense recognition for memberships (see Notes 2 and 3).
(2) The effect of applying SFAS No. 123 on the pro forma net income per share
disclosures is not indicative of future amounts because it does not take
into consideration option grants made prior to 1995 or in future years.
(3) Includes incremental compensation expense of $335.4 million ($204.9
million, after tax) or $.25 per basic and diluted share as a result of
the immediate vesting of HFS options upon consummation of the Cendant
Merger.
F-50
The fair values of the stock options are estimated on the dates of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted in 1997, 1996 and 1995:
CENDANT
PLANS CUC PLANS HFS PLANS PHH PLANS
----------- ----------------------- ----------------------- ----------------------
1997 1996 1995 1996 1995 1996 1995
----------- ----------- ----------- ----------- ----------- ----------- ----------
Dividend Yield -- -- -- -- -- 2.8% 3.5%
Expected volatility 32.5% 28.0% 26.0% 37.5% 37.5% 21.5% 19.8%
Risk-free interest rate 5.6% 6.3% 5.3% 6.4% 6.4% 6.5% 6.9%
Expected holding period 7.8 years 5.0 years 5.0 years 9.1 years 9.1 years 7.5 years 7.5 years
The weighted average fair value of Cendant stock options granted during the
year ended December 31, 1997 was $13.71. The weighted average fair values
of stock options granted under the former CUC plans (inclusive of plans
acquired) during the years ended December 31, 1996 and 1995 were $7.51 and
$6.69, respectively. The weighted average fair values of stock options
granted under the former HFS plans (inclusive of the PHH plans) during the
years ended December 31, 1996 and 1995 were $10.96 and $4.79, respectively.
The tables below summarize information regarding Cendant stock options
outstanding and exercisable as of December 31, 1997:
(Shares in millions)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- -------------------------- -------- --------------- ---------- -------- ---------
$.01 to $ 10.00 48.9 5.4 $ 4.16 47.5 $ 4.09
$10.01 to $ 20.00 29.2 7.1 14.60 21.1 14.99
$20.01 to $ 30.00 46.5 8.9 23.55 35.1 23.75
$30.01 to $ 40.00 47.4 9.8 31.35 18.1 31.40
----- -----
Total 172.0 7.8 18.66 121.8 15.69
===== =====
Shares exercisable and available for grant at December 31, 1997 and 1996
were as follows:
1997 1996
--------- ------------------------------
HFS OPTIONS
CENDANT CUC (INCLUSIVE OF PHH
OPTIONS OPTIONS OPTIONS)
(In millions) --------- --------- ------------------
Shares exercisable 121.8 11.8 46.2
Shares available for grant 49.3 8.4 5.1
The Company reserved 11.4 million shares of Company common stock for
issuance in connection with its Restricted Stock Plan. As of December 31,
1997, 10.6 million shares of restricted common stock have been granted of
which 10.4 million shares have vested under this plan.
The Company has reserved 1.1 million shares of Company common stock in
connection with its 1994 Employee Stock Purchase Plan, which enables
employees to purchase shares of common stock from the Company at 90% of the
fair market value on the fifteenth day following the last day of each
calendar quarter, in an amount up to 25% of the employees' year-to-date
earnings.
20. EMPLOYEE BENEFIT PLANS
PENSION AND RETIREMENT PLANS
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate
funds for their retirement. The Company matches the contributions of
participating employees on the basis of the percentages specified in the
plans.
F-51
During 1996, a Deferred Compensation Plan (the "Plan") was implemented
providing senior executives with the opportunity to participate in a
funded, deferred compensation program. The assets of the Plan are held in
an irrevocable rabbi trust. Under the Plan, participants may defer up to
80% of their base compensation and up to 98% of bonuses earned. The Company
contributes $0.50 for each $1.00 contributed by a participant, regardless
of length of service, up to a maximum of six percent of the employee's
compensation. The Plan is not qualified under Section 401 of the Internal
Revenue Code. The Company's matching contributions relating to the above
plans were not material to the consolidated financial statements.
The Company's PHH subsidiary has a non-contributory defined benefit pension
plan covering substantially all domestic employees of PHH and its
subsidiaries. PHH's subsidiary located in the United Kingdom has a
contributory defined benefit pension plan, with participation at the
employee's option. Under both the domestic and foreign plans, benefits are
based on an employee's years of credited service and a percentage of final
average compensation. The policy for both plans is to contribute amounts
sufficient to meet the minimum requirements plus other amounts as the
Company deems appropriate from time to time. The projected benefit
obligations of the funded plans were $108.1 million and $97.1 million and
funded assets, at fair value (primarily common stock and bond mutual funds)
were $102.7 million and $88.4 million at December 31, 1997 and 1996,
respectively. The net pension cost and the recorded liability were not
material to the accompanying consolidated financial statements.
The Company also sponsors two unfunded retirement plans to provide certain
key executives with benefits in excess of limits under the federal tax law
and to include annual incentive payments in benefit calculations. The
projected benefit obligation, net pension cost and recorded liability
related to the unfunded plans were not material to the accompanying
consolidated financial statements.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company's PHH subsidiary provides health care and life insurance
benefits for certain retired employees up to the age of 65. The net
periodic postretirement benefit costs and the recorded liability were not
material to the accompanying consolidated financial statements.
21. INVESTMENTS
ARAC
Upon entering into a definitive merger agreement to acquire Avis in 1996,
the Company announced its strategy to dilute its interest in ARAC while
retaining assets associated with the franchise business, including
trademarks, reservation system assets and franchise agreements with ARAC
and other licensees. Since the Company's control was planned to be
temporary, the Company accounted for its 100% investment in ARAC under the
equity method. The Company's equity interest was diluted to 27.5% pursuant
to an IPO by ARAC in September 1997 and was further diluted to 20.4% as a
result of a secondary offering in March 1998.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year master
license agreement and receives royalty fees based upon 4% of ARAC revenue,
escalating to 4.5% of ARAC revenue over a 5-year period. In addition, the
Company operates the telecommunications and computer processing system which
services ARAC for reservations, rental agreement processing, accounting and
fleet control for which the Company charges ARAC at cost.
NRT
During the third quarter of 1997, the Company executed an agreement with
NRT Incorporated ("NRT") (a corporation created to acquire residential real
estate brokerage firms) and the principal stockholders' of NRT, which
permitted the Company, at its discretion, to acquire up to $263.3 million of
NRT preferred stock and $446.0 million of intangible assets of real estate
brokerage firms acquired by NRT. During the third quarter of 1997, the
Company acquired $182.0 million of NRT preferred stock and through
December 31, 1997, the Company had also acquired $216.1 million of certain
intangible assets including trademarks associated with real estate brokerage
firms acquired by NRT which are subject to a 50 year franchise agreement.
F-52
In September 1997, NRT acquired the real estate brokerage business and
operations of National Realty Trust ("the Trust"), and two other regional
real estate brokerage businesses. The Trust is an independent trust to which
the Company contributed the brokerage offices formerly owned by Coldwell
Banker in connection with the Company's acquisition of Coldwell Banker. NRT
is the largest residential brokerage firm in the United States.
22. DIVESTITURE
On December 17, 1997, as directed by the Federal Trade Commission in
connection with the Cendant Merger, CUC sold immediately preceding the
Cendant Merger all of the outstanding shares of its timeshare exchange
businesses, Interval International Inc. ("Interval"), for net proceeds of
$240.0 million less transaction related costs pursuant to a Stock Purchase
Agreement ("Interval Agreement"). The Company is restricted in its
solicitation of Interval's employees, customers or clients for a period of
two years from the closing date of the transaction pursuant to the Interval
Agreement. In conjunction with the sale, the Company agreed to continue to
provide services to certain of Interval's customers for a specified period,
guarantee performance of certain responsibilities to third parties (i.e.,
lease payments and certain other contracts), and absorb certain additional
transitional costs related to the transaction. The estimated fair value of
the services to be provided to Interval's customers of $57.6 million was
recorded as a non-current liability. The value assigned will be amortized
over the average life of the servicing period. After considering all these
factors, the Company recognized a gain on the sale of Interval of $76.6
million ($26.4 million, after tax), which has been reflected as an
extraordinary gain in the consolidated statements of operations.
23. FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Revenue from franchising activities includes initial franchise fees charged
to lodging properties and real estate brokerage offices upon execution of a
franchise contract. Initial franchise fees amounted to $26.0 million, $24.2
million and $15.7 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Franchising activity for the years ended December 31, 1997, 1996 and 1995 is
as follows:
LODGING REAL ESTATE
--------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
------- ------- ------- -------- -------- ------
FRANCHISE IN OPERATION
Units at end of year 5,566 5,397 4,603 11,715 11,349 5,990
EXECUTED BUT NOT OPENED
Acquired -- 24 31 -- 110 104
New agreements 1,205 1,142 983 1,107 829 248
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees related
to the Company's lodging brands' franchisees are calculated based on a
specified percentage of gross room revenues. Marketing and reservation fees
received from the Company's real estate brands' franchisees are based on a
specified percentage of gross closed commissions earned on the sale of real
estate. As provided in the franchise agreements, at the Company's
discretion, all of these fees are to be expended for marketing purposes and
the operation of a centralized brand-specific reservation system for the
respective franchisees and are controlled by the Company until
disbursement. Membership and service fee revenues included marketing and
reservation fees of $170.0 million, $157.6 million and $140.1 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
F-53
24. INDUSTRY SEGMENT INFORMATION
The Company operates within three principal industry segments -- alliance
marketing, travel and real estate. A description of the Company's segments,
and the services provided within its underlying businesses, are as follows:
ALLIANCE MARKETING SEGMENT
Individual, wholesale and discount program membership services are provided
to consumers and are distributed through various channels, including
financial institutions, credit unions, charities, other cardholder-based
organizations and retail establishments. These memberships include such
components as shopping, travel, auto, dining, home improvement, lifestyle,
credit card and checking account enhancement packages, financial products
and discount programs. The Company also administers insurance package
programs, which are generally combined with discount shopping and travel for
credit union members and publishes a coupon book which is sold through
schools and other not-for- profit organizations.
TRAVEL SERVICES SEGMENT
Franchising (Lodging and car rental). As a franchisor of guest lodging
facilities and car rental agency locations, Cendant licenses the independent
owners and operators of hotels and car rental agencies to use its brand
names. Operational and administrative services are provided to franchisees,
which include access to a national reservation system, national advertising
and promotional campaigns, co-marketing programs and volume purchasing
discounts.
Fleet management. Fleet management services primarily consist of the
management, purchasing, leasing, and resale of vehicles for corporate
clients and government agencies. These services also include fuel,
maintenance, safety and accident management programs and other fee-based
services for clients' vehicle fleets.
Timeshare. Timeshare exchange programs, publications and other
travel-related services are provided to the timeshare industry.
Value-added tax services. Cendant processes value-added tax refunds for
travelers abroad.
REAL ESTATE SERVICES SEGMENT
Franchising (Real estate brokerage). As a franchisor of real estate
brokerage offices, Cendant licenses the owners and operators of independent
real estate brokerage offices to use its brand names. Operational and
administrative services are provided to franchisees, which are designed to
increase franchisee revenue and profitability. Such services include
advertising and promotions, referrals, training and volume purchasing
discounts.
Relocation. Relocation services are provided to client corporations and
include the selling of transferee residences, providing equity advances on
transferee residences for the purchase of new homes and home management
services. Cendant also offers fee-based programs such as home marketing
assistance, household goods moves, destination services and property
dispositions for financial institutions and government agencies.
Mortgage. Mortgage services primarily include the origination, sale and
servicing of residential first mortgage loans. Cendant markets a variety of
first mortgage products to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms and other mortgage banks.
New mover services. Welcoming packages are distributed to new homeowners
which provides them with discounts from local merchants.
OTHER SERVICES SEGMENT
Financial services and marketing. Cendant (i) markets financial product
memberships, generally annuities, mutual funds, and life insurance for
financial institutions; (ii) provides marketing and other services to
casino gaming facilities; and (iii) operates the telecommunications and
computer system which facilitates hotel and car rental agency reservations
and rental agreement processing.
F-54
The following table presents industry segment and geographic data of the
Company for the years ended December 31, 1997, 1996 and 1995. Operating
income consists of net revenues less operating expenses (total expenses
excluding interest--net).
INDUSTRY SEGMENT DATA
Real
Travel Estate Alliance Other
Services Services Marketing(5) Services Consolidated
(In millions) ------------- ------------ ------------------ ----------------- -------------
1997
Net revenues $ 1,337.2 $ 987.0 $ 1,570.3 $ 345.5 $ 4,240.0
Operating income(1) 272.6 280.7 125.0 (370.4) 307.9
Identifiable assets 6,700.4 5,113.1 1,395.8 864.1 (4) 14,073.4
Depreciation and amortization 102.7 58.4 42.0 34.6 237.7
Capital expenditures 51.6 65.4 23.3 42.4 182.7
1996
Net revenues $ 802.4 $ 782.4 $ 1,474.3 $ 178.6 $ 3,237.7
Operating income 254.3 216.0 48.9 (2) 28.6 547.8
Identifiable assets 6,685.3 4,170.0 1,395.9 511.3 (4) 12,762.5
Depreciation and amortization 55.5 44.5 34.8 10.7 145.5
Capital expenditures 47.6 30.5 19.0 43.5 140.6
1995
Net revenues $ 684.4 $ 504.3 $ 1,302.3 $ 125.1 $ 2,616.1
Operating income 196.2 114.1 38.8 (3) 17.8 366.9
Identifiable assets 4,449.4 2,406.0 1,072.1 592.0 (4) 8,519.5
Depreciation and amortization 46.9 18.0 30.5 5.0 100.4
Capital expenditures 17.3 14.4 44.2 32.8 108.7
------------
(1) Includes merger-related costs and other unusual charges which were
allocated to the business segments as follows: Travel--$186.0 million,
Real estate--$65.3 million, Alliance Marketing--$12.7 million, Other--
(substantially Corporate-related)--$440.1 million.
(2) Includes merger-related costs and other unusual charges of $109.4
million.
(3) Includes costs related to Ideon products abandoned and restructuring of
$97.0 million.
(4) Includes net assets of discontinued operations of $273.3, $120.1 and
$188.9 in 1997, 1996 and 1995, respectively.
(5) 1997 Alliance Marketing segment data has been restated for a change in
accounting, effective January 1, 1997, related to revenue and expense
recognition for memberships (see Notes 2 and 3).
GEOGRAPHIC DATA
NORTH EUROPE AND
AMERICA OTHER CONSOLIDATED
(In millions) ------------- ------------ -------------
1997
Net revenues $ 3,731.2 $ 508.8 $ 4,240.0
Operating income 210.3 97.6 307.9
Identifiable assets 12,640.0 1,433.4 14,073.4
1996
Net revenues $ 3,042.2 $ 195.5 $ 3,237.7
Operating income 508.1 39.7 547.8
Identifiable assets 11,981.2 781.3 12,762.5
1995
Net revenues $ 2,435.3 $ 180.8 $ 2,616.1
Operating income 332.7 34.2 366.9
Identifiable assets 7,775.4 744.1 8,519.5
F-55
25. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 1997
and 1996, as restated for (i) the findings from the independent
investigation confirming accounting irregularities in certain CUC business
units and the preparation and audit of the Company's restated financial
statements (collectively classified as "Accounting errors and
irregularities"); (ii) the change in accounting for memberships; and (iii)
discontinued operations. See Notes 2, 3 and 6 for a description of such
accounting adjustments. The underlying per share information is calculated
based on weighted average shares outstanding during each quarter, and
therefore, the sum of the quarters may not equal the total year amounts.
FIRST QUARTER 1997
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED
------------- ---------------- ----------------- -----------
(in millions, except per share data)
Net revenues $ 1,158.2 $ (67.2) $ (137.3) $ 953.7
--------- -------- -------- --------
Operating income 297.2 (84.7) (11.5) 201.0
--------- -------- -------- --------
Income from continuing operations before
cumulative effect of accounting change 166.0 (49.4) (2.8) 113.8
Income from discontinued operations, net
of taxes -- -- 2.8 2.8
Cumulative effect of accounting change,
net of tax -- (283.1) -- (283.1)
---------- -------- -------- ---------
Net income (loss) $ 166.0 $ (332.5) $ -- $ (166.5)
========== ======== ======== =========
Per Share Information:
Income from continuing operations before
cumulative effect of accounting change
Basic $ 0.21 $ 0.14
Diluted 0.19 0.13
SECOND QUARTER 1997
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED(1)
-------------- ---------------- ----------------- ------------
(in millions, except per share data)
Net revenues $ 1,300.5 $ (173.0) $ (127.9) $ 999.6
--------- -------- -------- -------
Operating income (loss) 70.9 (122.0) 18.2 (32.9)
--------- -------- -------- --------
Loss from continuing operations (13.4) (70.6) 14.6 (69.4)
Loss from discontinued operations, net
of taxes -- -- (14.6) (14.6)
---------- -------- -------- --------
Net loss $ (13.4) $ (70.6) $ -- $ (84.0)
========== ======== ======== ========
Per Share Information:
Loss from continuing operations
Basic $ (0.02) $ (0.09)
Diluted (0.02) (0.09)
- ----------
(1) Includes Unusual Charges, related to continuing operations, of $295.4
million primarily associated with the PHH Merger in April 1997. Unusual
Charges of $278.9 million ($208.4 million, after-tax or $.24 per share)
pertained to continuing operations and $16.5 million were associated with
discontinued operations.
(2) Includes adjustments for accounting errors and irregularities and a
change in accounting.
F-56
THIRD QUARTER 1997
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED
------------- ---------------- ----------------- -------------
(in millions, except per share data)
Net revenues $ 1,431.3 $ (102.8) $ (142.0) $ 1,186.5
--------- -------- -------- ---------
Operating income 429.8 (74.2) (1.5) 354.1
--------- -------- -------- ---------
Income from continuing operations 248.3 (45.7) 0.4 203.0
Loss from discontinued operations, net
of taxes -- -- (0.4) (0.4)
---------- -------- -------- ---------
Net income $ 248.3 $ (45.7) $ -- $ 202.6
========== ======== ======== =========
Per Share Information:
Income from continuing operations
Basic $ 0.31 $ 0.25
Diluted 0.29 0.24
FOURTH QUARTER 1997
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED(3)
-------------- ---------------- ----------------- ------------------
(in millions, except per share data)
Net revenues $ 1,424.7 $ (89.5) $ (235.0) $ 1,100.2
--------- -------- -------- ----------
Operating income (436.9) 232.9 (10.3) (214.3)
---------- -------- -------- ----------
Loss from continuing operations before
extraordinary gain (345.5) 165.0 (0.6) (181.1)
Loss from discontinued operations before
extraordinary gain, net of taxes -- -- (14.6) (14.6)
Extraordinary gain, net of tax -- 11.2 15.2 26.4 (4)
---------- -------- -------- ----------
Net loss $ (345.5) $ 176.2 $ -- $ (169.3)
========== ======== ======== ===========
Per Share Information:
Loss from continuing operations before
extraordinary gain
Basic $ (0.42) $ (0.22)
Diluted (0.42) (0.22)
- ----------
(2) Includes adjustments for accounting errors and irregularities and a
change in accounting.
(3) Includes Unusual Charges in the net amount of $442.6 million
substantially associated with the Cendant and Hebdo Mag mergers during
the fourth quarter of 1997. Net Unusual Charges of $425.2 million ($296.3
million, after-tax or $.34 per share) pertained to continuing operations
and $17.4 million were associated with discontinued operations.
(4) Represents the gain on the sale of Interval International, Inc. in
December 1997, a Company subsidiary which was sold in consideration of
Federal Trade Commission anti-trust concerns within the timeshare
industry.
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FIRST QUARTER 1996
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------ ---------------- ----------------- -----------
(in millions, except per share data)
Net revenues $ 821.4 $ (65.8) $ (94.7) $ 660.9
------- ------- ------- -------
Operating income 165.8 (60.1) (0.5) 105.2
------- ------- ------- -------
Income from continuing operations 96.0 (40.8) 1.3 56.5
Loss from discontinued operations, net
of taxes -- -- (1.3) (1.3)
-------- ------- ------- --------
Net income $ 96.0 $ (40.8) $ -- $ 55.2
======== ======= ======= ========
Per Share Information:
Income from continuing operations
Basic $ 0.14 $ 0.08
Diluted 0.12 0.07
SECOND QUARTER 1996
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------ ---------------- ----------------- ----------------
(in millions, except per share data)
Net revenues $ 935.7 $ (53.7) $ (106.7) $ 775.3
------- ------- -------- -------
Operating income 186.7 (54.7) 13.8 145.8
------- ------- -------- -------
Income from continuing operations 101.0 (34.1) 20.3 87.2
Loss from discontinued operations, net
of taxes -- -- (20.3) (20.3)(5)
-------- ------- -------- -------
Net income $ 101.0 $ (34.1) $ -- $ 66.9 (5)
======== ======= ======== ========
Per Share Information:
Income from continuing operations
Basic $ 0.14 $ 0.12
Diluted 0.13 0.11
- ----------
(5) Includes Unusual Charges of $24.9 million associated with the Davidson
and Sierra mergers in July 1996.
F-58
THIRD QUARTER 1996
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------- ---------------- ----------------- ----------------
(in millions, except per share data)
Net revenues $ 1,042.9 $ 43.1 $ (132.4) $ 953.6
--------- ------- -------- -------
Operating income 115.0 33.7 (29.0) 119.7 (6)
--------- ------- -------- -------
Income from continuing operations 68.5 13.6 (15.5) 66.6 (6)
Income from discontinued operations, net
of taxes -- -- 15.5 15.5
---------- ------- -------- -------
Net income $ 68.5 $ 13.6 $ -- $ 82.1 (6)
========== ======= ======== ========
Per Share Information:
Income from continuing operations
Basic $ 0.09 $ 0.09
Diluted 0.08 0.08
- ----------
(6) Includes Unusual Charges of $109.4 million ($70.0 million, after tax or
$.09 per share) associated with the Ideon Merger in August 1996.
FOURTH QUARTER 1996
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------- ---------------- ----------------- -----------
(in millions, except per share data)
Net revenues $ 1,108.8 $ (83.8) $ (177.1) $ 847.9
--------- ------- -------- -------
Operating income 271.6 (51.2) (43.3) 177.1
--------- ------- -------- -------
Income from continuing operations 158.1 (32.3) (22.8) 103.0
Income from discontinued operations, net
of taxes -- -- 22.8 22.8
---------- ------- -------- -------
Net income $ 158.1 $ (32.3) $ -- $ 125.8
========== ======= ======== =======
Per Share Information:
Income from continuing operations
Basic $ 0.20 $ 0.13
Diluted 0.19 0.13
26. SUBSEQUENT EVENTS
PENDING ACQUISITIONS
American Bankers. On March 23, 1998, the Company entered into a definitive
agreement (the "ABI Merger Agreement") to acquire American Bankers Insurance
Group, Inc. ("American Bankers") for $67 per share in cash and stock, for
aggregate consideration of approximately $3.1 billion. The Company has
agreed to purchase 23.5 million shares of American Bankers at $67 per share
through its pending cash tender offer, to be followed by a merger in which
the Company has agreed to deliver Cendant shares with a value of $67 for
each remaining share of American Bankers common stock outstanding. The
Company has already received anti-trust clearance to acquire American
Bankers. The tender offer is subject to the receipt of tenders representing
at least 51 percent of the common shares of American Bankers as well as
customary closing conditions, including regulatory approvals. From time to
time representatives of the Company and representatives of American Bankers
have discussed possible modifications to the terms of the ABI Merger
Agreement, including a change in
F-59
the mix of consideration to increase the cash component and decrease the
stock component and changing the transaction to a taxable transaction. No
agreement regarding any such modification has been reached and there can be
no assurance that such discussion will result in any agreement being
reached. The transaction is expected to be completed in the fourth quarter
of 1998 or the first quarter of 1999. If no agreement regarding the terms
of any modification to the terms of the ABI Merger Agreement is reached,
the current ABI Merger Agreement will remain in effect in accordance with
its terms. American Bankers provides affordable, specialty insurance
products and services through financial institutions, retailers and other
entities offering consumer financing.
In connection with the Company's proposal to acquire American Bankers, the
Company has a bank commitment to provide a $650 million, 364-day revolving
credit facility which will bear interest, at the option of the Company, at
rates based on prime rates, as defined, or LIBOR plus an applicable
variable margin.
RAC Motoring Services. On May 21, 1998, the Company announced that it has
reached a definitive agreement with the Board of Directors of Royal
Automobile Club Limited ("RACL") to acquire their RAC Motoring Services
subsidiary for approximately $735 million in cash. The sale of RAC Motoring
Services has subsequently been approved by its shareholders. Closing is
subject to certain conditions, including regulatory approval. Although no
assurances can be made, the Company currently anticipates that the
transaction will be completed in the spring of 1999. RAC Motoring Services
is the second-largest roadside assistance company in the UK and also owns
the UK's largest driving school company.
Providian. On December 9, 1997, the Company executed a definitive agreement
to acquire Providian Auto and Home Insurance Company for approximately
$219.0 million in cash. Closing is subject to receipt of required
regulatory approval and accordingly, no assurance can be made that the
acquisition will be completed. Providian sells automobile insurance to
consumers through direct response marketing.
COMPLETED ACQUISITIONS
National Parking Corporation. On April 27, 1998, the Company completed the
acquisition of National Parking Corporation ("NPC") for $1.6 billion in
cash, which included the repayment of approximately $227 million of
outstanding NPC debt. NPC is substantially comprised of two operating
subsidiaries. National Car Parks is the largest private (non-municipal)
single car park operator in the United Kingdom ("UK") with approximately 500
locations. Green Flag operates the third largest roadside assistance group
in the UK and offers a wide-range of emergency support and rescue services
to approximately 3.5 million members.
Harpur Group. On January 20, 1998, the Company completed the acquisition of
The Harpur Group Ltd. ("Harpur"), a leading fuel card and vehicle
management company in the UK, from privately held H-G Holdings, Inc. for
approximately $186.0 million in cash plus future contingent payments of up
to $20.0 million over the next two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480.0 million
in cash. Jackson Hewitt operates the second largest tax preparation service
franchise system in the United States. The Jackson Hewitt franchise system
specializes in computerized preparation of federal and state individual
income tax returns.
Other. Subsequent to December 31, 1997, the Company acquired certain other
entities for an aggregate purchase price of approximately $348.5 million in
cash. Such acquisitions will be accounted for under the purchase method of
accounting.
FINANCING TRANSACTIONS
Term Loan Facility. On May 29, 1998, the Company entered into a 364-day term
loan agreement with a syndicate of financial institutions which provided for
borrowings of $3.25 billion (the "Term Loan Facility"). The Term Loan
Facility, as amended, bears interest at LIBOR plus an applicable LIBOR
spread, as defined. Upon the execution of the Term Loan Facility, temporary
credit
F-60
agreements, which provided for $1.0 billion of borrowings, were terminated.
The Term Loan Facility, as amended, contains certain restrictive covenants,
which are substantially similar to and consistent with the covenants in
effect for the Company's existing revolving credit agreements.
Issuance Of Mandatorily Redeemable Preferred Securities. On March 2, 1998,
the Company issued 29.9 million FELINE PRIDES and 2.3 million trust
preferred securities and received approximately $1.4 billion in gross
proceeds therefrom. The FELINE PRIDES consist of 27.6 million Income PRIDES
and 2.3 million Growth PRIDES, each with a face amount of $50 per PRIDE.
The Income PRIDES consist of trust preferred securities and stock purchase
contracts under which the holders will purchase common stock from the
Company in February 2001. The Growth PRIDES consist of stock purchase
contracts under which the holders will purchase common stock from the
Company in February 2001 and zero coupon U.S. Treasury securities. The
trust preferred securities will bear interest, in the form of preferred
stock dividends, at the annual rate of 6.45 percent. Such preferred stock
dividends are presented as minority interest, net of tax in the
consolidated statements of income. The forward purchase contract forming a
part of the Income PRIDES will pay 1.05 percent annually in the form of a
contract adjustment payment. The forward purchase contract forming a part
of the Growth PRIDES will pay 1.3 percent annually in the form of a
contract adjustment payment. The forward purchase contracts call for the
holder to purchase the minimum of 1.0395 shares and a maximum of 1.3514
shares of Company common stock per PRIDES security, depending upon the
average of the closing price per share of Company common stock for a 20
consecutive day period ending in mid-February of 2001.
Redemption of 4 3/4% Notes. On May 4, 1998, the Company redeemed all of its
outstanding ($144.5 million principal amount) 4 3/4% Convertible Senior
Notes at a price of 103.393% of the principal amount together with interest
accrued to the redemption date. Prior to May 4, 1998, holders of such notes
exchanged $90.5 million of the 4 3/4% Notes for 2.5 million shares of
Company common stock.
Redemption of 6 1/2% Notes. On April 8, 1998, the Company exercised its
option to call its 6 1/2% Convertible Subordinated Notes (the "6 1/2%
Notes") for redemption on May 11, 1998, in accordance with the provisions
of the indenture relating to the 6 1/2% Notes. Prior to the redemption
date, all of the outstanding 6 1/2% Notes were converted into 2.1 million
shares of Company common stock.
SEVERANCE AGREEMENT
On July 28, 1998, the Company announced that Walter A. Forbes resigned as
Chairman of the Company and as a member of the Board of Directors. The
severance agreement reached with Mr. Forbes gives him the benefits required
by his employment contract relating to a termination of Mr. Forbes'
employment with the Company for reasons other than for cause. Those benefits
total $35 million in cash and include the granting of approximately
1.3 million stock options.
REPRICING OF STOCK OPTIONS
On July 28, 1998, the Compensation Committee of the Board of Directors
approved, in principle, a program to reprice certain Company stock options
granted to employees of the Company, other than executive officers, during
December 1997 and the first quarter of 1998. The new option price for such
stock options is to be the market price of the Company's common stock as
reported on the New York Stock Exchange shortly after the filing of the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1997.
On September 23, 1998, the Compensation Committee extended such repricing
program to certain executive officers and senior managers of the Company
subject to certain conditions including revocation of a portion of existing
options plus repricing of other portions at prices at and above fair market
value at the time of repricing. Additionally, a management equity ownership
program was adopted that requires executive officers and these senior
managers to acquire Company common stock at various levels commensurate with
such manager's compensation.
F-61
AMENDMENT AND WAIVER (this "Amendment"), dated as of August
26, 1998, to the FIVE YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT AGREEMENT
and the 364-DAY COMPETITIVE ADVANCE AND REVOLVING CREDIT AGREEMENT, each of
which is dated as of October 2, 1996 (as each of the same may be amended,
supplemented or otherwise modified from time to time, the "Credit Agreements"),
by and among CENDANT CORPORATION, a Delaware corporation (the "Borrower"), the
financial institutions parties thereto (the "Lenders"), and THE CHASE MANHATTAN
BANK, a New York banking corporation, as agent for the Lenders (in such
capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, pursuant to the Amendment and Waiver dated as of
April 15, 1998 (the "April Waiver") and the Amendment dated as of May 6, 1998
(the "May Amendment") the Lenders agreed that the Borrower's consolidated
financial statements and related officer's and accountant's certificates for
the fiscal year ended December 31, 1997 and the fiscal quarter ending March 31,
1998 could be delivered on or prior to August 31, 1998;
WHEREAS, the Borrower has requested the Lenders to extend the
date on which such financial statements and certificates are required to be
delivered from August 31, 1998 to September 30, 1998 upon the terms and
conditions set forth herein;
WHEREAS, the Borrower has also requested the Lenders to
extend to September 30, 1998 the date on which the Borrower's consolidated
financial statements and related officer's certificate are required to be
delivered pursuant to Section 5.1(b) and (c) of the Credit Agreements for the
fiscal quarter ending June 30, 1998;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, the undersigned hereby agree as follows:
1. Defined Terms. Terms defined in the Credit Agreements and
used herein shall have the meanings given to them in the Credit Agreements.
2. Amendment and Waiver. (a) The Required Lenders under each
Credit Agreement hereby amend the May Amendment to waive compliance by the
Borrower with the provisions of Section 5.1(a), (b), (c) and (h) of the Credit
Agreements with respect to the financial statements, officer's certificates and
accountant's certificate required to be delivered in respect of the fiscal year
ending December 31, 1997 and fiscal quarter ending March 31, 1998 as long as
such financial statements and certificates are delivered on or prior to
September 30, 1998. The result of such amendment is to extend the date by which
such financial statements and certificates are required to be delivered from
August 31, 1998 to September 30, 1998. The Required Lenders agree that the
failure to deliver such financial statements and certificates prior to
September 30, 1998 shall not constitute a Default or Event of Default.
2
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(b) The Required Lenders under each Credit Agreement hereby
waive compliance by the Borrower with the provisions of Section 5.1(b) and (c)
of the Credit Agreements with respect to the financial statements and officer's
certificate required to be delivered in respect of the fiscal quarter ending
June 30, 1998 as long as such financial statements and certificate are
delivered on or prior to September 30, 1998. The Required Lenders agree that
the failure to deliver such financial statements and certificate prior to
September 30, 1998 shall not constitute a Default or Event of Default.
3. Effective Date. This Amendment shall become effective on
the date (the "Effective Date") on which the Borrower, the Administrative Agent
and the Required Lenders under each Credit Agreement shall have duly executed
and delivered to the Administrative Agent this Amendment.
4. No Other Amendments; Confirmation. Except as expressly
amended hereby, the provisions of the Credit Agreements and each of the
Fundamental Documents are and shall remain in full force and effect.
5. Governing Law. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
6. Counterparts. This Amendment may be executed by one or
more of the parties hereto on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
7. Representations and Warranties. The Borrower hereby
represents and warrants that (a) each of the representations and warranties
in Section 3 of each Credit Agreement (other than those set forth in Section
3.4 and 3.5) shall be, after giving effect to this Amendment, true and correct
in all material respects as if made on and as of the Effective Date (unless such
representations and warranties are stated to relate to a specific earlier date,
in which case such representations and warranties shall be true and correct in
all material respects as of such earlier date) and (b) after giving effect to
this Amendment, no Default or Event of Default shall have occurred and be
continuing.
IN WITNESS WHEREOF, the undersigned have caused this
Amendment to be executed and delivered by their duly authorized officers as of
the date first above written.
CENDANT CORPORATION
By: /s/ Michael P. Monaco
------------------------------------
Name: Michael P. Monaco
Title: Vice Chairman and CFO
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By: /s/ Carol Ulmer
----------------------------------
Name: /s/ Carol Ulmer
Title: Vice President
3
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ABN-AMRO BANK N.V. NEW YORK
BRANCH
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
BANK OF AMERICA NT&SA
By: /s/ Steve Aronowitz
------------------------------------
Name:/s/ Steve Aronowitz
Title: Managing Director
BANK OF MONTREAL
By: /s/ Bruce Pietka
------------------------------------
Name:/s/ Bruce Pietka
Title: Director
THE BANK OF NEW YORK
By: /s/ Georgia Paiv Kita
------------------------------------
Name:/s/ Georgia Paiv Kita
Title: Vice President
4
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THE BANK OF NOVA SCOTIA
By: /s/ Stephen Lockhart
------------------------------------
Name:/s/ Stephen Lockhart
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By: /s/ W. A. DiNicola
------------------------------------
Name:/s/ W. A. DiNicola
Title: Vice President
BANQUE PARIBAS
By: /s/ Duane Helkowski
------------------------------------
Name:/s/ Duanne Helkowski
Title: Vice President
By: /s/ Sean Reddington
------------------------------------
Name:/s/ Sean Reddington
Title: Vice President
5
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BAYERISCHE LANDESBANK
GIROZENTRALE
CAYMAN ISLANDS BRANCH
By: /s/ Sean O'Sullivan
------------------------------------
Name:/s/ Sean O'Sullivan
Title: Vice President
By: /s/ Peter Oberman
------------------------------------
Name:/s/ Peter Oberman
Title: Senior Vice President
BAYERISCHE VEREINSBANK AG, NEW
YORK BRANCH
By: /s/ Marianne Weinzinger
------------------------------------
Name:/s/ Marianne Weinzinger
Title: Vice President
By: /s/ Pamela Gillons
------------------------------------
Name:/s/ Pamela Gillons
Title: Asst. Treasurer
CANADIAN IMPERIAL
BANK OF COMMERCE
By: /s/ Gerald Girardi
------------------------------------
Name:/s/ Gerald Girardi
Title: Executive Director
6
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CITIBANK, N.A.
By: /s/ James Garvin
------------------------------------
Name: /s/ James Garvin
Title: Attorney-in-Fact
COMERICA BANK
By: /s/ Kimberly Kersten
------------------------------------
Name: /s/ Kimberly Kersten
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Rod Hurst
------------------------------------
Name: /s/ Rod Hurst
Title: Vice President
CREDIT SUISSE FIRST BOSTON
By: /s/ Chris Horgan
------------------------------------
Name: /s/ Chris Horgan
Title: Vice President
By: /s/ Kristin Lepri
------------------------------------
Name: /s/ Kristin Lepri
Title: Associate
7
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DG BANK DEUTSCHE
GENOSSENSCHAFTSBANK, CAYMAN
ISLAND BRANCH
By: /s/ Stefanie Gaensslen
------------------------------------
Name: /s/ Stefanie Gaensslen
Title: Asst. Vice President
FIRST AMERICAN NATIONAL BANK
By: /s/ Scott Bane
------------------------------------
Name: /s/ Scott Bane
Title: Senior Vice President
8
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FIRST HAWAIIAN BANK
By: /s/ Scott Nahme
------------------------------------
Name: /s/ Scott Nahme
Title: Vice President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Carlton Williams
------------------------------------
Name: /s/ Carlton Williams
Title: Director
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Cory Helfand
------------------------------------
Name: /s/ Cory Helfand
Title: Vice President
FIRST NATIONAL BANK OF MARYLAND
By: s/s Marion Knott
------------------------------------
Name: /s/ Marion Knott
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ Mark Smith
------------------------------------
Name: /s/ Mark Smith
Title: Senior Vice President
FLEET NATIONAL BANK
By: /s/ Marlene Haddad
------------------------------------
Name: /s/ Marlene Haddad
Title: Vice President
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THE FUJI BANK, LIMITED
NEW YORK BRANCH
By: /s/ Toshiaki Yakura
------------------------------------
Name:/s/ Toshiaki Yakura
Title: Senior Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
NEW YORK BRANCH
By: /s/ William Kennedy
------------------------------------
Name:/s/ William Kennedy
Title: Vice President
MELLON BANK, N.A.
By: /s/ Donald Cassidy
------------------------------------
Name:/s/ Donald Cassidy
Title: First Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By: /s/ Christopher Kunhardt
------------------------------------
Name: /s/ Christopher Kunhardt
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Eileen Higgins
------------------------------------
Name: /s/ Eileen Higgins
Title: Vice President
10
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THE NORTHERN TRUST COMPANY
By: /s/ Kelly Schneck
------------------------------------
Name: /s/ Kelly Schneck
Title: Commercial Banking Officer
PNC BANK, N.A.
By: /s/ Michael Nardo
------------------------------------
Name: /s/ Michael Nardo
Title: Vice President
ROYAL BANK OF CANADA
By: /s/ Sheryl Greenberg
------------------------------------
Name: /s/ Sheryl Greenberg
Title: Senior Manager
THE SAKURA BANK, LIMITED
By: /s/ Haruhide Maeda
------------------------------------
Name: /s/ Haruhide Maeda
Title: Joint General Manager
THE SANWA BANK, LIMITED
By: /s/ Dominic Sorresso
------------------------------------
Name: /s/ Dominic Sorresso
Title: Vice President
11
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THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By: /s/ Kazuyoshi Ogawa
------------------------------------
Name: /s/ Kazuyoshi Ogawa
Title: Joint General Manager
SUMMIT BANK
By:
------------------------------------
Name:
Title:
THE TOKAI BANK LIMITED NEW YORK
BRANCH
By: /s/ Shinichi Makatani
------------------------------------
Name: /s/ Shinichi Makatani
Title: Assistant General Manager
UNITED STATES NATIONAL BANK OF
OREGON
By: /s/ Greg Wilson
------------------------------------
Name:/s/ Greg Wilson
Title: Commercial Banking Officer
12
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WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
By: /s/ Cynthia Nieson
------------------------------------
Name: /s/ Cynthia Nieson
Title: Managing Director
BANKERS TRUST COMPANY
By: /s/ James Reilly
------------------------------------
Name: /s/ James Reilly
Title: Vice President
EXTENSION AGREEMENT (this "Agreement"), dated as of August
31, 1998, under the 364-DAY COMPETITIVE ADVANCE AND REVOLVING CREDIT AGREEMENT,
dated as of October 2, 1996 (as the same may be amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), by and among
CENDANT CORPORATION, a Delaware corporation (the "Borrower"), the financial
institutions parties thereto (the "Lenders"), and THE CHASE MANHATTAN BANK, a
New York banking corporation, as agent for the Lenders (in such capacity, the
"Administrative Agent").
W I T N E S S E T H:
WHEREAS, the current Maturity Date under the Credit Agreement
is September 30, 1998 and the Borrower has requested that the Maturity Date be
extended to October 31, 1998;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, the undersigned hereby agree as follows:
1. Defined Terms. Terms defined in the Credit Agreement and
used herein shall have the meanings given to them in the Credit Agreement.
2. Extension. Each Lender which executes this Amendment (an
"Extending Lender") agrees that the Maturity Date is extended from September 30
to October 31, 1998. Each Extending Lender acknowledges and agrees that each
Lender which does not agree to extend the Maturity Date as provided in the
preceding sentence will be paid principal, interest and other amounts owed to
it under the Credit Agreement (and the Commitment of such non-extending Lender
will be terminated) on September 30, 1998.
3. Effective Date. This Agreement shall become effective on
the date (the "Effective Date") on which the Borrower, the Administrative Agent
and the Required Lenders under the Credit Agreement shall have duly executed
and delivered to the Administrative Agent this Agreement.
4. No Other Amendments; Confirmation. Except as expressly
amended hereby, the provisions of the Credit Agreement and each of the
Fundamental Documents are and shall remain in full force and effect.
5. Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
6. Counterparts. This Agreement may be executed by one or
more of the parties hereto on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. This Agreement may be delivered by facsimile transmission of the
relevant signature pages hereof.
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IN WITNESS WHEREOF, the undersigned have caused this
Agreement to be executed and delivered by their duly authorized officers as of
the date first above written.
CENDANT CORPORATION
By: /s/ Michael P. Monaco
------------------------------------
Name: Michael P. Monaco
Title: Vice Chairman and CFO
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By: /s/ Carol Ulmer
----------------------------------
Name: /s/ Carol Ulmer
Title: Vice President
BANK OF AMERICA NT&SA
By: /s/ Steve Aronowitz
----------------------------------
Name: /s/ Steve Aronowitz
Title: Managing Director
BANK OF MONTREAL
By: /s/ Bruce Pietka
----------------------------------
Name: /s/ Bruce Pietka
Title: Director
THE BANK OF NEW YORK
By:
----------------------------------
Name:
Title:
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THE BANK OF NOVA SCOTIA
By: /s/ Stephen Lockhart
----------------------------------
Name: /s/ Stephen Lockhart
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By: /s/ W.A. DiNicola
----------------------------------
Name: /s/ W.A. DiNicola
Title: Vice President
BANQUE PARIBAS
By: /s/ Duane Helkowski
----------------------------------
Name: /s/ Duane Helkowski
Title: Vice President
By: /s/ David Canavan
----------------------------------
Name: /s/ David Canavan
Title: Director
BAYERISCHE LANDESBANK
GIROZENTRALE
CAYMAN ISLANDS BRANCH
By: /s/ Sean O'Sullivan
----------------------------------
Name: /s/ Sean O'Sullivan
Title: Vice President
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BAYERISCHE VEREINSBANK AG, NEW
YORK BRANCH
By: /s/ Marianne Weinzinger
----------------------------------
Name: /s/ Marianne Weinzinger
Title: Vice President
By: /s/ Pamela Gillons
----------------------------------
Name: /s/ Pamela Gillons
Title: Asst. Treasurer
CANADIAN IMPERIAL
BANK OF COMMERCE
By: /s/ Gerald Girardi
----------------------------------
Name: /s/ Gerald Girardi
Title: Executive Director
COMERICA BANK
By: /s/ Kimberly Kirsten
----------------------------------
Name: /s/ Kimberly Kirsten
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Rod Hurst
----------------------------------
Name: /s/ Rod Hurst
Title: Vice President
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CREDIT SUISSE FIRST BOSTON
By:
----------------------------------
Name:
Title:
By:
----------------------------------
Name:
Title:
DG BANK DEUTSCHE
GENOSSENSCHAFTSBANK, CAYMAN
ISLAND BRANCH
By: /s/ Stefanie Gaensslen
----------------------------------
Name: /s/ Stefanie Gaensslen
Title: Asst. Vice President
FIRST AMERICAN NATIONAL BANK
By: /s/ Scott Bane
----------------------------------
Name: /s/ Scott Bane
Title: Senior Vice President
THE FIRST NATIONAL BANK OF BOSTON
By:
----------------------------------
Name:
Title:
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THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Cory Helfand
----------------------------------
Name: /s/ Cory Helfand
Title: Vice President
FIRST NATIONAL BANK OF MARYLAND
By: /s/ Susan Elliott Benninghoff
----------------------------------
Name: /s/ Susan Elliott Benninghoff
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/ Mark Smith
----------------------------------
Name: /s/ Mark Smith
Title: Senior Vice President
FLEET NATIONAL BANK
By: /s/ Marlene Haddad
----------------------------------
Name: /s/ Marlene Haddad
Title: Vice President
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By: /s/ Raymond Ventura
----------------------------------
Name: /s/ Raymond Ventura
Title: Vice President & Manager
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
NEW YORK BRANCH
7
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By:
----------------------------------
Name:
Title:
MELLON BANK, N.A.
By: /s/ Donald Cassidy
----------------------------------
Name: /s/ Donald Cassidy
Title: First Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By: /s/ Christopher Kunhardt
----------------------------------
Name: /s/ Christopher Kunhardt
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Eileen Higgins
----------------------------------
Name: /s/ Eileen Higgins
Title: Vice President
THE NORTHERN TRUST COMPANY
By: /s/ Eric Strickland
----------------------------------
Name: /s/ Eric Strickland
Title: Vice President
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ROYAL BANK OF CANADA
By: /s/ Sheryl Greenberg
----------------------------------
Name: /s/ Sheryl Greenberg
Title: Senior Manager
THE SAKURA BANK, LIMITED
By:
----------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By: /s/ Kazuyoshi Ogawa
----------------------------------
Name: /s/ Kazuyoshi Ogawa
Title: Joint General Manager
THE TOKAI BANK LIMITED NEW YORK
BRANCH
By:
----------------------------------
Name:
Title:
UNITED STATES NATIONAL BANK OF
OREGON
By:
----------------------------------
Name:
Title:
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WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
By: /s/ Alan Bookspan
----------------------------------
Name: /s/ Alan Bookspan
Title: Vice President
----------------------------------
/s/ Walter Duffy
Associate
AMENDMENT AND WAIVER (this "Amendment"), dated as of September
25, 1998, to the FIVE YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT AGREEMENT
and the 364-DAY COMPETITIVE ADVANCE AND REVOLVING CREDIT AGREEMENT, each of
which is dated as of October 2, 1996 (as each of the same may be amended,
supplemented or otherwise modified from time to time, the "Credit Agreements"),
by and among CENDANT CORPORATION, a Delaware corporation (the "Borrower"), the
financial institutions parties thereto (the "Lenders"), and THE CHASE MANHATTAN
BANK, a New York banking corporation, as agent for the Lenders (in such
capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower has requested the Lenders to amend
certain provisions of the Credit Agreements and to consent to the extension of
the date by which the Borrower's financial statements for the fiscal quarters
ending March 31, 1998 and June 30, 1998 are required to be delivered to October
16, 1998;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, the undersigned hereby agree as follows:
1. Defined Terms. Terms defined in the Credit Agreements and
used herein shall have the meanings given to them in the Credit Agreements.
2. Amendments and Waiver. (a) Section 1 of each Credit
Agreement is amended by adding at the end of the definition of "Consolidated
Total Indebtedness" the following:
For purposes of this definition, the amount of Indebtedness outstanding
under the Borrower's Term Loan Agreement dated as of May 29, 1998, as
amended, at any time shall be deemed to be reduced (but not to less
than zero) by the amount of cash and cash equivalents of the Borrower
and its Consolidated Subsidiaries at such time determined on a
consolidated basis in accordance with GAAP.
(b) Section 1 of each Credit Agreement is amended by deleting
the definition of "Consolidated EBITDA" and substituting therefor the following:
"Consolidated EBITDA" shall mean, without duplication, for any
period for which such amount is being determined, the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) provision
for taxes based on income, (iii) depreciation expense, (iv)
Consolidated Interest Expense, (v) amortization expense, (vi)
non-recurring cash charges or expenses in fiscal year 1998 not to
exceed $363,600,000 to the extent incurred or paid in such period plus
(vii) other non-cash items reducing Consolidated Net Income, all as
determined on a consolidated basis for the Borrower and its
Consolidated Subsidiaries in accordance with GAAP. Notwithstanding the
foregoing, in calculating Consolidated EBITDA pro forma effect shall be
given to each acquisition of a Subsidiary or any entity acquired in a
merger in any relevant period
2
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for which the covenants set forth in Sections 6.7 and 6.8 are being
calculated as if such acquisition had been made on the first day of
such period.
(c) The Required Lenders under each Credit Agreement hereby
waive compliance by the Borrower with the provisions of Section 5.1(b) and (c)
of the Credit Agreements with respect to the financial statements and officer's
certificates required to be delivered in respect of the fiscal quarters ending
March 31, 1998 and June 30, 1998 as long as such financial statements and
certificates are delivered on or prior to October 16, 1998. The Required Lenders
agree that the failure to deliver such financial statements and certificates
prior to October 16, 1998 shall not constitute a Default or Event of Default.
(d) The amendments set forth in paragraphs (a) and (b) above
shall be effective for the fiscal quarter ending June 30, 1998 and thereafter.
3. Effective Date. This Amendment shall become effective on
the date (the "Effective Date") on which the Borrower, the Administrative Agent
and the Required Lenders under each Credit Agreement shall have duly executed
and delivered to the Administrative Agent this Amendment.
4. No Other Amendments; Confirmation. Except as expressly
amended hereby, the provisions of the Credit Agreements and each of the
Fundamental Documents are and shall remain in full force and effect.
5. Governing Law. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
6. Counterparts. This Amendment may be executed by one or more
of the parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
IN WITNESS WHEREOF, the undersigned have caused this Amendment
to be executed and delivered by their duly authorized officers as of the date
first above written.
CENDANT CORPORATION
By: /s/ Michael P. Monaco
-------------------------------
Name: Michael P. Monaco
Title: Vice Chairman and CFO
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THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By:
-------------------------------
Name:
Title:
ABN-AMRO BANK N.V. NEW YORK
BRANCH
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
BANK OF AMERICA NT&SA
By:
-------------------------------
Name:
Title:
BANK OF MONTREAL
By:
-------------------------------
Name:
Title:
THE BANK OF NEW YORK
By:
-------------------------------
Name:
Title:
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THE BANK OF NOVA SCOTIA
By:
-------------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By:
-------------------------------
Name:
Title:
BANQUE PARIBAS
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
BAYERISCHE LANDESBANK
GIROZENTRALE
CAYMAN ISLANDS BRANCH
By:
-------------------------------
Name:
Title:
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BAYERISCHE VEREINSBANK AG, NEW
YORK BRANCH
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
CANADIAN IMPERIAL
BANK OF COMMERCE
By:
-------------------------------
Name:
Title:
CITIBANK, N.A.
By:
-------------------------------
Name:
Title:
COMERICA BANK
By:
-------------------------------
Name:
Title:
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CREDIT LYONNAIS NEW YORK BRANCH
By:
-------------------------------
Name:
Title:
CREDIT SUISSE FIRST BOSTON
By:
-------------------------------
Name:
Title:
By:
-------------------------------
Name:
Title:
DG BANK DEUTSCHE
GENOSSENSCHAFTSBANK, CAYMAN
ISLAND BRANCH
By:
-------------------------------
Name:
Title:
FIRST AMERICAN NATIONAL BANK
By:
-------------------------------
Name:
Title:
FIRST HAWAIIAN BANK
By:
-------------------------------
Name:
Title:
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THE FIRST NATIONAL BANK OF BOSTON
By:
-------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:
-------------------------------
Name:
Title:
FIRST NATIONAL BANK OF MARYLAND
By:
-------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By:
-------------------------------
Name:
Title:
FLEET NATIONAL BANK
By:
-------------------------------
Name:
Title:
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By:
-------------------------------
Name:
Title:
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THE INDUSTRIAL BANK OF JAPAN,
LIMITED
NEW YORK BRANCH
By:
-------------------------------
Name:
Title:
MELLON BANK, N.A.
By:
-------------------------------
Name:
Title:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By:
-------------------------------
Name:
Title:
NATIONSBANK, N.A.
By:
-------------------------------
Name:
Title:
THE NORTHERN TRUST COMPANY
By:
-------------------------------
Name:
Title:
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PNC BANK, N.A.
By:
-------------------------------
Name:
Title:
ROYAL BANK OF CANADA
By:
-------------------------------
Name:
Title:
THE SAKURA BANK, LIMITED
By:
-------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
-------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By:
-------------------------------
Name:
Title:
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SUMMIT BANK
By:
-------------------------------
Name:
Title:
THE TOKAI BANK LIMITED NEW YORK
BRANCH
By:
-------------------------------
Name:
Title:
UNITED STATES NATIONAL BANK OF
OREGON
By:
-------------------------------
Name:
Title:
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
By:
-------------------------------
Name:
Title:
BANKERS TRUST COMPANY
By:
-------------------------------
Name:
Title:
AMENDMENT (this "Amendment"), dated as of August 26, 1998, to
the TERM LOAN AGREEMENT dated as of May 29, 1998 (as the same may be amended,
supplemented or otherwise modified from time to time, the "Term Loan
Agreement"), by and among CENDANT CORPORATION, a Delaware corporation (the
"Borrower"), the financial institutions parties thereto (the "Lenders"), the
Syndication Agent, Co-Documentation Agents, Managing Agents and Co-Agents named
therein and THE CHASE MANHATTAN BANK, a New York banking corporation, as agent
for the Lenders (in such capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower has requested the Lenders to amend
certain provisions of the Term Loan Agreement upon the terms and conditions set
forth herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, the undersigned hereby agree as follows:
1. Defined Terms. Terms defined in the Term Loan Agreement
and used herein shall have the meanings given to them in the Term Loan
Agreement.
2. Amendments. The Required Lenders hereby agree that each
reference in Sections 5.1(a) and 5.1(b) of the Term Loan Agreement to the date
"August 31, 1998" shall instead be a reference to "September 30, 1998".
(b) Subsection 5.1(b) of the Term Loan Agreement is amended by
deleting the phrase "fiscal quarter ending on or about March 31, 1998" and
substituting therefor the phrase "fiscal quarters ending on or about March 31,
1998" and June 30, 1998".
3. Effective Date. This Amendment shall become effective on
the date (the "Effective Date") on which the Borrower, the Administrative Agent
and the Required Lenders shall have duly executed and delivered to the
Administrative Agent this Amendment.
4. No Other Amendments; Confirmation. Except as expressly
amended hereby, the provisions of the Term Loan Agreement and each of the
Fundamental Documents are and shall remain in full force and effect.
5. Governing Law. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
6. Counterparts. This Amendment may be executed by one or
more of the parties hereto on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
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IN WITNESS WHEREOF, the undersigned have caused this
Amendment to be executed and delivered by their duly authorized officers as of
the date first above written.
CENDANT CORPORATION
By: /s/ Michael P. Monaco
------------------------------------
Name: Michael P. Monaco
Title: Vice Chairman and CFO
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By: /s/Carol Ulmer
----------------------------------
Name:/s/Carol Ulmer
Title: Vice President
BANK OF AMERICA NT&SA
By: /s/ Steve Aronowitz
----------------------------------
Name: /s/ Steve Aronowitz
Title: Managing Director
BARCLAYS BANK PLC
By: /s/ Eric Jaeger
----------------------------------
Name: /s/ Eric Jaeger
Title: Director
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BANK BRUSSELS LAMBERT, NEW YORK
BRANCH
By: /s/ M.C. Swinnen
----------------------------------
Name: /s/ M.C. Swinnen
Title: Senior Manager
THE BANK OF NOVA SCOTIA
By: /s/ S. Lockhart
----------------------------------
Name: /s/ S. Lockhart
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By: /s/ W. DiNicola
----------------------------------
Name: /s/ W. DiNicola
Title: Attorney-In-Fact
BANQUE NATIONALE DE PARIS, NEW
YORK BRANCH
By: /s/ Robert Taylor
----------------------------------
Name: /s/ Robert Taylor
Title: Senior Vice President
5
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BANQUE PARIBAS, NEW YORK BRANCH
By: /s/ Duane Helkowski
----------------------------------
Name: /s/ Duane Helkowski
Title: Vice President
By: /s/ Sean Riddington
----------------------------------
Name: /s/ Sean Riddington
Title: Vice President
CANADIAN IMPERIAL BANK OF
COMMERCE
By: /s/ Gerald Girardi
----------------------------------
Name: /s/ Gerald Girardi
Title: Executive Director
COMERICA BANK
By: /s/ Kimberly Kersten
----------------------------------
Name: /s/ Kimberly Kersten
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Rod Hurst
----------------------------------
Name: /s/ Rod Hurst
Title: Vice President
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CREDIT SUISSE FIRST BOSTON
By: /s/ Chris Horgan
----------------------------------
Name: /s/ Chris Horgan
Title: Vice President
By: /s/ Kristin Lepri
----------------------------------
Name: /s/ Kristin Lepri
Title: Associate
FIRST UNION NATIONAL BANK
By: /s/ Mark Smith
----------------------------------
Name:/s/ Mark Smith
Title: Senior Vice President
FLEET NATIONAL BANK
By: /s/ Marlene Haddad
----------------------------------
Name: /s/ Marlene Haddad
Title: Vice President
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By: /s/ Toshiaki Yakura
----------------------------------
Name: /s/ Toshiaki Yakura
Title: Senior Vice President
7
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THE INDUSTRIAL BANK OF JAPAN,
LIMITED
NEW YORK BRANCH
By: /s/ William Kennedy
----------------------------------
Name: /s/ William Kennedy
Title: Vice President
MELLON BANK, N.A.
By: /s/ Donald Cassidy
----------------------------------
Name: /s/ Donald Cassidy
Title: First Vice President
NATIONSBANK, N.A.
By: /s/ Eileen Higgins
----------------------------------
Name: /s/ Eileen Higgins
Title: Vice President
ROYAL BANK OF CANADA
By: /s/ Sheryl Greenberg
----------------------------------
Name: /s/ Sheryl Greenberg
Title: Senior Manager
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THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By: /s/ Kazoyoshi Ogawa
----------------------------------
Name: /s/ Kazoyoshi Ogawa
Title: Joint General Manager
WELLS FARGO BANK, N.A.
By: /s/ Timothy McDevitt
----------------------------------
Name:/s/ Timothy McDevitt
Title: Vice President
----------------------------------
/s/ David Hollingsworth
Vice President
AMENDMENT (this "Amendment"), dated as of September 25, 1998, to the
TERM LOAN AGREEMENT dated as of May 29, 1998 (as the same may be amended,
supplemented or otherwise modified from time to time, the "Term Loan
Agreement"), by and among CENDANT CORPORATION, a Delaware corporation (the
"Borrower"), the financial institutions parties thereto (the "Lenders"), the
Syndication Agent, Co-Documentation Agents, Managing Agents and Co-Agents named
therein and THE CHASE MANHATTAN BANK, a New York banking corporation, as agent
for the Lenders (in such capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower has requested the Lenders to amend
certain provisions of the Term Loan Agreement upon the terms and conditions set
forth herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, the undersigned hereby agree as follows:
1. Defined Terms. Terms defined in the Term Loan Agreement
and used herein shall have the meanings given to them in the Term Loan
Agreement.
2. Amendments. (a) Section 1 of the Credit Agreement is
amended by adding at the end of the definition of "Consolidated Total
Indebtedness" the following:
For purposes of this definition, the amount of Indebtedness outstanding
under this Agreement at any time shall be deemed to be reduced (but not
to less than zero) by the amount of cash and cash equivalents of the
Borrower and its Consolidated Subsidiaries at such time determined on a
consolidated basis in accordance with GAAP.
(b) Section 1 of the Credit Agreement is amended by deleting
the definition of "Consolidated EBITDA" and substituting for therefor the
following:
"Consolidated EBITDA" shall mean, without duplication, for any
period for which such amount is being determined, the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) provision
for taxes based on income, (iii) depreciation expense, (iv)
Consolidated Interest Expense, (v) amortization expense, (vi)
non-recurring cash charges or expenses in fiscal year 1998 not to
exceed $363,600,000 to the extent incurred or paid in such period plus
(vii) other non-cash items reducing Consolidated Net Income, all as
determined on a consolidated basis for the Borrower and its
Consolidated Subsidiaries in accordance with GAAP. Notwithstanding the
foregoing, in calculating Consolidated EBITDA pro forma effect shall be
given to each acquisition of a Subsidiary or any entity acquired in a
merger in any relevant period for which the covenants set forth in
Sections 6.7 and 6.8 are being calculated as if such acquisition had
been made on the first day of such period.
(c) Subsection 5.1(b) of the Term Loan Agreement is amended by
deleting the first parenthetical clause therein and substituting therefor the
phrase "(or, in the case of the
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fiscal quarters ending on or about March 31, 1998 and June 30, 1998, on or prior
to October 16, 1998)".
(d) The amendments set forth in paragraphs (a) and (b) above
shall be effective for the fiscal quarter ending June 30, 1998 and thereafter.
3. Effective Date. This Amendment shall become effective on
the date (the "Effective Date") on which the Borrower, the Administrative Agent
and the Required Lenders shall have duly executed and delivered to the
Administrative Agent this Amendment.
4. No Other Amendments; Confirmation. Except as expressly
amended hereby, the provisions of the Term Loan Agreement and each of the
Fundamental Documents are and shall remain in full force and effect.
5. Governing Law. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
6. Counterparts. This Amendment may be executed by one or more
of the parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
7. Representations and Warranties. The Borrower hereby
represents and warrants that (a) each of the representations and warranties
in Section 3 of the Term Loan Agreement (other than those set forth in Sections
3.4 and 3.5) shall be, after giving effect to this Amendment, true and correct
in all material respects as if made on and as of the Effective Date (unless such
representations and warranties are stated to relate to a specific earlier date,
in which case such representations and warranties shall be true and correct in
all material respects as of such earlier date) and (b) after giving effect to
this Amendment, no Default or Event of Default shall have occurred and be
continuing.
3
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IN WITNESS WHEREOF, the undersigned have caused this Amendment
to be executed and delivered by their duly authorized officers as of the date
first above written.
CENDANT CORPORATION
By: /s/ Michael P. Monaco
------------------------------
Name: Michael P. Monaco
Title: Vice President and CFO
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By: /S/ Carol A. Ulmer
------------------------------
Name: Carol A. Ulmer
Title: Vice President
BANK OF AMERICA NT&SA
By: /s/ Steve A. Aronowitz
------------------------------
Name: Steve A. Aronowitz
Title: Managing Director
BARCLAYS BANK PLC
By: /s/ Eric Jaeger
------------------------------
Name: Eric Jaeger
Title: Director
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BANK BRUSSELS LAMBERT, NEW YORK
BRANCH
By:
------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By: /s/ J.W. Campbell
------------------------------
Name: J.W. Campbell
Title: Unit Head
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY
By:
------------------------------
Name:
Title:
BANQUE NATIONALE DE PARIS, NEW
YORK BRANCH
By: /s/ Robert Taylor
------------------------------
Name: Robert Taylor
Title: Senior Vice President
By: /s/ Richard L. Sted
------------------------------
Name: Richard L. Sted
Title: Senior Vice President
5
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BANQUE PARIBAS, NEW YORK BRANCH
By: /s/ Duane Helkowski
------------------------------
Name: Duane Helkowski
Title: Vice President
By: /s/ David I. Canavan
------------------------------
Name: David I. Canavan
Title: Director
CANADIAN IMPERIAL BANK OF
COMMERCE
By: /s/ Gerald Girardi
------------------------------
Name: Gerald Girardi
Title: Executive Director
COMERICA BANK
By: /s/ Kimberly S. Kersten
------------------------------
Name: Kimberly S. Kersten
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Rod Hurst
------------------------------
Name: Rod Hurst
Title: Vice President
6
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CREDIT SUISSE FIRST BOSTON
By: /s/ Chris T. Horgan
------------------------------
Name: Chris T. Horgan
Title: Vice President
By: /s/ Kristin Lepri
------------------------------
Name: Kristin Lepri
Title: Associate
FIRST UNION NATIONAL BANK
By:
------------------------------
Name:
Title:
FLEET NATIONAL BANK
By: /s/ Marlene K. Haddad
------------------------------
Name: Marlene K. Haddad
Title: Vice President
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By: /s/ Toshiaki Yakura
------------------------------
Name: Toshiaki Yakura
Title: Senior Vice President
7
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THE INDUSTRIAL BANK OF JAPAN,
LIMITED
NEW YORK BRANCH
By: /s/ William Kennedy
------------------------------
Name: William Kennedy
Title: Vice President
MELLON BANK, N.A.
By: /s/ Donald G. Cassidy, Jr.
------------------------------
Name: Donald G. Cassidy, Jr.
Title: First Vice President
NATIONSBANK, N.A.
By: /s/ Eileen C. Higgins
------------------------------
Name: Eileen C. Higgins
Title: Vice President
ROYAL BANK OF CANADA
By: /s/ Sheryl L. Greenberg
------------------------------
Name: Sheryl L. Greenberg
Title: Senior Manager
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By: /s/ John C. Kissinger
------------------------------
Name: John C. Kissinger
Title: General Manager
8
TL
WELLS FARGO BANK, N.A.
By: /s/ Donald Hartmann
------------------------------
Name: Donald Hartmann
Title: Senior Vice President
By: /s/ Donald Hartmann
------------------------------
Name: Donald Hartmann
Title: Senior Vice President
PNC BANK, N.A.
By: /s/ Frieda Youlios
------------------------------
Name: Frieda Youlios
Title: Vice President
EXHIBIT 12
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Income from continuing operations before
income taxes, extraordinary gain and
cumulative effect of accounting change ........... $ 257.3 $ 533.5 $ 350.3
Plus: Fixed charges ............................... 409.4 325.6 291.2
Less: Capitalized interest ........................ -- (.6) --
-------- -------- --------
Earnings available to cover fixed charges ......... $ 666.7 $ 858.5 $ 641.5
======== ======== ========
Fixed charges (2):
Interest, including amortization of deferred
financing costs .................................. $ 379.0 $ 299.9 $ 270.4
Capitalized interest .............................. -- .6 --
Interest portion of rental payment ................ 30.4 25.1 20.8
-------- -------- --------
Total fixed charges ............................ $ 409.4 $ 325.6 $ 291.2
======== ======== ========
Ratio of earnings to fixed charges (3) ............ 1.63x 2.64x 2.20x
======== ======== ========
- ----------
(1) Financial data prior to December 31, 1994 has not been restated and is
therefore not presented herein. Previously reported information for
periods prior to December 31, 1994 should not be relied upon.
(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 operating lease rentals).
(3) For the years ended December 31, 1997, 1996 and 1995 income from
continuing operations before income taxes, extraordinary gain and
cumulative effect of accounting change includes non-recurring
merger-related costs and other unusual charges of $704.1 million, $109.4
million and $97.0 million, respectively. Excluding such charges, the
ratio of earnings to fixed charges for the years ended December 31, 1997,
1996 and 1995 is 3.35x, 2.97x and 2.54x, respectively.
EXHIBIT 18
September 28, 1998
Cendant Corporation
6 Sylvan Way
Parsippany, New Jersey 07054
Dear Sirs/Madams:
We have audited the financial statements of Cendant Corporation as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, included in your Annual Report on Form 10-K/A to the
Securities and Exchange Commission and have issued our report thereon dated
September 28, 1998. Note 2 to such financial statements contains a description
of your adoption during the year ended December 31, 1997 of a change in revenue
and expense recognition policies in accounting for your membership business
activities. In our judgment, such change is to an alternative accounting
principle that is preferable under the circumstances.
Yours truly,
Deloitte & Touche LLP
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Cendant Corporation's
Registration Statement No. 333-46661 on Form S-4, Registration Statement Nos.
333-11035, 333-17323, 333-17411, 333-20391, 333-23063, 333-26927, 333-35709,
333-35707, 333-45155, 333-45227 and 333-49405 on Form S-3, and Registration
Statement Nos. 33-74066, 33-91658, 333-00475, 333-03237, 33-58896, 33-91656,
333-03241, 33-26875, 33-75682, 33-93322, 33-93372, 33-75684, 33-80834,
33-74068, 33-41823, 33-48175, 333-09633, 333-09655, 333-09637, 333-22003,
333-30649, 333-42503, 333-34517-2, 333-42549, 333-45183 and 333-47537 on Form
S-8 of our report dated September 28, 1998 (which expresses an unqualified
opinion and includes explanatory paragraphs relating to the restatement as
described in Note 3, certain litigation as described in Note 17, and the change
in method of recognizing revenue and membership solicitation costs as described
in Notes 2 and 3) appearing in this Annual Report on Form 10-K/A of Cendant
Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Parsippany, NJ
September 28, 1998
EXHIBIT 23.2
The Board of Directors
PHH Corporation:
We consent to the incorporation by reference in Registration Statement
Nos. 333-11035, 333-17323, 333-17411, 333-20391, 333-26927, 333-35709, and
333-23063, 333-45227, 333-45155 and 333-49405 on Forms S-3, in Registration
Statement No. 333-46661 on Form S-4 and in Registration Nos. 33-26875,
33-75682, 33-93322, 33-41823, 33-48175, 33-58896, 33-91656, 333-03241,
33-74068, 33-74066, 33-91658, 333-00475, 333-03237, 33-75684, 33-80834,
33-93372, 333-09633, 333-09637, 333-09655, 333-22003, 333-34517-2, 333-42503,
333-30649, 333-42549, 333-45183, and 333-47537 on Forms S-8 for Cendant
Corporation of our report dated April 30, 1997, with respect to the
consolidated balance sheet of PHH Corporation and subsidiaries (the "Company")
at December 31, 1996 and the related consolidated statements of income,
shareholders' equity, and cash flows for the years ended December 31, 1996 and
January 31, 1996, before the restatement related to the merger of Cendant
Corporation's relocation business with the Company and reclassifications to
conform to the presentation used by Cendant Corporation, which report is
included in the Annual Report on Form 10-K/A of Cendant Corporation for
the year ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
September 25, 1998
INDEPENDENT AUDITORS' CONSENT
EXHIBIT 23.3
We consent to the incorporation by reference in Cendant Corporation's
Registration Statement No. 333-46661 on Form S-4, Registration Statement Nos.
333-11035, 333-17323, 333-17411, 333-20391, 333-23063, 333-26927, 333-35709,
333-35707, 333-45155, 333-45227 and 333-49405 on Form S-3, and Registration
Statement Nos. 33-74066, 33-91658, 333-00475, 333-03237, 33-58896, 33-91656,
333-03241, 33-26875, 33-75682, 33-93322, 33-93372, 33-75684, 33-80834,
33-74068, 33-41823, 33-48175, 333-09633, 333-09655, 333-09637, 333-22003,
333-30649, 333-42503, 333-34517-2, 333-42549, 333-45183 and 333-47537 on Form
S-8 of our report dated February 21, 1996 with respect to the consolidated
statements of earnings, shareholders' equity, and cash flows of Davidson &
Associates, Inc. and subsidiaries for the year ended December 31, 1995
appearing in this Annual Report on Form 10-K/A of Cendant Corporation for the
year ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Long Beach, CA
September 28, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated
February 2, 1996, related to the consolidated financial statements of Ideon
Group, Inc. which appears in the Annual Report on Form 10-K/A of Cendant
Corporation for the year ended December 31, 1997 in the following registration
statements:
Form S-4:
- ---------
333-46661
Form S-3:
- ---------
333-11035
333-17323
333-17411
333-20391
333-23063
333-26927
333-35709
333-35707
333-45155
333-45227
333-49405
Form S-8:
- ---------
33-74066
33-91658
333-00475
333-03237
33-58896
33-91656
333-03241
33-26875
33-75682
33-93322
33-93372
33-75684
33-80834
33-74068
33-41823
33-48175
33-17249
33-17247
33-17248
333-09633
333-09655
333-09637
333-22003
333-30649
333-42503
333-34571-2
333-42549
333-45183
333-47537
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Tampa, Florida
September 28, 1998
5
1,000,000
YEAR YEAR YEAR
DEC-31-1997 DEC-31-1996 DEC-31-1995
JAN-01-1997 JAN-01-1996 JAN-01-1995
DEC-31-1997 DEC-31-1996 DEC-31-1995
67 448 0
0 0 0
1,232 1,055 0
61 61 0
0 0 0
2,590 2,494 0
0 0 0
0 0 0
14,073 12,763 0
2,534 2,176 0
1,246 781 0
0 0 0
0 0 0
8 8 0
3,813 3,948 0
14,073 12,763 0
0 0 0
4,240 3,238 2,616
0 0 0
3,228 2,582 2,152
704 109 97
0 0 0
51 14 17
257 533 350
191 220 143
66 313 207
(27) 17 23
27 0 0
(283) 0 0
(217) 330 230
$(0.27) $0.44 $0.33
$(0.27) $0.41 $0.31
