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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, 2000
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)
9 WEST 57TH STREET
NEW YORK, NY 10019
(Address of principal executive office) (Zip Code)
212-413-1800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, Par Value $.01 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7 3/4% Notes due 2003
3% Convertible Subordinated Notes due 2002
Zero Coupon Senior Convertible Contingent Debt Securities due 2021
Zero Coupon Convertible Debentures due 2021
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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 March 15, 2001 was $12,008,130,000. 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 844,796,413 as of March 15, 2001.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be mailed to
stockholders in connection with our annual stockholders meeting to be held May
22, 2001 (the "Annual 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.
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TABLE OF CONTENTS
Item Description Page
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PART I
1 Business 4
2 Properties 35
3 Legal Proceedings 36
4 Submission of Matters to a Vote of Security Holders 42
PART II
5 Market for the Registrant's Common Equity and Related Stockholder
Matters 42
6 Selected Financial Data 43
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 44
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 61
11 Executive Compensation 61
12 Security Ownership of Certain Beneficial Owners and Management 61
13 Certain Relationships and Related Transactions 61
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 62
Signatures 63
3
PART I
ITEM 1. BUSINESS
Except as expressly indicated or unless the context otherwise requires, the
"Company", "Cendant", "we", "our" or "us" means Cendant Corporation, a Delaware
Corporation, and its subsidiaries.
GENERAL
We are one of the foremost providers of travel and real estate services in the
world. We were created through the merger of HFS Incorporated into CUC
International, Inc. in December 1997 with the resultant corporation being
renamed Cendant Corporation.
We operate in four business segments--Hospitality, Real Estate Services, Vehicle
Services, and Financial Services. Our businesses provide a wide range of
complementary consumer and business services. Our businesses are intended to
complement one another and create cross-marketing opportunities both within each
segment and between segments. Our Hospitality segment franchises hotel
businesses and facilitates the sale and exchange of vacation ownership
intervals; our Real Estate Services segment franchises real estate brokerage
businesses, provides home buyers with mortgages and assists in employee
relocations; our Vehicle Services segment franchises and operates car rental
businesses, provides fleet management services to corporate clients and
government agencies and operates parking facilities in the United Kingdom; and
our Financial Services segment provides marketing strategies primarily to
financial institutions through offering an array of financial and
insurance-based products to consumers, franchises tax preparation service
businesses and provides consumers with access to a variety of discounted
products and services.
As a franchisor of hotels, residential and commercial real estate brokerage
offices, car rental operations and tax preparation services, we license the
owners and operators of independent businesses the right to use our brand names.
We do not own or operate hotels, real estate brokerage offices or tax
preparation offices. Instead, we provide our franchisees with services designed
to increase their revenue and profitability.
Hospitality Segment
Our Hospitality segment contains our nine lodging brands and our timeshare and
travel agency businesses. In our lodging franchise business, we franchise hotels
primarily in the mid-priced and economy markets. We are the world's largest
hotel franchisor, operating the Days Inn(R), Ramada(R) (in the United States),
Super 8(R), Howard Johnson(R), Wingate Inn(R), Knights Inn(R), Travelodge(R) (in
North America), Villager(R) and AmeriHost Inn(R) lodging franchise systems. In
our timeshare business, we own Resort Condominiums International, LLC, the
world's leading timeshare exchange company. On April 2, 2001, we acquired
Fairfield Communities, Inc., one of the largest vacation ownership companies in
the United States. See "Recent Developments--Acquisitions--Fairfield
Communities" below.
Real Estate Services Segment
Our Real Estate Services segment consists of our three real estate brands and
our mortgage and relocation businesses. We are the world's largest real estate
brokerage franchisor. In our real estate franchise business, we franchise real
estate brokerage offices under the CENTURY 21(R), Coldwell Banker(R) and ERA(R)
real estate brokerage franchise systems. In our relocation business, our Cendant
Mobility Services Corporation subsidiary is a leading provider of corporate
relocation services in the world. We offer relocation clients a variety of
services in connection with the transfer of a client's employees and offer
similar services to affinity groups and their members. In our mortgage business,
our Cendant Mortgage Corporation subsidiary originates, sells and services
residential mortgage loans in the United States, marketing such services to
consumers through relationships with corporations, financial institutions, real
estate brokerage firms and mortgage banks.
Vehicle Services Segment
With the acquisition of Avis Group Holdings, Inc. on March 1, 2001, the Vehicle
Services segment now consists of the car rental operations and fleet management
services businesses of Avis Group, in addition to the Avis franchise system and
our parking facility business. Our Avis car rental business is the second
largest car rental
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system in the world (based on total revenues and volume of rental transactions).
Our fleet management services business is a leader in the industry. Our National
Car Parks Limited subsidiary is the largest private parking facility operator in
the United Kingdom.
Financial Services Segment
Our Financial Services segment consists of our insurance/wholesale businesses,
our tax preparation service business and our individual membership business. Our
insurance/wholesale business markets and administers insurance products,
primarily accidental death and dismemberment insurance and term life insurance,
and also provides marketing strategies primarily to financial institutions
through an offering of checking account enhancement packages for the benefit of
their customers. The insurance/wholesale business is conducted through
FISI*Madison LLC ("FISI"), Benefit Consultants, Inc. ("BCI"), Long Term
Preferred Care, Inc. ("LTPC") and Cims Ltd. ("Cims"), which are all wholly-owned
subsidiaries. Our Jackson Hewitt Inc. subsidiary operates the second largest tax
preparation service system in the United States with locations in 48 states and
franchises a system of approximately 3,300 offices that specialize in
computerized preparation of Federal and state individual income tax returns. Our
individual membership business, with approximately 24.3 million memberships,
provides customers with access to a variety of discounted products and services.
On July 2, 2001, we announced that we entered into outsourcing agreements with
Trilegiant Corporation whereby Trilegiant would provide fulfillment services to
members of our individual membership business in exchange for a servicing fee.
See "Recent Developments - Outsourcing of Individual Membership Business" below.
Recent Developments
Acquisitions
We continually explore and conduct discussions with regards to acquisitions and
other strategic corporate transactions in our industries and in other franchise,
franchisable or service businesses. In addition to transactions previously
announced, as part of our regular on-going evaluation of acquisition
opportunities, we currently are 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 CD common
stock or our other securities, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other things,
initiate and complete satisfactorily our 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, if necessary, secure financing. No
assurance can be given with respect to the timing, likelihood or business effect
of any possible transaction. In the past, we have been involved in both
relatively small acquisitions and acquisitions which have been significant. The
following text provides descriptions of recently announced transactions.
Galileo International. On July 18, 2001, we announced that we had entered into
an agreement to acquire all of the outstanding common stock of Galileo
International, Inc. at an expected value of $33 per share, or approximately $2.9
billion. As part of the acquisition, we will also assume approximately $600
million of Galileo's net debt. Galileo is one of the leading providers of
electronic global distribution services (GDS) for the travel industry. The
transaction, which is expected to close in the fall of 2001, is subject to
customary regulatory approvals and the approval of Galileo's stockholders.
Avis Group Holdings. On March 1, 2001, we purchased the 82% of Avis Group
Holdings, Inc. that we did not already own at a price of $33.00 per share in
cash, or approximately $994 million. Our car rental business is now comprised of
the Avis franchise system and the car rental operations of Avis Group, formerly
our largest Avis franchisee. In addition, through the acquisition of Avis Group,
we also acquired PHH Arval, a leader in the fleet management services business,
which offers fleet leasing, fleet management, other management services to
corporate clients and government agencies, and Wright Express Corporation, the
leading fuel card service provider in the United States, which offers fuel and
vehicle expense management programs to corporations and government agencies for
the effective management and control of vehicle travel expenses.
In an effort to effectively integrate the operations of Avis Group with our
operations, we implemented an internal reorganization on March 1, 2001. Pursuant
to this reorganization, the car rental operations of Avis Group became a part of
our subsidiary, Cendant Car Holdings, LLC, and the worldwide fleet management
operations of Avis Group became a part of our subsidiary, PHH Corporation.
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Fairfield Communities. On April 2, 2001, we acquired all of the outstanding
common stock of Fairfield Communities, Inc. for approximately $750 million in
cash. Fairfield, with more than 324,000 vacation-owning households, is a leading
vacation ownership company in the United States, marketing and managing resort
properties at 35 locations in 12 states and the Bahamas. Fairfield operates over
32 dedicated sales centers and manages over 110 timeshare and whole ownership
resort associations.
Holiday Cottages Group. On January 17, 2001, we acquired Holiday Cottages Group
Ltd. ("HCG"). HCG is a leading provider of holiday cottage rentals in Europe.
HCG markets eight brands and processed reservations for cottage rentals
comprising approximately 184,000 rental weeks for 2000.
RCI Southern Africa and RCI Pacific. On February 28, 2001, RCI Europe, our
wholly owned subsidiary, acquired Vacation Exchanges International (Pty) Ltd.,
which does business as RCI Southern Africa Ltd. This acquisition also included
our acquisition of the remaining 50 percent of RCI Pacific (Pty) Ltd. that we
did not already own. RCI Southern Africa Ltd. operates in the timeshare exchange
industry in southern Africa, Australia, New Zealand and Fiji.
AmeriHost Inn. On October 2, 2000, we completed the acquisition of the AmeriHost
Inn and AmeriHost Inn & Suites(SM) brand names and franchising rights. AmeriHost
Inn and AmeriHost Inn & Suites hotels are new construction, limited service,
mid-priced hotels. We and Amerihost Properties, Inc. ("API") intend to grow the
AmeriHost hotel system through continued property development by API and our
active franchise sales to API and third parties. Additionally, we have entered
into an agreement with API to share royalties on AmeriHost hotels for a period
of 25 years.
Bradford & Bingley Relocation Services. On September 7, 2000, we acquired
Bradford & Bingley Relocation Services, Ltd. ("BBRS"), a leading corporate
relocation services provider in the United Kingdom. BBRS operations were merged
with our Cendant Relocation (UK) Limited operations immediately after the
acquisition.
Hamilton Watts International. On July 20, 2000, we acquired Hamilton Watts
International, a leading provider of expatriate and corporate relocation
management services in Australia and across Southeast Asia.
MarketTrust. On January 8, 2001, our FISI subsidiary acquired certain assets of
MarketTrust, Inc., including its agreements to provide checking account
enhancement packages to over 320 financial institutions located across the
United States.
Internet Developments
In March 2001, we funded the development of an online travel portal due to
launch in late 2001. We hope to maximize growth opportunities of our existing
travel businesses and take advantage of our experience with the move.com portal.
The travel portal will leverage new technology coupled with access to our
lodging, timeshare, car rental and travel agency services to address the full
range of consumer travel needs. The travel portal will deliver a consumer
friendly experience with products and services from a wide variety of travel
providers.
Securities Offerings
On February 13, 2001, we issued $1.2 billion principal amount at maturity of
zero-coupon senior convertible contingent notes due 2021. The notes were offered
at an initial offering price of $608.41 per $1,000 principal amount at maturity,
with gross proceeds of approximately $750 million. On March 9, 2001, Lehman
Brothers Inc. exercised its option to purchase an additional $246 million
principal amount at maturity of notes. Each $1,000 principal amount at maturity
note will be convertible into 33.4 shares of CD common stock if the closing
price of CD common stock on the New York Stock Exchange exceeds specified levels
or in the event our credit rating falls below investment grade or if we call the
notes for redemption or engage in certain corporate transactions. The notes will
not be redeemable by the Company prior to February 13, 2004 but we may be
required to repurchase notes at the accreted value thereof, at the option of the
holders, on February 13, 2004, 2009, or 2014. We may elect to pay the purchase
price for the foregoing repurchases in cash or shares of CD common stock.
Simultaneously with the February 13, 2001 notes offering, we issued 40 million
shares of our CD common stock to Lehman at $13.20 per share, resulting in net
proceeds of approximately $528 million. On March 9, 2001,
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Lehman exercised its option to purchase an additional six million shares of CD
common stock to cover over-allotments which provided $79.2 million in net
proceeds. We used a portion of the proceeds from the offerings to fund the
acquisition of Avis Group. The remaining proceeds will be used to reduce
outstanding debt and for general corporate purposes.
On May 4, 2001, we issued $800 million of zero-coupon senior convertible
contingent notes due 2021. On May 8, 2001, Goldman Sachs exercised its option to
purchase an additional $200 million of notes. Each $1,000 principal amount at
maturity note will be convertible into approximately 39 shares of CD common
stock if the closing price of CD common stock on the New York Stock Exchange
exceeds specified levels or in certain other circumstances. We may be required
to repurchase the notes at the option of the holders at certain specified times
prior to 2021 but not prior to May 2002. We may elect to pay the purchase price
for the foregoing repurchases in cash or shares of CD common stock.
Sale of Move.com
On February 16, 2001, we completed the sale of move.com along with certain
ancillary businesses to Homestore.com. The transaction combines two leading Web
sites in the home and real estate category under the Homestore.com(TM) brand.
The transaction also provides Homestore.com's Web site REALTOR.com(R) with an
exclusive 40-year license to the aggregated listings of our CENTURY 21, Coldwell
Banker and ERA national real estate franchises. Homestore.com acquired the
businesses in an all-stock transaction totaling approximately 26.3 million
shares of Homestore common stock valued at $718 million. See "Divested
Businesses--Move.com and Ancillary Businesses" below.
Outsourcing of Individual Membership Business
On July 2, 2001, we entered into agreements with Trilegiant Corporation, a newly
formed corporation to be headquartered in Norwalk, CT, to outsource and license
our individual membership business to Trilegiant. The former management of
Cendant Membership Services, Inc. ("CMS") and Cendant Incentives, Inc. own 100%
of the common stock and we own 20% of the equity through a convertible preferred
stock investment in Trilegiant. All employees of CMS and Cendant Incentives will
become employees of Trilegiant. Previously, we had planned to spin off our
individual membership business.
We will retain the economic benefits from existing members of our individual
membership business and Trilegiant will provide fulfillment services to these
members for a servicing fee. Trilegiant will also have the right to use all
assets necessary for the operation of our individual membership business and,
beginning in the third quarter of 2002, we will receive a license fee of 5% of
Trilegiant's revenues, increasing to 16% over ten years. The outsourcing
agreement has a 40-year term.
As a result of this transaction, the previously announced spin-off of the
individual membership business to our stockholders will no longer occur.
Principal Class Action Litigation Settlement and Government Investigation
Findings
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC International, Inc. business units,
approximately 70 lawsuits claiming to be class actions, three lawsuits claiming
to be brought derivatively on our behalf and several individual lawsuits and
arbitration proceedings have been filed against us and, among others, our
predecessor, HFS Incorporated, and several current and former officers and
directors of Cendant and HFS. These lawsuits assert, among other things, various
claims under the Federal securities laws including claims under sections 11, 12
and 15 of the Securities Act of 1933 and sections 10(b), 14(a) and 20(a) of and
Rules 10b-5 and 14a-9 under the Securities Exchange Act of 1934 and state,
statutory and common laws, including claims that financial statements previously
issued by us allegedly were false and misleading and that these statements
allegedly caused the price of our securities to be artificially inflated. See
"Item 3. Legal Proceedings".
In addition, the staff of the Securities and Exchange Commission (the "SEC") and
the United States Attorney for the District of New Jersey have conducted
investigations relating to the accounting irregularities. On June 14, 2000, the
SEC concluded its investigation when we consented to entry of an Order
Instituting Public
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Administration Proceedings in which the SEC found that we had violated certain
record-keeping provisions of the federal securities laws, Sections 13(a) and
13(b) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1, and ordered
us to cease and desist from committing or causing any violation and any future
violation of those provisions.
On December 7, 1999, we announced that we reached a preliminary agreement to
settle the principal Securities Action pending against us in the U.S. District
Court in Newark, New Jersey relating to the aforementioned class action
lawsuits. In the definitive written settlement agreement executed March 17,
2000, the Company agreed to pay the class members approximately $2.85 billion in
cash. The District Court approved the settlement in orders dated August 15,
2000. Certain parties who objected to the settlement have appealed the District
Court's orders approving the settlement, the plan of allocation of the
settlement fund and awarding attorneys fees and expenses to counsel for the lead
plaintiffs. The U.S. Court of Appeals for the Third Circuit issued a briefing
schedule for the appeals, which is nearly complete. Oral arguments for all
appeals were heard on May 22, 2001; the court reserved its decision until
further notice. We currently plan to fund the settlement through the use of
available cash, the use of existing credit facilities, the issuance of debt
securities, and/or the issuance of equity securities. We intend to finance the
cost of the settlement so as to maintain our investment grade ratings.
The settlements do not encompass all litigation asserting claims associated with
the accounting irregularities. We do not believe that it is feasible to predict
or determine the final outcome or resolution of these unresolved proceedings. An
adverse outcome from such unresolved proceedings could be material with respect
to earnings in any given reporting period. However, the Company does not believe
that the impact of such unresolved proceedings should result in a material
liability to the Company in relation to its consolidated financial position or
liquidity.
* * *
Financial information about our business segments may be found in Note 25 to our
Consolidated Financial Statements presented in Item 8 of this Annual Report on
Form 10-K/A and incorporated herein by reference.
Forward-Looking Statements
Forward-looking statements in this Annual Report on Form 10-K/A are subject to
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements 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. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical acts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements:
o the effect of economic conditions and interest rate changes on
the economy on a national, regional or international basis and
the impact thereof on our businesses;
o the effects of changes in current interest rates, particularly
on our real estate franchise and mortgage businesses;
o the resolution or outcome of our unresolved pending litigation
relating to the previously announced accounting irregularities
and other related litigation;
o our ability to develop and implement operational and financial
systems to manage growing operations and to achieve enhanced
earnings or effect cost savings;
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o competition in our existing and potential future lines of
business and the financial resources of, and products
available to, competitors;
o our ability to integrate and operate successfully acquired and
merged businesses and risks associated with such businesses,
including the pending acquisition of Galileo and the
acquisitions of Avis Group and Fairfield, the compatibility of
the operating systems of the combining companies, and the
degree to which our existing administrative and back-office
functions and costs and those of the acquired companies are
complementary or redundant;
o our ability to obtain financing on acceptable terms to finance
our growth strategy and to operate within the limitations
imposed by financing arrangements and rating agencies;
o competitive and pricing pressures in the vacation ownership
and travel industries, including the car rental industry;
o changes in the vehicle manufacturer repurchase arrangements
between vehicle manufacturers and Avis Group in the event that
used vehicle values decrease; and
o changes in laws and regulations, including changes in
accounting standards and privacy policy regulation.
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. Most of these factors are
difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Principal Executive Office
Our principal executive office is located at 9 West 57th Street, New York, New
York 10019 (telephone number: (212) 413-1800).
HOSPITALITY SEGMENT
The Hospitality segment contains our nine lodging brands and our timeshare and
travel agency businesses and represented 22%, 17% and 14% of our revenue for
2000, 1999 and 1998, respectively. In our lodging franchise business, we
franchise hotels primarily in the mid-priced and economy markets. We are the
world's largest hotel franchisor, operating the Days Inn(R), Ramada(R) (in the
United States), Super 8(R), Howard Johnson(R), Wingate Inn(R), Knights Inn(R),
Travelodge(R) (in North America), Villager(R) and AmeriHost Inn(R) lodging
franchise systems. In our timeshare business, we own Resort Condominiums
International, LLC, the world's leading timeshare exchange company. On November
2, 2000, we acquired Fairfield Communities, Inc., one of the largest vacation
ownership companies in the United States. See "Recent
Developments--Acquisitions--Fairfield Communities" above.
Lodging Franchise Business
General. Our lodging franchise business represented 11%, 8% and 7% of our
revenue for 2000, 1999 and 1998, respectively. The lodging industry can be
divided into four broad sectors based on price and services: upper upscale,
which typically charge room rates above $110 per night; upscale, which typically
charge room rates between $81 and $110 per night; middle market, with room rates
generally between $55 and $80 per night; and economy, where room rates generally
are less than $55 per night. Of our franchised brands, Ramada, Howard
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Johnson, Wingate Inn and AmeriHost Inn compete principally in the middle market
sector and Days Inn, Knights Inn, Super 8, Travelodge and Villager compete
primarily in the economy sector.
As a franchisor of lodging brands, we provide a number of services designed to
directly or indirectly increase hotel occupancy rates, revenue and
profitability, the most important of which is a centralized brand-specific
reservation system. Similarly, brand awareness, derived from nationally
recognized brand names supported by national advertising and marketing
campaigns, can increase the desirability of a hotel property to prospective
guests. We believe that, in general, national franchise brands with a greater
number of hotels enjoy greater brand awareness among potential hotel guests, and
thus, are perceived as more valuable by existing and prospective franchisees
than brands with fewer 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, technology and operating
standards, plus the ongoing payment of franchise royalties and assessments for
the reservation system and marketing programs) with the increase in gross room
revenue and decrease in certain expenses anticipated to be derived from brand
membership. Other benefits to brand affiliation include group purchasing
services, training programs, design and construction advice, and other
franchisee support services, all of which provide the benefits of a national
lodging services organization to operators of independently-owned hotels. We
believe that, in general, franchise affiliations are viewed as enhancing the
value of a hotel property by providing economic benefits to the property.
The fee and cost structure of our lodging business provides significant
opportunities for us to increase earnings by increasing the number of franchised
properties. Hotel franchisors derive substantially all of their revenue from
continuing franchise fees. Continuing franchise fees are comprised of two
components, a royalty portion and a marketing/reservation portion, both of which
are normally charged by the franchisor as a percentage of the franchisee's gross
room revenue. The royalty portion of the franchise fee is intended to cover the
operating expenses of the franchisor, such as expenses incurred in quality
assurance, administrative support and other franchise services and to provide
the franchisor with operating profits. The marketing/reservation portion of the
franchise fee is intended to reimburse the franchisor for the expenses
associated with providing such franchise services as a central reservation
system, national advertising and marketing programs and certain training
programs.
Our franchisees are dispersed geographically, which minimizes the exposure to
any one hotel owner or geographic region. Of the more than 6,400 properties and
4,900 franchisees in our systems, no individual hotel owner accounts for more
than 2% of our lodging franchisee properties.
Franchise Systems. The following is a summary description of our lodging
franchise systems. Information reflects properties that are open and operating
and is presented as of December 31, 2000.
Primary Domestic Avg. Rooms # of # of
Brand Market Served Per Property Properties Rooms Location*
----- ---------------- ------------ ---------- ----- ---------
AmeriHost Inn Middle Market 63 81 5,141 Domestic
Days Inn Upper Economy 85 1,912 162,129 International(1)
Howard Johnson Middle Market 100 508 50,938 International(2)
Knights Inn Lower Economy 79 230 18,194 International(3)
Ramada Middle Market 123 988 121,431 Domestic
Super 8 Economy 61 1,969 119,266 International(3)
Travelodge Upper Economy 81 564 45,699 International(4)
Villager Lower Economy 89 110 9,770 International(4)
Wingate Inn Upper Middle Market 94 93 8,745 Domestic
----- -------
Total 6,455 541,313
===== =======
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* Description of rights owned or licensed.
(1) Includes properties in Canada, China, Colombia, Czech Republic, Hungary,
India, Jordan, Mexico, Philippines, South Africa, United Kingdom, and
Uruguay.
(2) Includes properties in Argentina, Canada, Colombia, Dominican Republic,
Ecuador, Israel, Jordan, Lebanon, Malta, Mexico, Oman, Venezuela, United
Arab Emirates, and United Kingdom.
(3) Includes properties in Canada.
(4) Includes properties in Canada and Mexico.
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Franchise Growth. Growth of the franchise systems through the sale of long-term
franchise agreements to operators of existing and newly constructed hotels is
the leading source of revenue and earnings growth in our lodging franchise
business. We also continue to seek opportunities to acquire or license
additional hotel franchise systems, including established brands in the upper
upscale and upscale sectors of the market, where we are not currently
represented.
We market franchises principally to independent hotel and motel owners, as well
as to owners who have the right to terminate franchise affiliations of their
properties with other hotel brands. We believe that our existing franchisees
also represent a significant potential market because many own, or may own in
the future, other hotels, which can be converted to our brand names.
Accordingly, a significant factor in our sales strategy is maintaining the
satisfaction of our existing franchisees by providing quality services.
We employ a national franchise sales force consisting of approximately 94 sales
personnel, which is divided into several brand specific sales groups, with
regional offices around the country. The sales force is compensated primarily
through commissions. In order to provide broad marketing of our brands, sales
referrals are made among the sales groups and a referring salesperson is
entitled to a commission for a referral which results in a franchise sale.
We seek to expand our franchise systems and provide marketing and other
franchise services to franchisees on an international basis through a series of
master license agreements with master developers and franchisors based outside
the United States. As of December 31, 2000, our franchising subsidiaries (other
than Ramada and AmeriHost) have entered into international master licensing
agreements for part or all of approximately 66 countries on five continents.
These agreements typically include minimum development requirements and require
payment of an initial development fee in connection with the execution of the
license agreement as well as recurring franchise fees.
Operations. Our organization is designed to provide a high level of service to
our franchisees while maintaining a controlled level of overhead expense. In the
lodging business, expenses related to marketing and reservations services are
budgeted to match anticipated marketing and reservation fees each year.
Central Reservation Systems. Unlike many other franchise businesses (such as
restaurants), the lodging business is characterized by remote purchasing through
travel agencies and through use by consumers of toll-free telephone numbers and
the Internet. Each of our reservation systems is independently operated,
focusing on its specific brand and franchise system, and is comprised of: one or
more nationally advertised toll-free telephone numbers; reservation agents who
accept inbound calls; a computer operation that processes reservations; and
automated links which accept reservations from travel agents and other travel
providers, such as airlines, and which report reservations made through the
system to each franchisee property. Each reservation agent handles reservation
requests and inquiries for only one of our franchise systems and there is no
"cross selling" of franchise systems to consumers. We maintain six reservation
centers that are located in: Knoxville and Elizabethton, Tennessee; Phoenix,
Arizona; Winner and Aberdeen, South Dakota; and Saint John, New Brunswick,
Canada.
Each brand maintains an Internet Web site to acquaint viewers with the brand and
its properties. Each property has its own series of information pages. Each
brand also accepts reservations over the Internet from the brand's own Web site
and other Internet Web sites equipped with compatible booking devices. In 2000,
the brand Web sites had 139 million page views and booked an aggregate of
1,337,015 roomnights from Internet booking sources, compared with 64.7 million
page views and 649,253 roomnights booked in 1999, increases of 115% and 106%,
respectively.
Franchise Agreements. Our franchise agreements grant the right to utilize one of
the brand names associated with our lodging franchise systems to lodging
facility owners or operators under long-term franchise agreements. An annual
average of 1.8% of our existing franchise agreements are scheduled to expire
from January 1, 2001 through December 31, 2006, with no more than 2.4% 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
generally based on property size and type, as well as continuing franchise fees
comprised of royalty fees and marketing/reservation fees based on gross room
revenues. Under the terms of the standard franchise agreements in effect at
December 31, 2000, franchisees are typically required to pay recurring fees
comprised of a royalty portion and a marketing/reservation portion, generally
calculated as a percentage of annual gross room revenue ranging from 7.0% to
8.8%. Under certain circumstances we discount fees from the standard rates.
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Our typical franchise agreement is terminable by us upon the franchisee's
failure to maintain certain quality standards, to pay franchise fees or other
charges or to meet other specified obligations. In the event of such
termination, we are typically entitled to be compensated for lost revenue 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.
The lodging franchise agreements are terminable by the franchisee under certain
limited circumstances. The franchisee may terminate under certain procedures if
the hotel suffers a substantial casualty or condemnation. Some franchisees and
our brands have negotiated certain mutual termination rights, which usually may
be exercised only on specific anniversary dates of the hotel's opening, and only
if certain conditions precedent are met. The lodging franchise business also has
a policy that allows a franchisee to terminate the franchise if its hotel fails
to achieve 50% annual occupancy after certain conditions and waiting periods are
satisfied.
Trademarks and Other Intellectual Property. The service marks "Days Inn,"
"Ramada," "Howard Johnson," "Super 8," "Travelodge," "Wingate Inn," "Villager,"
"Knights Inn," and "AmeriHost Inn" and related logos are material to our
business. We, through our franchisees, actively use these marks. All of the
material marks in each franchise system are registered (or have applications
pending for registration) with the United States Patent and Trademark Office as
well as major countries worldwide where the brands are franchised. We own the
marks relating to following systems: Days Inn; Howard Johnson; Super 8;
Travelodge (in North America); Wingate Inn; Villager; Knights Inn; and AmeriHost
Inn.
We franchise the service mark "Ramada" and related marks and Ramada brands and
logos (the "Ramada Marks") to lodging facility owners in the United States
pursuant to two license agreements (the "Ramada License Agreements") between an
indirect subsidiary of Marriott Corporation ("Licensor") and Ramada Franchise
Systems, Inc. ("RFS"), our wholly-owned subsidiary.
The Ramada License Agreements limit RFS' 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 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.
During 2000, RFS received approximately $49 million in royalties from its Ramada
franchisees and paid the Licensor approximately $25 million in license fees.
The Ramada License Agreements are subject to certain termination events relating
to, among other things, (i) the failure to maintain aggregate annual gross room
sales minimum amounts stated in the Ramada License Agreements, (ii) the
maintenance by us of a minimum net worth of $50 million (however, this minimum
net worth requirement may be satisfied by a guaranty of an affiliate of ours
with a net worth of at least $50 million or by an irrevocable letter of credit
(or similar form of third-party credit support)), (iii) non-payment of
royalties, (iv) failure to maintain registrations on the Ramada Marks and to
take reasonable actions to stop infringements, (v) failure to pay certain
liabilities specified by the Restructuring Agreement, dated July 15, 1991, by
and among New World Development Co., Ltd. (a predecessor to Licensor), Ramada
International Hotels and Resorts, Inc., Ramada Inc., Franchise System Holdings,
Inc., the Company and RFS, and (vi) failure to maintain appropriate hotel
standards of service and quality. A termination of the Ramada License Agreements
would result in the loss of the income stream from franchising the Ramada brand
names and could result in the payment by us of liquidated damages equal to three
years of license fees. We do not believe that we will have difficulty complying
with all of the material terms of the Ramada License Agreements.
Competition. Competition among the national lodging brand franchisors to grow
their franchise systems is intense. Our primary national lodging brand
competitors are the Holiday Inn(R) and Best Western(R) brands and Choice Hotels,
which franchises seven brands, including the Comfort Inn(R), Quality Inn(R) and
Econo Lodge(R) brands. Our Days Inn, Travelodge and Super 8 properties
principally compete with Comfort Inn, Red Roof Inn(R) and Econo Lodge in the
economy sector. The chief competitors of our Ramada, Howard Johnson, Wingate Inn
and AmeriHost Inn properties, which compete in the middle market sector of the
hotel industry, are Holiday Inn(R)
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and Hampton Inn(R). Our Knights Inn and Travelodge brands compete with Motel
6(R) properties. In addition, a lodging facility owner may choose not to
affiliate with a franchisor but to remain independent.
We believe that competition for the sale of franchises in the lodging industry
is based principally upon the perceived value and quality of the brand and
services offered to franchisees, as well as the nature of those services. We
believe that prospective franchisees value a franchise based upon their view of
the relationship of conversion costs and future charges to the potential for
increased revenue and profitability. The reputation of the franchisor among
existing franchisees is also a factor, which may lead a property owner to select
a particular affiliation. We also believe that the perceived value of its brand
names to prospective franchisees is, to some extent, a function of the success
of its existing franchisees.
The ability of our lodging franchisees to compete in the lodging industry is
important to our prospects for growth, although, because franchise fees are
based on franchisee gross room revenue, our revenue is not directly dependent on
franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
and local economic conditions. The effect of these conditions on our results of
operations is substantially reduced by virtue of the diverse geographical
locations of our franchised properties.
Seasonality. Our principal source of lodging revenue is based upon the annual
gross room revenue of franchised properties. As a result, our lodging franchise
business experiences seasonal revenue patterns similar to those of the hotel
industry where higher revenues are generated during the summer months than
during other periods of the year because of increased leisure travel. Therefore,
any occurrence that disrupts travel patterns during the summer period could have
a material adverse effect on our franchisee's annual performance and our annual
performance.
Timeshare Business
General. Our timeshare business represented 9%, 7% and 6% of our revenue for
2000, 1999 and 1998, respectively. Our Resort Condominiums International ("RCI")
subsidiary is the world's largest provider of timeshare vacation exchange
opportunities and services for more than 2.8 million timeshare members from
approximately 200 nations and more than 3,700 resorts in more than 100 countries
around the world. Our RCI(R) 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 and consulting services. RCI has significant operations in North
America, Europe, the Middle East, Latin America, Africa, Australia and the
Pacific Rim and has more than 3,900 employees worldwide.
The resort component of the leisure industry is primarily serviced by two
alternatives for overnight accommodations: commercial lodging establishments and
timeshare resorts. Commercial lodging consists principally of: (i) hotels and
motels in which a room is rented on a nightly, weekly or monthly basis for the
duration of the visit; and (ii) rentals of privately-owned condominium units or
homes. Generally, the commercial lodging industry 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 $11,000, plus a yearly
maintenance fee of approximately $350 per interval owned. Based upon information
published about the industry, we believe that during 2000, sales of timeshares
exceeded $7.5 billion worldwide. Two principal sectors make up the timeshare
exchange industry: owners of timeshare interest (consumers) and resort
properties (developers/operators). Trade industry sources have estimated that
the total number of timeshare owners is more
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than five million worldwide, while the total number of timeshare resorts
worldwide has been estimated to be nearly 5,500. The timeshare exchange industry
derives revenue from annual subscribing membership fees paid by owners of
timeshare interests, fees paid by such owners for each exchange and fees paid by
members and resort affiliates for various other products and services.
The RCI(R) Weeks Exchange Program ("RCI Weeks") provides RCI members who own
timeshares at RCI-affiliated resorts the ability to exchange their timeshare
vacation accommodations in any given year for comparable value accommodations at
other RCI-affiliated resorts. Approximately 1.3 million members of RCI Weeks,
representing approximately 50% of the total members of RCI Weeks, reside outside
of the United States.
We provide members of RCI Weeks with access to both domestic and international
timeshare resorts, publications regarding timeshare exchange opportunities and
other travel-related services, including discounted purchasing programs. During
2000, we arranged more than 2.1 million exchanges. Our RCI members paid an
average annual subscribing membership fee of $57, as well as an average exchange
fee of approximately $140 for every exchange arranged by us, resulting in
membership and exchange fees totaling approximately $360 million during 2000.
Developers of resorts affiliated with RCI Weeks typically pay the first year
subscribing membership fee for new owner/members upon the sale of the timeshare
interest.
Growth. The timeshare exchange industry has experienced significant growth over
the past decade. We believe that the factors driving this growth include the
demographic trend toward older, more affluent Americans who travel more
frequently; the entrance of major hospitality and entertainment companies into
timeshare development; a worldwide acceptance of the timeshare concept; and an
increasing focus on leisure activities, family travel and a desire for value,
variety and flexibility in a vacation experience. We believe that future growth
of the timeshare exchange industry will be determined by general economic
conditions both in the United States and worldwide, the public image of the
industry, improved approaches to marketing and sales, a greater variety of
products and price points, the broadening of the timeshare market and a variety
of other factors. Accordingly, we cannot predict if future growth trends will
continue at rates comparable to those of the recent past.
One of the key innovations that we introduced to the vacation timeshare industry
was the RCI Points Exchange Program, formally known as the Global Points
Network(R). RCI Points members are assigned points, which represent the
comparable value of their timeshare interests. These points can then be used for
stays at RCI resorts, airfare, car rentals, hotel stays, cruises and more,
providing enormous flexibility for RCI Points members. RCI Points is a creative
way to enhance the attractiveness of RCI membership by adapting to changes in
consumer vacation habits that have trended toward shorter, but more frequent
vacations. Initial reaction to RCI Points has been positive and the program will
continue to expand in 2001.
On April 2, 2001, we acquired Fairfield Communities Inc., one of the largest
vacation ownership companies in the United States. Fairfield develops timeshare
resorts, markets vacation ownership products and manages resort properties under
the Fairfield(R) name at 35 locations in 12 states and the Bahamas. Fairfield's
primary business is the sale of timeshare interests and it operates more than 32
sales centers throughout the United States. It also manages more than 110
property owners associations. In 2000, over 625,000 families visited resorts
owned or managed by Fairfield. The acquisition of Fairfield will enable us to
expand our timeshare product offerings to include timeshare financing, unit
interval sales and marketing, property management, club management and timeshare
exchange programs. Immediately prior to the closing of the Fairfield
acquisition, Fairfield transferred its real estate development assets to a third
party and entered into agreements with the third party governing their
relationship. On January 8, 2001, Fairfield announced the acquisition of
Dolphin's Cove Resort in Anaheim, California from Dolphin's Cove Resort, Ltd.
This acquisition increases Fairfield's membership base to more than 340,000 and
includes option rights to develop an oceanfront vacation ownership resort in
southern California.
RCI Affiliates. Most RCI members are acquired through developers; only a small
percentage of members are acquired through our direct solicitation activities.
As a result, the growth of the timeshare exchange business is dependent on the
sale of timeshare units by affiliated resorts such as Fairfield. RCI affiliates
consist of international brand names and independent developers, owners'
associations and vacation clubs. We enter into resort affiliation agreements
with timeshare resort developers and allow these developers to offer
participation in the RCI exchange programs to individual purchasers of timeshare
interests. See "Property Affiliation Agreements" below. We believe that national
lodging and hospitality companies are attracted to the timeshare
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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, seven of every ten timeshare resorts worldwide are affiliated with RCI.
We also believe that RCI's existing affiliates represent a significant potential
market because a portion of their existing properties are not sold. In addition,
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 our growth strategy is maintaining the satisfaction of our existing
affiliates by providing quality support services.
International Exchange System. Members are served through a network of call
centers located in countries throughout the world. These call centers are
staffed by approximately 2,200 people. Major regional call and information
support centers are located in Indianapolis, Saint John (Canada), Kettering
(England), Cork (Ireland), Mexico City and Singapore. All members receive a
directory that lists resorts available through the exchange system, a periodic
magazine and other information related to the exchange system and available
travel services. These materials are published in various languages.
Travel Services. In addition to exchange services, our 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. We provide travel services to our U.S. members through our affiliate,
RCI Travel, Inc. ("RCIT"). On a global basis, we provide travel services through
entities operating in local jurisdictions (hereinafter, RCIT and its local
entities are referred to as "RCI Travel Agencies"). RCI Travel Agencies provide
airline reservations and 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.
RCI Travel Agencies also offer travel packages utilizing resort developers'
unsold inventory to generate both revenue and prospective timeshare purchasers
through affiliated resorts.
Consulting. We provide worldwide timeshare consulting services through our
indirect subsidiary, RCI Consulting, Inc. 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.
Property Management. We provide resort property management services through our
indirect subsidiary, 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 reservation service center, advanced reservations
technology, human resources expertise and owners' association administration.
Property Affiliation Agreements. We are affiliated with more than 3,700
timeshare resorts, of which approximately 1,400 resorts are located in the
United States and Canada, more than 1,300 in Europe and Africa, more than 550 in
Mexico and Latin America and more than 350 in the Asia-Pacific region. The terms
of our affiliation agreement with our affiliates generally require that the
developer enroll each new timeshare purchaser at the resort as a subscribing
member of RCI, license the affiliated resort to use the RCI name and trademarks
for certain purposes, set forth the materials and services RCI will provide to
the affiliate, and generally describe RCI's expectations of the resort's
management. The affiliation agreement also includes stipulations for
representation of the exchange program, minimum enrollment requirements and
treatment of exchange guests. Affiliation agreements are typically for a term of
five years and automatically renew thereafter for terms of one to five years
unless either party takes affirmative action to terminate the relationship. We
make 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.
Trademarks and Intellectual Property. The service marks "RCI", "Resort
Condominiums International(R)" and related trademarks and logos are material to
RCI's business. RCI and its subsidiaries actively use the marks. "RCI" and
"Resort Condominiums International" are registered with the United States Patent
and Trademark Office as well as major countries worldwide where RCI or its
subsidiaries have significant operations. We own the marks used in RCI's
business.
Competition. The global timeshare exchange industry is comprised of a number of
entities, including resort developers and owners. RCI's largest competitor is
Interval International Inc. ("Interval"), formerly our wholly
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owned subsidiary. Based upon industry sources, we believe that approximately 98%
of the nearly 5,500 timeshare resorts in the world are affiliated with either
RCI or Interval. Based upon 1999 audited statistics (which are the most recent
available), RCI had over 2.6 million members, while Interval had approximately
968,000 members. In 1999, RCI confirmed more than two million exchange
transactions, while Interval confirmed approximately 585,000 transactions.
Seasonality. A principal source of timeshare revenue relates to exchange
services to members. Since members have historically shown a tendency to plan
their vacations in the first quarter of the year, revenues are generally
slightly higher in the first quarter in comparison to other quarters of the
year. We 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.
REAL ESTATE SERVICES SEGMENT
Our Real Estate Services segment consists of our three real estate brands and
our relocation and mortgage businesses and represented 31%, 23% and 19% of our
revenue for 2000, 1999 and 1998, respectively.
Real Estate Franchise Business
General. Our real estate franchise business represented 13%, 9% and 7% of our
revenue for 2000, 1999 and 1998, respectively. We own the CENTURY 21 franchise
system, the world's largest franchisor of residential real estate brokerage
offices with approximately 6,600 independently owned and operated franchised
offices with approximately 102,000 active sales agents worldwide, the ERA
franchise system, a leading residential real estate brokerage franchise system
with over 2,500 independently owned and operated franchised offices and more
than 28,000 sales agents worldwide and the Coldwell Banker franchise system, the
world's leading brand for the sale of million-dollar-plus homes and now the
third largest residential real estate brokerage franchise system with
approximately 3,000 independently owned and operated franchised offices and
approximately 76,000 sales agents worldwide.
We believe that application of our franchisee-focused management strategies and
techniques can significantly increase the revenues produced by our real estate
brokerage franchise systems while also increasing the quality and quantity of
services provided to franchisees. We believe that independent real estate
brokerage offices currently affiliate with national real estate franchisors
principally to gain the consumer recognition and credibility of a nationally
known and promoted brand name. Brand recognition is important to real estate
brokers since homebuyers are generally infrequent users of brokerage services
and upon arrival in an area are often unfamiliar with the local brokers.
Our preferred alliance program seeks to capitalize on the valuable access point
that CENTURY 21, Coldwell Banker and ERA brokerage offices provide for service
providers who wish to reach these home buyers and sellers as well as agents and
brokers. Preferred alliances include providers of property and casualty
insurance, moving and storage services, mortgage and title insurance, Internet
services, sellers of furniture, telecommunications and other household goods.
Our real estate brokerage franchisees are dispersed geographically, which
minimizes the exposure to any one broker or geographic region. During 1997, we
acquired a preferred equity interest in NRT Incorporated ("NRT"), a joint
venture between Apollo Management and the Company, which was created to acquire
residential real estate brokerage firms. In August, 1997, NRT acquired the
assets of National Realty Trust, the largest franchisee of the Coldwell Banker
system. NRT has also acquired other independent regional real estate brokerage
businesses which NRT has converted to Coldwell Banker, CENTURY 21 and ERA
franchises. NRT is the largest franchisee of our brokerage franchise systems
based on gross commissions, and represents 6% of the franchised offices. Of the
more than 12,000 franchised offices in our real estate brokerage franchise
systems, no individual broker, other than NRT, accounts for more than 1% of our
real estate brokerage revenues.
Franchise Systems
CENTURY 21. Century 21 is the world's largest residential real estate brokerage
franchisor, with approximately 6,600 independently owned and operated franchise
offices with nearly 102,000 active sales agents located in 30 countries and
territories.
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The primary component of Century 21's revenue is service fees on commissions
from real estate transactions. Service fees are 6% of gross closed commission
income. CENTURY 21 franchisees who meet certain levels of annual gross closed
commissions are eligible for the CENTURY 21 Incentive Bonus Program ("CIB"),
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 closed commissions. During
2000, approximately 16% of CENTURY 21 franchisees qualified for CIB payments,
which aggregated to less than 1% of gross closed commissions.
In addition to service fees, 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 ("NAF"), which in turn uses
those proceeds for local, regional and national advertising, marketing and
public relations campaigns. In 2000, NAF spent approximately $46 million on
advertising and marketing campaigns.
Coldwell Banker. Coldwell Banker is the world's leading brand for the sale of
million-dollar-plus homes and the third largest residential real estate
brokerage franchisor, with approximately 3,000 independently owned and operated
franchise offices in the United States, Canada and 12 other countries, with
approximately 76,000 sales agents. Revenue from the Coldwell Banker system is
primarily derived from service and other fees paid by franchisees, including
initial franchise fees and fees paid for ongoing services. Coldwell Banker
franchisees pay us annual ongoing service fees equal to 6% of a franchisee's
annual gross revenue (subject to annual rebates to franchisees who achieve
certain threshold levels of gross revenue annually).
Coldwell Banker franchisees who meet certain levels of annual gross revenue are
eligible for the Performance Premium Award Program ("PPA"), 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. During 2000, approximately 30% of Coldwell Banker franchisees
qualified for PPA payments.
Coldwell Banker Real Estate Corporation offers a commercial-only franchise,
licensing the Coldwell Banker Commercial(R) trademarks and systems. Coldwell
Banker Commercial franchisees pay annual fees consisting of ongoing service and
marketing fees, generally 6% and 1%, respectively, of their annual gross revenue
(subject to annual rebates to franchisees who achieve certain revenue thresholds
annually, and to minimums and maximums on the marketing fees).
In addition to service and other fees, Coldwell Banker franchisees pay an annual
advertising fee equal to 2.5% of a franchisee's annual gross revenue (subject to
certain minimums and maximums) to the Coldwell Banker Advertising Fund ("CBAF").
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. During 2000, CBAF expended approximately $23 million or
marketing campaigns.
ERA. The ERA franchise system is a leading residential real estate brokerage
franchise system, with more than 2,500 independently owned and operated
franchise offices, and more than 28,000 sales agents located in 24 countries.
Revenue from the ERA franchise system primarily results from (i) franchisees'
payments of monthly membership fees ranging from $230 to $905 per month, based
on volume, plus $208 per branch and a per transaction fee of approximately $128
and (ii) for franchise agreements entered into after July 1997, royalty fees
equal to 6% of the franchisees' gross revenue. For franchise agreements dated
after July 1997, ERA franchisees who met certain levels of annual gross revenue
are eligible for the Volume Incentive 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.
In addition to membership and transaction fees, ERA franchisees pay (i) a fixed
amount per month, which ranges from $247 to $991, based on volume, plus an
additional $247 per month for each branch office into the ERA National Marketing
Fund ("ERA NMF"), and (ii) for franchise agreements entered into after July
1997, a contribution to the ERA NMF equal to 2% of the franchisees' gross
revenues, subject to minimums and maximums. ERA NMF is utilized for local,
regional and national marketing activities, including media purchases and
production, direct mail and promotional activities and other marketing efforts.
During 2000, ERA NMF spent approximately $6 million on marketing campaigns.
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Brokerage Franchise Growth. We market real estate brokerage franchises primarily
to independent, unaffiliated owners of real estate brokerage companies as well
as individuals who are interested in establishing real estate brokerage
businesses. We believe that our existing franchisee base represents another
source of potential growth, as franchisees seek to expand their existing
business to additional markets. Therefore, our sales strategy focuses on
maintaining satisfaction and enhancing the value of the relationship between the
franchisor and the franchisee.
Our real estate brokerage franchise systems employ a national franchise sales
force consisting of approximately 125 sales 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.
Brokerage Operations. Our brand name marketing programs for the real estate
brokerage business generally focus on increasing brand awareness in order to
increase the likelihood of potential homebuyers and home sellers engaging
franchise brokers' services. Each brand has a dedicated marketing staff in order
to develop the brand's marketing strategy while maintaining brand integrity. The
corporate marketing services department provides services related to production
and implementation of the marketing strategy developed by the brand marketing
staffs.
Each brand provides its franchisees and their sales associates with training
programs that have been developed by such brand. The training programs include
mandatory programs instructing the franchisee and/or the sales associate how to
best utilize the methods of the particular system and additional optional
training programs that expand upon such instruction. Each brand's training
department is staffed with instructors experienced in both real estate practice
and instruction. In addition, we have established regional support personnel who
provide consulting services to the franchisees in their respective regions.
Each system provides a series of awards to brokers and their sales associates
who are outstanding performers in each year. These awards signify the highest
levels of achievement within each system and provide a significant incentive for
franchisees to attract and retain sales associates.
Each system provides its franchisees with referrals of potential customers which
are developed from sources both within and outside of the system.
Through our Cendant Supplier Services operations, we provide our franchisees
with volume purchasing discounts for products, services, furnishings and
equipment used in real estate brokerage operations. In addition to the preferred
alliance programs described herein, Cendant Supplier Services establishes
relationships with vendors and negotiates discounts for purchases by its
customers. We do not maintain inventory, directly supply any of the products
and, generally, do not extend credit to franchisees for purchases.
Brokerage Franchise Agreements. Our franchise agreements grant the right to
utilize one of the brand names associated with our franchise systems.
Our current form of franchise agreement for all real estate brokerage brands is
terminable by us in the event of the franchisee's failure to pay fees or other
charges or for other material defaults under the franchise agreement. In the
event of such termination, the CENTURY 21 and ERA agreements generally provide
that we are entitled to be compensated for lost revenues in an amount equal to
the average monthly franchise fees calculated for the remaining term of the
agreement. Pre-1996 agreements do not provide for liquidated damages of this
sort. See "CENTURY 21," "Coldwell Banker" and "ERA" above for more information
regarding the commissions and fees payable under our franchise agreements.
NRT is the largest franchisee of Coldwell Banker, CENTURY 21 and ERA brand names
based on gross commission income. NRT's status as a franchisee is governed by
franchise agreements with our brands, pursuant to which NRT has the
non-exclusive right to operate as part of the Coldwell Banker, ERA and CENTURY
21 real estate franchise systems at locations specified in those agreements. In
February 1999, NRT entered into new fifty-year franchise agreements with our
brands. These agreements require NRT to pay royalty and advertising fees of 6.0%
and 2.0% (2.5% for its Coldwell Banker offices) (subject to certain
limitations), respectively, on its annual gross revenues. Lower royalty and
advertising fees apply in certain circumstances. These agreements generally
provide restrictions on NRT's ability to close offices beyond certain limits.
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Internet. Each of our brands has a consumer Web site that offers real estate
listing contacts and services. century21.com, coldwellbanker.com and era.com are
the official Web sites for the CENTURY 21(R), Coldwell Banker(R) and ERA(R) real
estate franchise systems, respectively.
Brokerage Trademarks and Intellectual Property. The service marks "CENTURY 21,"
"Coldwell Banker" and "ERA" and related logos are material to our business.
Through our franchisees, we actively use these marks. All of the material marks
in each franchise system are registered (or have applications pending for
registration) with the United States Patent and Trademark Office as well as
major countries worldwide where the brands are franchised. The marks used in the
real estate brokerage systems are owned by us through our subsidiaries.
Competition. Competition among the national real estate brokerage brand
franchisors to grow their franchise systems is intense. The chief competitors to
our real estate brokerage franchise systems include the Prudential(R), GMAC Real
Estate(sm) (also known as Better Homes & Gardens(R)) and RE/MAX(R) real estate
brokerage brands. In addition, a real estate broker may choose to affiliate with
a regional chain or choose not to affiliate with a franchisor but to remain
independent.
We believe that competition for the sale of franchises in the real estate
brokerage industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. We also believe that the perceived value of our brand names to
prospective franchisees is, to some extent, a function of the success of our
existing franchisees.
The ability of our real estate brokerage franchisees to compete in the industry
is important to our prospects for growth, although, because franchise fees are
based on franchisee gross commissions or volume, our revenue is not directly
dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
and local economic conditions. The effect of these conditions on our results of
operations is reduced by virtue of the diverse geographical locations of our
franchisees. At December 31, 2000, the combined real estate franchise systems
had approximately 8,100 franchised brokerage offices in the United States and
more than 12,000 offices worldwide. The real estate franchise systems have
offices in 43 countries and territories in North and South America, Europe,
Asia, Africa and Australia.
Seasonality. The principal sources of revenue are based upon the timing of
residential real estate sales, which are generally lower in the first calendar
quarter each year, and relatively level the other three quarters of the year. As
a result, our revenue is generally lower in the first calendar quarter of each
year.
Relocation Business
General. Our relocation business represented 9%, 7% and 7% of our revenue for
2000, 1999 and 1998, respectively. Cendant Mobility(sm) is the leading provider
of employee relocation services in the world and assists more than 128,000
affinity customers, transferring employees and global assignees annually,
including over 20,000 employees internationally each year in 111 countries. At
December 31, 2000, we employed approximately 2,600 people in our relocation
business.
Services. The employee relocation business offers a variety of services in
connection with the transfer of our clients' employees. The relocation services
provided to our customers primarily include the evaluation, inspection, selling
or purchasing of a transferee's home, the issuance of equity advances (generally
guaranteed by the corporate client), certain home management services,
assistance in locating a new home at the transferee's destination and consulting
and other related services.
Corporate clients pay a fee for the services performed. Another source of
revenue is interest on equity advances and broker referral fees. Substantially
all costs associated with such services are reimbursed by the corporate client,
including, if necessary, repayment of equity advances and reimbursement of
losses on the sale of homes purchased in most cases (other than government
clients). As a result of the obligation of most corporate clients to reimburse
Cendant Mobility for losses on resale and guarantee repayment of equity
advances, our exposure on
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such items is limited to the credit risk of our corporate clients and not on the
potential changes in value of residential real estate. We believe such risk is
minimal due to the credit quality of our corporate clients. In transactions
where we assume the risk for losses on the sale of homes, which comprise
approximately 3% of net revenue, we control all facets of the resale process,
thereby limiting our exposure.
The homesale program service is the core service for many domestic and
international programs. This program provides employees guaranteed offers for
their homes and assists clients in the management of employees' productivity
during their relocation. Cendant Mobility allows clients to outsource their
relocation programs by providing clients with professional support for planning
and administration of all elements of their relocation programs. The majority of
new proposals involve outsourcing, due to corporate downsizing, cost containment
and increased need for expense tracking.
Our relocation accounting services supports auditing, reporting and disbursement
of all relocation-related expense activity.
Our group move management service provides coordination for moves involving a
large number of employees over a short period of time. Services include
planning, communications, analysis, and assessment of the move. Policy
consulting provides customized consultation and policy review, as well as
industry data, comparisons and recommendations. Cendant Mobility also has
developed and/or customized numerous non-traditional services including
outsourcing of all elements of relocation programs, moving services and spouse
counseling.
Our moving service, with over 65,000 shipments annually, provides support for
all aspects of moving an employee's household goods. We also handle insurance
and claim assistance, invoice auditing and quality control of van line, driver,
and overall service.
Our marketing assistance service provides assistance to transferees in the
marketing and sale of their own home. A Cendant Mobility professional assists in
developing a custom marketing plan and monitors its implementation through the
broker. The Cendant Mobility professional assists the local broker by acting as
an advocate for our clients' employees in negotiating offers. This helps
clients' employees obtain the highest possible price for their homes and assists
clients to ensure compliance with their relocation programs and management of
their costs.
For clients' employees moving to or from the U.S. from a foreign country, within
a foreign country, or from one foreign country to another, our international
assignment service group provides a full spectrum of relocation services. This
group coordinates these relocation services and assists with immigration
support, candidate assessment, intercultural training, language training, and
repatriation coaching.
Our affinity services provide value-added real estate and relocation services to
organizations with established members and/or customers. Organizations, such as
insurance and airline companies that have established members, offer our
affinity services to their members at no cost. This service helps the
organizations attract new members and retain current members. Affinity services
provide home buying and selling assistance, as well as mortgage assistance and
moving services to members of applicable organizations. Personal assistance is
provided to over 44,000 individuals, with approximately 22,000 real estate
transactions annually.
Vendor Networks. Cendant Mobility provides relocation services through various
vendor networks that meet the superior service standards and quality deemed
necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 350 principal
brokers and 850 associate brokers. Our van line, insurance, appraisal and
closing networks allow us to receive discounts, while maintaining control over
the quality of service provided to clients' transferees.
Business Growth. Our growth strategy is primarily driven by domestic and
international acquisitions and market expansion. On July 20, 2000, Cendant
Mobility acquired Hamilton Watts International, a leading provider of expatriate
relocation services in Australia and Southeast Asia. On September 7, 2000,
Cendant Mobility acquired Bradford & Bingley Relocation Services, Ltd. ("BBRS"),
a leading relocation management service in the United Kingdom. BBRS operations
were merged with our Cendant Relocation (UK) operations immediately after the
acquisition.
Trademarks and Intellectual Property. The service mark "Cendant Mobility" and
related trademarks and logos are material to our relocation business. Cendant
Mobility and its subsidiaries actively use the marks. All of the
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material marks used in Cendant Mobility'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 Cendant Mobility or
its subsidiaries have significant operations. We own the marks used in Cendant
Mobility's business.
Competition. Competition is based on service, quality and price. In the United
States, there are three other major national providers of such services:
Associates Relocation Management, GMAC Relocation Services and Prudential
Relocation Management. We are the market leader in the United States, United
Kingdom, and Australia/Southeast Asia for outsourced relocations.
Seasonality. The principal sources of revenue are based upon the timing of
transferee moves, which are lower in the first and last quarter of each year,
and at the highest levels in the second and third quarters.
Mortgage Business
General. Our mortgage business represented 9%, 7% and 5% of our revenue for
2000, 1999 and 1998, respectively. We originate, sell and service residential
first mortgage loans in the United States. For 2000, Cendant Mortgage(sm) was
the fifth largest lender of retail originated residential mortgages, and the
ninth largest lender of residential mortgages in the US. On December 18, 2000,
we announced a new alliance with Merrill Lynch whereby Merrill Lynch outsourced
its mortgage origination and servicing operations to us. Merrill Lynch closed
approximately $5 billion in retail purchase mortgages during 2000. As a result
of Merrill Lynch's loan volume, we are one of the largest retail mortgage
lenders.
A full line of first mortgage products are marketed to consumers through
relationships with corporations, financial institutions, real estate brokerage
firms, including CENTURY 21, Coldwell Banker and ERA franchisees, and other
mortgage banks. Cendant Mortgage is a centralized mortgage lender conducting its
business in all 50 states. At December 31, 2000, Cendant Mortgage had
approximately 4,400 employees.
Cendant Mortgage customarily sells all mortgages it originates to investors
(which include a variety of institutional investors) either as individual loans,
mortgage-backed securities or participation certificates issued or guaranteed by
Fannie Mae Corp., the Federal Home Loan Mortgage Corporation or the Government
National Mortgage Association. Cendant Mortgage also services mortgage loans and
earns revenue from the sale of the mortgage loans to investors, as well as on
the servicing of the loans for investors. Mortgage servicing consists of
collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage related expenses such as
taxes and insurance, and administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Teleservices. Mortgages are offered to consumers through an
800-number teleservices operation based in Mt. Laurel, New Jersey
under programs for real estate organizations (Phone In, Move In(R)),
private label programs for financial institutions, and for
relocation clients in conjunction with the operations of Cendant
Mobility. The teleservices operation provides us with retail
mortgage volume that contributes to Cendant Mortgage ranking as the
fifth largest retail originator in 2000 according to Inside Mortgage
Finance.
o Internet. Mortgage information is offered to consumers through a Web
interface that is owned by Cendant Mortgage. The Web interface
contains educational materials, rate quotes and a full mortgage
application. This content is made available to the customers of
partner organizations. Partners include Century 21, Coldwell Banker,
ERA, Cendant Mobility, Mellon Bank, United States Bank, GE Financial
Network and Merrill Lynch Credit Corporation. In addition, we
developed and launched our own online brand--InstaMortgage.com(sm)
in 1999. Applications from online customers are processed via our
teleservices platform.
o Point of Sale. Mortgages are offered to consumers through field
sales professionals with all processing, underwriting and other
origination activities based in New Jersey. These field sales
professionals generally are located in real estate offices around
the United States and are equipped with software to obtain product
information, quote interest rates and prepare a mortgage application
with the consumer.
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o Wholesale/Correspondent. We purchase closed loans from financial
institutions and mortgage banks after underwriting the loans.
Financial institutions include banks, thrifts and credit unions. Such
institutions are able to sell their closed loans to a large number of
mortgage lenders and generally base their decision to sell to Cendant
Mortgage on price, product menu and/or underwriting. We also have
wholesale/correspondent originations with mortgage banks affiliated
with real estate brokerage organizations.
Business Growth. Our strategy is to increase market share by expanding all of
our sources of business with emphasis on purchase mortgage volume through our
teleservices, Phone In, Move In and Internet (Log In, Move In(R)) programs. The
Phone In, Move In program was developed for real estate firms in 1997 and has
been established in over 6,000 real estate offices.
We are well positioned to expand our financial institutions business channel by
working with financial institutions which desire to outsource their mortgage
originations operations to Cendant Mortgage. We also will expand our relocation
mortgage volume through increased linkage with Cendant Mobility. Each of these
market share growth opportunities is driven by our low cost teleservices
platform. The competitive advantage of using a centralized, efficient and high
quality teleservices platform allows us to capture a higher percentage of the
highly fragmented mortgage market more cost effectively.
In connection with our new alliance with Merrill Lynch, Merrill Lynch will
continue to market mortgages to its clients in partnership with their financial
consultants. In January 2001, Merrill Lynch began utilizing our services on a
private-label basis to process and service loans.
Competition. Competition is based on service, quality, products and price. There
are an estimated 22,000 national, regional or local providers of mortgage
banking services across the United States. Cendant Mortgage has increased its
mortgage origination market share in the United States to 2.1% in 2000 from 1.8%
in 1999. According to Inside Mortgage Finance, the market share leader for 2000
reported a 7.1% market share in the United States. Competitive conditions can
also be impacted by shifts in consumer preference for variable rate mortgages
from fixed rate mortgages.
Seasonality. The principal sources of revenue are based on the timing of
mortgage origination activity, which is based upon the timing of residential
real estate sales. Real estate sales are generally lower in the first calendar
quarter each year and relatively level the other three quarters of the year. As
a result, our revenue is lower in the first calendar quarter of each year.
VEHICLE SERVICES SEGMENT
With the acquisition of Avis Group Holdings, Inc. on March 1, 2001, the Vehicle
Services segment now consists of the car rental operations and fleet management
services businesses of Avis Group, in addition to the Avis franchise system and
our parking facility business and represented 12%, 24% and 32% of our revenue
for 2000, 1999 and 1998, respectively.
Car Rental Operations and Franchise Businesses
General. We operate the Avis car rental franchise system (the "Avis System").
Our franchise business represented 5%, 4%, 3% of our revenue for 2000, 1999 and
1998, respectively. On March 1, 2001, we purchased the approximately 82% of Avis
Group, the largest Avis System franchisee, that we did not already own at a
price of $33.00 per share in cash, or approximately $994 million. See "Recent
Developments--Acquisitions--Avis Group Holdings" above. Our car rental business
is now comprised of the Avis System and the car rental operations of Avis Group.
As a result, we operate the second largest general use car rental business in
the world, based on total revenue and volume of rental transactions.
The Avis System is comprised of approximately 4,700 rental locations, including
locations at the largest airports and cities in the United States and
approximately 172 other countries and territories, and a fleet of approximately
265,000 vehicles during the peak season. Approximately 93% of the Avis System
rental revenues in the United States are received from locations operated by us
as a result of the acquisition of Avis Group either directly or under agency
arrangements, with the remainder being received from locations operated by
independent licensees.
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The Avis System in Europe, Africa, part of Asia and the Middle East is operated
under franchise by Avis Europe Ltd., an unaffiliated third party.
The car rental industry provides vehicle rentals to business and individual
customers worldwide. The industry is composed of two principal sectors: general
use (mainly at airport and downtown locations) and local use (mainly at downtown
and suburban locations). The car rental industry rents primarily from
on-airport, near-airport, downtown and suburban locations. 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 rental company'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 for business travelers 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.
The Avis System. The Avis System provides franchisees access to the benefits of
a variety of services, including: (i) comprehensive safety initiatives,
including the "Avis Cares(R)" 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)
a standardized system identity for rental location presentation and uniforms;
(iii) a 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 Web
site; and (v) brand awareness of the Avis System through the familiar "We Try
Harder(R)" service announcements.
Avis System franchisees are also provided with access to the Wizard(R) System, a
reservations, data processing and information management system for the vehicle
rental business. The Wizard System is linked to all major travel networks on six
continents through telephone lines and satellite communications. Direct access
with other computerized reservations systems allows real-time processing for
travel agents and corporate travel departments. Among the principal features of
the Wizard System are:
o an advanced graphical interface reservation system;
o "Roving Rapid Return(R)," 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(R) 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(SM)," which enables the Avis System locations to
assign vehicles and complete rental agreements while customers are
being transported to the vehicle;
o "Flight Arrival Notification," a flight arrival notification system
that alerts the rental location when flights have arrived so that
vehicles can be assigned and paperwork prepared automatically;
o "Avis Link(R)," 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 a franchisee 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
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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.
The Wizard System processes incoming customer calls during which customers may
inquire about locations, rates and availability and place or modify
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.
Licensees and License Agreements. We have 62 independent licensees that operate
locations in the United States. Our largest licensee, Avis Group (owned by us as
of March 1, 2001), accounted for approximately 93% of all United States
licensees' rental revenues during 2000. Other than Avis Group, certain licensees
in the United States pay us a fee equal to 5.2% of their total time and mileage
charges, less all customer discounts, of which we are required to pay 38.5% for
corporate licensee-related programs, while seven licensees pay 8% of their gross
revenue. Licensees outside the United States normally pay higher fees. Other
than Avis Group, our United States licensees currently pay 58.5 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.
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 us annual royalties for Africa and certain
portions of Asia, excluding Australia, New Zealand and Papua New Guinea. The
Avis Europe license expires on November 30, 2036, unless earlier termination is
effected in accordance with the license terms. Avis Europe also entered into a
Preferred Alliance Agreement with us under which Avis Europe became a preferred
alliance provider for car rentals to RCI customers in Europe, Asia and Africa.
United States Vehicle Rental Operations. Effective with the acquisition of Avis
Group on March 1, 2001, we operated approximately 602 vehicle rental facilities
at airport, near-airport and downtown locations throughout the United States.
During 2000, approximately 82% of our Avis Group's U.S. rental car operations
revenue was generated at 209 airports in the United States with the balance
generated at our 393 non-airport locations. Our emphasis on airport traffic has
resulted in a particular strong rental revenue market position at the major U.S.
airports.
At most airports, we are one of five to seven vehicle rental concessionaires. In
general, concession fees for airport locations are based on a percentage of
total concessionable revenues (as determined by each airport location), subject
to minimum guaranteed amounts. Concessions are typically awarded by airport
authorities every three to five years based upon competitive bids. As a result
of airport authority requirements as to the size of the minimum guaranteed fee,
smaller vehicle rental companies generally are not located at airports. Our
concession arrangements with the various airport authorities generally include
minimum requirements for vehicle age, operating hours and employee conduct, and
provide for relocation in the event of future construction and abatement of fees
in the event of extended low passenger volume.
International Vehicle Rental Operations. Avis car rental operations operate in
Canada, Puerto Rico, the U.S. Virgin Islands, Argentina, Australia and New
Zealand. Its operations in Canada and Australia were the principal contributors
of revenue, accounting for 80% of international vehicle rental operations
revenue in 2000. Revenue from international vehicle rental operations in 2000
was approximately $257 million.
Vehicle Purchasing. We participate in a variety of vehicle purchase programs
with major domestic and foreign manufacturers, principally General Motors,
although actual purchases are made directly through franchised dealers. We
acquire vehicles primarily through vehicle repurchase programs whereby the
manufacturers repurchase the vehicles at prices based on either (i) a specified
percentage of original vehicle cost determined by the month the vehicle is
returned to the manufacturer, or (ii) the original capitalization cost less a
set daily depreciation amount (the "Repurchase Programs"). The average price for
automobiles we purchased in 2000 for the U.S. rental fleet was approximately
$19,400. For the 2000 model year, approximately 79% of new vehicle purchases
were GM vehicles, 8% Chrysler vehicles and 13% Toyota, Nissan, Hyundai, Ford,
Isuzu, Mitsubishi and Suzuki vehicles. In model year 2001, approximately 69% of
our fleet in the United States will consist of GM vehicles, approximately 9%
will be Chrysler vehicles and the balance will be provided by other
manufacturers. Manufacturers' vehicle purchase programs sometimes provide us
with sales incentives for the purchase of certain
24
models, and most of these programs allow us to serve as a drop-ship location for
vehicles, thus enabling us to receive a fee from the manufacturers for preparing
newly purchased vehicles for use. There can be no assurance that we will
continue to benefit from sales incentives in the future. For our international
operations, vehicles are acquired by way of negotiated arrangements with local
manufacturers and dealers using operating leases or Repurchase Programs.
Under the terms of our agreement with GM, which expires at the end of GM's model
year 2004, we are required to purchase at least 147,900 GM vehicles for model
year 2001 and maintain at least 51% GM vehicles in our U.S. fleet at all times.
The GM Repurchase Program is available for all vehicles purchased pursuant to
the agreement.
Vehicle Rental Disposition. Our current strategy is to hold rental vehicles for
not more than 12 months with the average fleet age being approximately six
months. Approximately 99% of the vehicles purchased for our domestic fleet under
the model year 2000, including all GM vehicles, were eligible for Repurchase
Programs. These programs impose certain return conditions, including those
related to mileage and repair condition over specified allowances. Less than 3%
of the Repurchase Program vehicles purchased by us and returned in 2000 were
ineligible for return. Upon return of a Repurchase Program vehicle, we receive a
price guaranteed at the time of purchase and are thus protected from a decrease
in prevailing used car prices in the wholesale market. We dispose of our used
vehicles that are not repurchased by the manufacturers to dealers in the United
States through informal arrangements or at auctions. The future percentage of
Repurchase Program vehicles in our fleet will depend on the availability of
Repurchase Programs, over which we have no control.
United States Vehicle Rental Marketing. In the United States, approximately 76%
of Avis Group's 2000 car rental operations transactions were generated by
travelers who used the Avis System under contracts between the Company and their
employers or organizations of which they were members. Our corporate sales
organization is the principal source of contracts with corporate accounts.
Unaffiliated business travelers are solicited by direct mail, telesales and
advertising campaigns. Our telesales department consists of a centralized staff
that handles small corporate accounts, travel agencies, meetings and
conventions, tour operators and associations. Working with a state-of-the-art
system in Tulsa, Oklahoma, the telesales operation produced revenue for the Avis
System that exceeded $370 million in 2000. We solicit contractual arrangements
with corporate accounts by emphasizing the advantages of the Wizard System. It
plays a significant part in securing business of this type because the Wizard
System enables us to offer a wide variety of rental rate combinations, special
reports and tracking techniques tailored to the particular needs of each
account, access to a worldwide rental network and assurance of adherence to
agreed-upon rates.
Our presence in the leisure market is substantially less than our presence in
the business market. Leisure rental activity is important in enabling us to
balance the use of our fleet. Typically, business renters use vehicles from
Monday through Thursday, while in most areas of the United States leisure
renters use vehicles primarily over weekends. Our concentration on serving
business travelers has led to excess capacity from Friday through Sunday of most
weeks. We intend to increase our leisure market penetration by capitalizing on
our strength at airports and by increased focus of our marketing efforts toward
leisure travelers. An important part of our leisure marketing strategy is to
develop and maintain contractual arrangements with associations that provide
member benefits to their constituents. In addition to developing arrangements
with traditional organizations, we have created innovative programs such as the
Affinity Link Program that cross references bankcard members with Avis worldwide
identification numbers and provides discounts to the cardholders for
participating bankcard programs. We also use coupons in dine-out books and
provide discounts to members of shopping and travel clubs whose members
generated approximately $57 million of leisure business revenue in 2000.
Preferred supplier agreements with select travel agencies and contracts with
tour operators have also succeeded in generating leisure business for us.
Travel agents can make Avis System reservations through all four major
U.S.-based global distribution systems and several international-based systems.
Users of the U.S.-based global distribution systems can obtain access through
these systems to our rental location, vehicle availability and applicable rate
structures. An automated link between these systems and the Wizard System gives
them the ability to reserve and confirm rentals directly through these systems.
We also maintain strong links to the travel industry. We have arrangements with
frequent traveler programs of airlines such as Delta(R), American(R),
Continental(R), United(R) and TWA(R), and of hotels including the Hilton
Corporation, Hyatt Corporation, Best Western, and Starwood Hotels and Resorts.
These arrangements provide various incentives to all program participants and
cooperative marketing opportunities for
25
Avis and the partner. We also have an arrangement with our lodging brands
whereby lodging customers who are making reservations by telephone will be
transferred to us if they desire to rent a vehicle.
Avis Online. Avis has a strong brand presence on the Internet through our Avis
Online web site, www.avis.com. A steadily increasing number of Avis vehicle
rental customers obtain rate, location and fleet information and then reserve
their Avis rentals directly on the Avis Online web site. In addition, customers
electing to use other Internet services such as Expedia(R), Travelocity(R) and
America Online(R) for their travel plans also have access to Avis reservations.
During 2000, reservations through Internet sources increased to 7.4% of total
reservations from 3.7% in the prior year.
In addition to being able to determine rates and place reservations, Avis Online
users can find information about us, about other Avis programs and services,
special offers, point to point driving directions and maps as well as airport
maps.
International Vehicle Rental. We utilize a multi-faceted approach to sales and
marketing throughout our global network. In our principal international rental
operations, we employ teams of trained and qualified account executives to
negotiate contracts with major corporate accounts and leisure and travel
industry partners. In addition, we utilize centralized telemarketing and direct
mail initiatives to broaden continuously our customer base. Sales efforts are
designed to secure customer commitment and support customer requirements for
both domestic and international car rental needs.
International sales and marketing activities promote our reputation for
delivering a high quality of service, contract rates, competitive pricing and
customer benefits from special services such as Preferred Service, Roving Rapid
Return and other benefits of the Wizard System.
Our international operations maintain close relationships with the travel
industry including participation in several airline frequent flyer programs,
such as those operated by Air Canada(R), Ansett Australia Airlines(R) and
Varig(R) Brazilian Airlines, as well as participation in Avis Europe programs
with British Airways(R), Lufthansa(R) and other carriers.
Trademarks and Intellectual Property. The service mark "Avis," related marks
incorporating the word "Avis", and related logos are material to our business.
Our subsidiaries, joint ventures and licensees, actively use these marks. All of
the material marks used in the Avis business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office as well as major countries worldwide where Avis franchises are
in operation. We own the marks used in the Avis business.
Competition. The vehicle rental industry is characterized by intense price and
service competition. In any given location, we and our 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 Avis System.
Our principal competitors for commercial accounts in the United States are The
Hertz Corporation and National Car Rental System, Inc. Principal competitors for
unaffiliated business and leisure travelers in the United States are Budget Rent
A Car Corporation, Hertz, National and Alamo Rent-A-Car Inc. In addition, we
compete with a variety of smaller vehicle rental companies throughout the
country.
Competition in the U.S. vehicle rental operations business is based primarily
upon price, reliability, ease of rental and return and other elements of
customer service. In addition, competition is influenced strongly by advertising
and marketing. In part, because of the Wizard System, we have been particularly
successful in competing for commercial accounts. There have been many occasions
during the history of the vehicle rental industry in which all of the major
vehicle rental companies have been adversely affected by severe industry-wide
rental rate cutting, and we have, on such occasions, lowered our rates in
response to such rate cutting. However, during the past two years, industry-wide
rates have increased, reflecting, in part, both increased costs of owning and
maintaining vehicles and the need to generate returns on invested capital.
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
26
adverse effect on Avis' annual performance and affect our annual financial
performance. The fourth quarter is generally the weakest financial quarter for
the Avis System because there is limited leisure travel and a greater potential
for adverse weather conditions at such time. This general seasonal variation in
demand, along with more localized changes in demand at each of our car rental
operations, causes us to vary our fleet size over the course of the year. In
2000, our average monthly rental fleet ranged from a low of 200,441 vehicles in
January to a high of 253,503 vehicles in July. Rental utilization, which is
based on the number of hours vehicles are rented compared to the total number of
hours vehicles are available for rental, ranged from 65.3% in December to 80.5%
in August and averaged 74.5% for all of 2000.
Fleet Management Services Business
In October 1996, we acquired the fleet management business, which we
subsequently sold to Avis Group in June 1999. The fleet management business
represented 15% and 26% of our revenue for 1999 and 1998, respectively. On March
1, 2001, through the acquisition of Avis Group, we re-acquired the fleet
management business as a component of PHH Vehicle Management Services LLC (d/b/a
PHH Arval), a leader in the fleet management services business, which offers
fleet leasing, fleet management, other management services to corporate clients
and government agencies, and Wright Express Corporation, the leading fuel card
service provider in the United States, which offers fuel and vehicle expense
management programs to corporations and government agencies for the effective
management and control of vehicle travel expenses. These services include
vehicle leasing advisory services and fleet management services for a broad
range of vehicle fleets. Advisory services include fleet policy analysis and
recommendations, benchmarking, and vehicle recommendations and specifications.
In addition, we provide managerial services which include ordering and
purchasing vehicles, arranging for their delivery through dealerships located
throughout the United States and Canada, administration of the title and
registration process, as well as tax and insurance requirements, pursuing
warranty claims with vehicle manufacturers and remarketing used vehicles. We
also offer various leasing plans for our vehicle leasing programs, financed
primarily through the issuance of commercial paper and medium-term notes and
through unsecured borrowings under revolving credit agreements, securitization
financing arrangements and bank lines of credit.
Through PHH Arval and Wright Express in the United States, we also offer fuel
and expense management programs to corporation and government agencies for the
effective management and control of automotive business travel expenses. By
utilizing our service cards issued under the fuel and expense management
programs, a client's representatives are able to purchase various products and
services such as gasoline, tires, batteries, glass and maintenance services at
numerous outlets.
Products. Our fleet management services are divided into two principal products:
(i) asset based products; and (ii) fee based products.
Asset based products represents the services our clients require to lease a
vehicle which includes vehicle acquisition, vehicle remarketing, financing, and
fleet management consulting. We lease in excess of 287,000 units through both
open end lease structures and closed end structures. Open-end leases are the
prevalent structure in North America representing 96% of the total vehicles
financed in North America. The open-end leases can be structured on either a
fixed rate or floating rate basis (where the interest component of the lease
payment changes month to month based upon an index) depending upon client
preference. The open-end leases are typically structured with a 12-month minimum
lease term, with month-to-month renewals thereafter. The typical unit remains
under lease for approximately 34 months. A client receives a full range of
services in exchange for a monthly rental payment which includes a management
fee. The residual risk on the value of the vehicle at the end of the lease term
remains with the lessee under an open-end lease, except for a small amount which
is retained by the lessor.
Closed-end leases are structured with a fixed term with the lessor retaining the
vehicle residual risk. The most prevalent lease terms are 24 months, 36 months,
and 48 months. We utilize independent third-party valuations and internal
projections to set the residuals utilized for these leases.
The fee based products are designed to effectively manage costs and enhance
driver productivity. The three main fee based products are fuel services,
maintenance services and accident management. Fuel services represents the
utilization of our proprietary cards to access fuel through a network of
franchised and independent fuel stations. The cards operate as a universal card
with centralized billing designed to measure and manage costs. In the United
States, Wright Express is the leading fleet fuel card supplier with over 125,000
fuel facilities in its network and in excess of 3.2 million cards issued. Wright
Express distributes its fuel cards and related offerings through three primary
channels: (i) the Wright Express(R)-branded universal card, which is issued
directly to fleets
27
by Wright Express; (ii) the private label card, under which Wright Express
provides private label fuel cards and related services to commercial fleet
customers of major petroleum companies; and (iii) co-branded marketing, under
which Wright Express fuel cards are co-branded and issued in conjunction with
products and services of partners such as commercial vehicle leasing companies.
We offer customer vehicle maintenance charge cards that are used to facilitate
repairs and maintenance payments. The vehicle maintenance cards provide
customers with benefits such as (i) negotiated discounts off full retail prices
through our convenient supplier network, (ii) access to our in-house team of
certified maintenance experts that monitor each card transaction for policy
compliance, reasonability, and cost effectiveness, and (iii) inclusion of
vehicle maintenance card transactions in a consolidated information and billing
database that helps evaluate overall fleet performance and costs. We maintain an
extensive network of service providers in the United States and Canada to ensure
ease of use by the client's drivers.
We also provide our clients with comprehensive accident management services such
as (i) immediate assistance after receiving the initial accident report from the
driver (e.g., facilitating emergency towing services and car rental assistance,
etc.), (ii) organizing the entire vehicle appraisal and repair process through a
network of preferred repair and body shops, and (iii) coordinating and
negotiating potential accident claims. Customers receive significant benefits
from our accident management services such as (a) convenient coordinated 24-hour
assistance from our call center, (b) access to our leverage with the repair and
body shops included in our preferred supplier network (the largest in the
industry), which typically provides customers with extremely favorable repair
terms and (c) expertise of our damage specialists, who ensure that vehicle
appraisals and repairs are appropriate, cost-efficient, and in accordance with
each customer's specific repair policy.
Competition. The principal factors for competition in vehicle management
services are service quality and price. We are competitively positioned as a
fully integrated provider of fleet management services with a broad range of
product offerings. We rank second in the United States in the number of vehicles
under management and first in the number of proprietary fuel and maintenance
cards for fleet use in circulation. There are four other major providers of
fleet management services in the United States, hundreds of local and regional
competitors, and numerous niche competitors who focus on only one or two
products and do not offer the fully integrated range of products provided by us.
In the United States, it is estimated that only 45% of fleets are leased by
third-party providers. The unpenetrated market and the continued focus by
corporations on cost efficiency and outsourcing will provide the growth platform
in the future.
Seasonality. The fleet management services businesses are generally not
seasonal.
Parking Facility Business
General. Our parking facility business represented 7%, 5% and 3% of our revenue
for 2000, 1999 and 1998, respectively. Our National Car Parks subsidiary is the
largest private parking facility operator in the United Kingdom. NCP operates
off-street commercial parking facilities and on-street parking in the United
Kingdom, with over 60 years' experience of owning and/or managing a portfolio of
nearly 500 car parks, mostly located in city and town centers and at airports.
NCP has approximately 2,500 full and part-time employees. NCP provides a
high-quality, professional service, developing a total solution for its
customers and for organizations such as town and city administrations that wish
to develop modern and professionally managed parking and traffic management
facilities, tailored towards local business.
NCP owns and operates parking facilities in over 100 city and town centers
throughout the United Kingdom, most of which are regularly patrolled and many of
which have closed-circuit television surveillance. NCP is the only parking
facilities manager that can provide the motorist with such a comprehensive
geographical coverage and such levels of investment in secured facilities. In
addition, NCP is a leader in on-airport parking facilities at United Kingdom
airports, with over 31,000 car parking spaces in facilities close to passenger
terminals at ten airports across the United Kingdom. Booking facilities are
available through NCP's telesales service for convenient car parking reservation
at these airports, with free courtesy coach transfers to and from airport
terminals at most locations.
28
Regulations. There is increasing government regulation over all aspects of
transport within the United Kingdom. Therefore, an objective of NCP is to work
together with its customers, local and national government and other service
organizations in order to maintain the mutually beneficial partnership between
motorists and city center environment.
Trademarks and Intellectual Property. The service mark NCP(R) and related logos
are registered (or have applications pending for registration) in the UK Patent
Office and throughout the European Community.
Competition. NCP's main competition is from non-commercial, local government
authorities who usually choose to operate their own car parking facilities in
their respective cities and towns.
Seasonality. NCP's business has a distinct seasonal trend with revenue from
parking in city and town centers being closely associated with levels of retail
business. Therefore, peaks in revenue are experienced particularly around the
Christmas period. In respect of the airport parking side of the business,
seasonal peaks are experienced in line with summer vacations.
FINANCIAL SERVICES SEGMENT
Our Financial Services segment consists of our insurance/wholesale businesses,
our tax preparation business and our individual membership business (see "Recent
Developments - Outsourcing of Individual Membership Business" above). The
Financial Services segment represented 30%, 25% and 22% of our revenue for 2000,
1999 and 1998, respectively.
Insurance/Wholesale Business
General. Our insurance/wholesale business represented 13%, 9% and 8% of our
revenue for 2000, 1999 and 1998, respectively. We have nearly 38 million
customers and market and administer insurance products, primarily accidental
death and dismemberment insurance. We also provide products and services such as
checking account enhancement packages, financial products and discount programs
to customers of banks, credit card issuers, credit lenders and mortgage
companies. The direct marketing activities are conducted principally through our
wholly-owned subsidiaries, FISI, BCI, LTPC and Cims.
Enhancement Package Service. We sell enhancement packages for financial
institution consumer and business checking and deposit account holders primarily
through our FISI subsidiary. FISI's financial institution clients select a
customized package of our products and services and then usually add their own
services (such as unlimited check writing privileges, personalized checks,
cashiers' or travelers' checks without issue charge, or discounts on safe
deposit box charges or installment loan interest rates). With our marketing and
promotional assistance, the financial institution then offers the complete
package of enhancements to its checking account holders as a special program for
a monthly fee. Most of these financial institutions choose a standard
enhancement package, which generally includes $10,000 of common carrier
insurance and travel discounts. Others may include our shopping and credit card
registration services, a travel newsletter or pharmacy, eyewear or entertainment
discounts as enhancements. The common carrier coverage is underwritten under
group insurance policies with two referral underwriters. We continuously seek to
develop new enhancement features, which may be added to any package at an
additional cost to the financial institution. We generally charge a financial
institution client an initial fee to implement this program and monthly fees
thereafter based on the number of customer accounts participating in that
financial institution's program. Our enhancement packages are designed to enable
a financial institution to generate additional fee income as the institution
should be able to charge participating accounts more than the combined costs of
the services it provides and the payments it makes to us.
AD&D Insurance. Through our FISI and BCI subsidiaries, we serve as an agent and
third-party administrator for marketing accidental death and dismemberment
insurance throughout the country to the customers of financial institutions.
These products are primarily marketed through direct mail solicitations, which
generally offer $1,000 of accidental death and dismemberment insurance at no
cost to the customers and the opportunity to choose additional coverage of up to
$250,000. The annual premium generally ranges from $10 to $250. BCI also acts as
an administrator for term life and hospital accident insurance. FISI's and BCI's
insurance products and other services are offered to customers of banks, credit
unions, credit card issuers and mortgage companies.
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Long Term Care Insurance. Through our LTPC subsidiary, we are one of the largest
independent marketers of long term care insurance products in the United States
representing five national underwriters. LTPC's sales efforts are supported by
over 300 captive agents and 1,500 brokers across the United States.
International Operations. Our Cims subsidiary has developed the international
distribution of loyalty package services and insurance products. As of December
31, 2000, Cims has expanded its international membership and customer base to
approximately 13.7 million individuals. This base is driven by wholesale
membership through over 50 financial institutions throughout Europe, South
Africa and Asia, as well as through other distribution channels. We also have
exclusive licensing agreements covering the use of our merchandising systems in
Australia, Japan and certain other Asian countries under which licensees pay
initial license fees and agree to pay royalties to us based on membership fees,
access fees and merchandise service fees paid to them. Royalties from these
licenses were less than 1% of our revenues and profits within our
insurance/wholesale business for 2000, 1999 and 1998, respectively.
The economic impact of currency exchange rate movements on our business is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because we operate in a mix of services and numerous
countries, management believes currency exposures are fairly well diversified.
See Item 7A: "Quantitative and Qualitative Disclosures About Market Risk".
Distribution Channels. We market our products through a variety of distribution
channels. The consumer is ultimately reached in the following ways: (i) at
financial institutions or other associations through direct marketing; (ii) at
financial institutions or other associations through a direct sales force,
participating merchants or general advertising; and (iii) through companies and
various other entities.
Growth. Primary growth drivers include expanding our customer base to include
larger financial institutions and expanding the array of products and services
sold through the direct marketing channels to existing clients. We offer a
service whereby we develop consumer and business-to-business portals for
financial institutions to expand direct marketing initiatives that will attract
and retain additional customers and provide new sources of revenue. Other
potential target market sectors include the emerging affluent and students. Cims
is expanding its customer base beyond financial institutions to utilities,
insurance, and telecom companies.
Competition. Our checking account enhancement services compete with similar
services offered by other companies, including insurance companies and other
third-party marketers. In larger financial institutions, we may also compete
with a financial institution's own marketing staff. Competition for the offering
of our insurance products through financial institutions is growing and intense.
Our competitors include other third-party marketers and large national insurance
companies with established reputations that offer products with rates, benefits
and compensation similar to ours. The long term care insurance industry is
highly competitive. Our competition primarily includes large national insurance
companies, such as General Electric Financial Assurance Company.
Seasonality
Our direct marketing businesses are generally not seasonal.
Tax Preparation Business
General. Our tax preparation business represented 1%, 1% and 1% of our revenue
for 2000, 1999 and 1998, respectively. Our Jackson Hewitt Inc. subsidiary is the
second largest tax preparation service system in the United States. The Jackson
Hewitt(R) franchise system is comprised of a 48-state network (and the District
of Columbia) with approximately 3,300 offices operating under the trade name and
service mark "Jackson Hewitt Tax Service(R)." Office locations range from
stand-alone store front offices to offices within Wal-Mart(R) and Kmart(R)
stores. Through the use of proprietary interactive tax preparation software, we
are engaged in the preparation and electronic filing of federal and state
individual income tax returns. During 2000, Jackson Hewitt prepared over 1.8
million tax returns, which represented an increase of 33% from the approximately
1.38 million tax returns prepared during 1999. To complement our tax preparation
services, we also offer accelerated check refunds and refund anticipation loans
to our tax preparation customers through a designated bank. We believe that the
application of our focused management strategies and techniques for franchise
systems to the Jackson Hewitt
30
network can increase revenue produced by the Jackson Hewitt franchise system
while also increasing the quality and quantity of services provided to
franchisees.
Tax preparation revenues are primarily comprised of tax return preparation fees
and incremental fees through customer tax refund payment options. During 2000,
approximately 60%, or 76 million, of the 128 million tax returns filed were
completed by paid preparers. H&R Block's recent shift to an owner/operator
business model has resulted in Jackson Hewitt becoming the leading franchisor of
tax preparation services.
Growth. We believe revenue and market share growth in the tax preparation
industry will come primarily from selling new franchises, the application of
proven management techniques for existing franchise systems, and new product and
service offerings. During 1999, Jackson Hewitt, in conjunction with two of its
largest franchisees, created an independent joint venture, Tax Services of
America, Inc. ("TSA"), to maximize Jackson Hewitt's ability to add independent
tax preparation firms to its franchise system. Cendant initially invested $5
million in TSA. Jackson Hewitt initially invested approximately 80 company-owned
stores and currently has an approximately 80% interest in the form of
convertible preferred stock. TSA currently has over 350 offices and is expected
to prepare over 300,000 tax returns during the 2001 filing season. TSA's primary
objective is to grow by acquiring independent tax preparation firms in areas
where TSA is licensed to operate and convert them to the Jackson Hewitt system.
Franchise Agreements. Our tax preparation services franchise agreements grant
the right to utilize the Jackson Hewitt brand name to independent owners and
operators under long-term franchise agreements. An annual average of 1% of our
existing franchise agreements are scheduled to expire from January 1, 2001
through December 31, 2006, with no more than 2% (in 2003) scheduled to expire in
any one of those years.
The current standard agreements generally are for ten-year terms and generally
require, among other obligations, franchisees to pay a minimum initial fee, as
well as continuing franchise fees comprised of royalty fees and marketing fees.
Our typical franchise agreement is terminable by us upon the franchisee's
failure to maintain certain performance standards, to pay franchise fees or
other charges or to meet other specified obligations. The franchise agreements
are terminable by the franchisee under certain limited circumstances.
Trademarks and Intellectual Property. The trademark "Jackson Hewitt" and related
logo are material to Jackson Hewitt's business. We, through our franchisees,
actively use these marks. The trademark and logo are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office
Competition. Tax preparation businesses are highly competitive. There are a
substantial number of tax preparation firms and accounting firms that offer tax
preparation services. Commercial tax preparers are highly competitive with
regard to price, service and reputation for quality. Our largest competitor, H&R
Block, recently shifted to an owner/operator business model, which resulted in
our becoming the leading franchisor of tax preparation services.
Seasonality. Since most of our franchisees' customers file their tax returns
during the period from January through April of each year, substantially all
franchise royalties are received during the first and second quarters of each
year. As a result, Jackson Hewitt operates at a loss for the remainder of the
year. Historically, such losses primarily reflect payroll of year-round
personnel, the update of tax software and other costs and expenses relating to
preparation for the following tax season.
Individual Membership Business
General. Our individual membership business represented 16%, 15% and 13% of our
revenue for 2000, 1999 and 1998 respectively. We have approximately 24.3 million
memberships and we provide customers with access to a variety of discounted
products and services in such areas as retail shopping, travel, personal finance
and auto and home improvement. We affiliate with business partners such as
leading financial institutions, retailers, and oil companies to offer membership
as an enhancement to their credit card, charge card or other customers.
Participating institutions generally receive commissions on initial and renewal
memberships, based on a percentage of the net membership fees. Individual
membership programs offer consumers discounts on over 31,500 brand categories by
providing shop at home convenience in areas such as retail shopping, travel,
automotive, dining and home improvement.
31
On July 2, 2001, we entered into outsourcing and licensing agreements with
Trilegiant Corporation. We will retain the economic benefits from existing
members of our individual membership business and Trilegiant will provide
fulfillment services to these members for a servicing fee. Beginning in the
third quarter of 2002, we will receive a license fee of 5% of Trilegiant
revenues, increasing to 16% over ten years. The outsourcing agreement has a
40-year term. See "Recent Developments - Outsourcing of Individual Membership
Business" above.
Services. A brief description of the different types of membership programs is
as follows:
Shoppers Advantage(R) ("SA") is a discount shopping program that provides
product price information and home shopping services to its members. SA's
merchandise database contains information on over 80,000 brand name products,
including a written description of the product, the manufacturer's suggested
retail price, the vendor's price, features and availability. SA acts as a
conduit between its members and the vendors; accordingly, it does not maintain
an inventory of products.
Travelers Advantage(R) is a discount travel service program whereby our Cendant
Travel, Inc. subsidiary (one of the ten largest full service travel agencies in
the U.S.), obtains information on schedules and rates for major scheduled
airlines, hotel chains and car rental agencies from the American Airlines
Sabre(R) Reservation System. In addition, the Travelers Advantage division
maintains its own database containing information on tours, travel packages and
short notice travel arrangements. Members book their reservations through
Cendant Travel, which earn commissions (ranging from 5%-25%) on all travel sales
from the providers of the travel services.
The AutoVantage(R) Service offers members comprehensive new car summaries and
preferred prices on new domestic and foreign cars purchased through an
independent dealer network (which includes over 1,800 dealer franchises) and
discounts on maintenance, tires and parts at more than 25,000 locations.
AutoVantage Gold(R) is a premium version of the AutoVantage(R) Service,
providing, among other things, road and tow services to its members.
Credit Card Guardian(R) and "Hot-Line" services enable consumers, among other
things, to register their credit and debit cards with us so that the account
numbers of these cards may be kept securely in one place.
The PrivacyGuard(R) and Credentials(R) services provide members with a
comprehensive and understandable means of monitoring key personal information.
The service offers a member access to information in certain key areas
including: credit history and monitoring, driving records maintained by state
motor vehicle authorities and medical files maintained by third parties.
The Buyers Advantage(R) services extend 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.
The CompleteHome(R) service is designed to save members time and money in
maintaining and improving their homes. Members can order do-it-yourself "How-To
Guides" or call the service for a tradesperson referral.
The Family FunSaver Club(R) provides its members with a variety of benefits,
including the opportunity to inquire about and purchase family travel services
and family related products, the opportunity to buy new cars at a discount, a
discounted family dining program and a Family Values Guide offering coupon
savings on family related products such as movie tickets, casual restaurants and
theme parks.
The HealthSaver(sm) membership provides discounts ranging from 10% to 50% off
retail prices on prescription drugs, eyewear, eye care, dental care, selected
health-related services and fitness equipment, including sporting goods.
Trademarks and Other Intellectual Property. The individual membership business
trademarks and service marks listed above and related logos are material to the
individual membership business. We actively use these marks. Individual
membership business trademarks and logos are registered (or have applications
pending for registration) with the United States Patent and Trademark Office,
unless otherwise indicated above.
Competition. The membership services industry is highly competitive. Our
competitors include membership services companies, as well as large retailers,
travel agencies, insurance companies and financial service institutions, some of
which have financial resources, product availability, technological capabilities
or customer bases that may be greater than ours. To date, we have been able to
compete effectively with such competitors. However, there can be no assurance
that we will continue to be able to do so.
Seasonality. Our individual membership business is generally not seasonal.
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DIVESTED BUSINESSES
Move.com and Ancillary Businesses. On February 16, 2001, we completed the sale
of move.com along with certain ancillary businesses, to Homestore.com.
Homestore.com acquired the businesses in an all-stock transaction totaling
approximately 26.3 million shares of Homestore common stock valued at $718
million As a result of the transaction, we will have a designee on the
Homestore.com Board of Directors. See "Recent Developments--Sale of Move.com"
above.
Through move.com, we operated a network of Web sites, which offered a wide
selection of quality relocation, real estate and home-related products and
services. We sought to provide a one-source, "friend-in-need" solution before,
during and after the move. We also provided a multi-channel distribution
platform for our business partners, who were trying to reach a highly targeted
and valued group of consumers at the most opportune times. The move.com network
generated the following types of revenue from its business partners: listing
subscription fees, advertising and sponsorship fees, e-commerce transaction fees
and Web site management fees. During 2000, the move.com network represented an
immaterial part of our business operations.
The move.com network was comprised of the following Web sites that offered
relocation, real estate and home-related content and services: (i) move.comSM,
the Internet portal and flagship site, combining home and rental housing
listings, mortgage services and numerous moving and home-related services; (ii)
Rent.net(R), a leading online rental and relocation guide and advertising source
for the apartment industry, representing properties and relocation services in
more than 3,000 cities across North America; (iii) Seniorhousing.net(R), which
provides the move.com network with a directory of over 750 retirement
communities, assisted living facilities and nursing homes containing detailed
property descriptions, photographs, floor plans, 360- virtual tours and direct
communication links to onsite managers; (iv) Corporatehousing.net(SM), the
leading online directory and advertising source for the temporary/corporate
housing industry, with over 400 local and national listing providers across the
United States and Canada; (v) Selfstorage.net(R), a leading online directory and
advertising source for the self storage industry, with over 3,000 storage
facilities across the United States and Canada and (vi) Welcomewagon.com, the
official Web site of Welcome Wagon/Getko, which provides the move.com network
with local community information.
Through Welcome Wagon, we distributed complimentary welcoming packages which
provide new homeowners and other consumers throughout the United States and
Canada with discounts for local merchants. These activities were conducted
through our Welcome Wagon International Inc. and Getko Group, Inc. subsidiaries.
REGULATION
Marketing Regulation. Primarily through our insurance/wholesale and our
individual membership business, we market our products and services via a number
of distribution channels, including direct mail, telemarketing and online. These
channels are regulated on the state and federal levels and we believe that these
activities will increasingly be subject to such regulation. Such regulation may
limit our ability to solicit new members or to offer one or more products or
services to existing members. In addition to direct marketing, our
insurance/wholesale and individual membership products and services are subject
to various state and local regulations including, as applicable, those of state
insurance departments. While we have not been adversely affected by existing
regulations, we cannot predict the effect of any future federal, state or local
legislation or regulation.
In November 1999, the Federal Gramm-Leach-Bliley Act became law. This Act and
its implementing regulations modernized the regulatory structure affecting the
delivery of financial services to consumers and provided for new requirements
and limitations relating to direct marketing by financial institutions to their
customers. Such additional requirements and limitations became effective in
November 2000, but mandatory compliance is not required until July 1, 2001. We
have taken various steps to address the requirements of the Act; however, since
certain specific aspects of the implementing regulations related to this Act
have not yet been clarified, it remains unclear what effect, if any, those
regulations might have on our businesses.
We are also aware of, and are actively monitoring the status of, certain
proposed privacy-related state legislation that might be enacted in the future;
it is unclear at this point what effect, if any, such state legislation might
have on our businesses.
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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. Although no assurance can be given, proposed changes in
the FTC's franchise rule should have no adverse impact on our franchised
businesses. A number of states require registration or disclosure in connection
with franchise offers and sales. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of the
franchisor to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While our franchising operations have
not been materially adversely affected by such existing regulation, we cannot
predict the effect of any future federal or state legislation or regulation.
Real Estate Regulation. The federal Real Estate Settlement Procedures Act
(RESPA) and state real estate brokerage laws restrict payments which real estate
and mortgage brokers and other parties may receive or pay in connection with the
sales of residences and referral of settlement services (e.g., mortgages,
homeowners insurance, title insurance). Such laws may to some extent restrict
preferred alliance arrangements involving our real estate brokerage franchisees,
mortgage business and relocation business. Our mortgage 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.
Currently, there are local efforts in certain states which could limit referral
fees to our relocation business.
It is a common practice for online mortgage and real estate related companies to
enter into advertising, marketing and distribution arrangements with other
Internet companies and Web sites, whereby the mortgage and real estate related
companies pay fees for advertising, marketing and distribution services and
other goods and facilities. The applicability of RESPA's referral fee
prohibitions to the compensation provisions of these arrangements is unclear and
the Department of Housing and Urban Development has provided no guidance to date
on the subject.
Timeshare Exchange Regulation. Our timeshare exchange business is subject to
foreign, federal, state and local laws and regulations including those relating
to taxes, consumer credit, environmental protection and labor matters. In
addition, we are subject to state statutes in those states regulating timeshare
exchange services, and must prepare and file annually certain disclosure guides
with regulators in states where required. We are not subject to those state
statutes governing the development of timeshare condominium units and the sale
of timeshare interests, but such statutes directly affect the members and
resorts that participate in the RCI exchange programs. Therefore, the statutes
indirectly impact our timeshare exchange business.
Internet Regulation. Although our business units' operations on the Internet are
not currently regulated by any government agency in the United States beyond
regulations discussed above and applicable to businesses generally, it is likely
that a number of laws and regulations may be adopted governing the Internet. In
addition, existing laws may be interpreted to apply to the Internet in ways not
currently applied. Regulatory and legal requirements are subject to change and
may become more restrictive, making our business units' compliance more
difficult or expensive or otherwise restricting their ability to conduct their
businesses as they are now conducted.
Vehicle Rental and Fleet Leasing Regulation. We are subject to federal, state
and local laws and regulations including those relating to taxing and licensing
of vehicles, franchising, consumer credit, environmental protection, retail
vehicle sales and labor matters. The principal environmental regulatory
requirements applicable to our vehicle and fleet management operations relate to
the ownership or use of tanks for the storage of petroleum products, such as
gasoline, diesel fuel and waste oils; the treatment or discharge of waste
waters; and the generation, storage, transportation and off-site treatment or
disposal of solid or liquid wastes. We operate 287 locations at which petroleum
products are stored in underground or aboveground tanks. We have instituted an
environmental compliance program designed to ensure that these tanks are in
compliance with applicable technical and operational requirements, including the
replacement and upgrade of underground tanks to comply with the December 1998
EPA upgrade mandate and periodic testing and leak monitoring of underground
storage tanks. We believe that the locations where we currently operate are in
compliance, in all material respects, with such regulatory requirements.
We may also be subject to requirements related to the remediation of, or the
liability for remediation of, substances that have been released to the
environment at properties owned or operated by us or at properties to which we
send substances for treatment or disposal. Such remediation requirements may be
imposed without regard to fault and liability for environmental remediation can
be substantial.
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We may be eligible for reimbursement or payment of remediation costs associated
with future releases from its regulated underground storage tanks have
established funds to assist in the payment of remediation costs for releases
from certain registered underground tanks. Subject to certain deductibles, the
availability of funds, compliance status of the tanks and the nature of the
release, these tank funds may be available to us for use in remediating future
releases from its tank systems.
A traditional revenue source for the vehicle rental industry has been the sale
of loss damage waivers, by which rental companies agree to relieve a customer
from financial responsibility arising from vehicle damage incurred during the
rental period. Approximately 3.4% of our vehicle operations revenue during 2000
was generated by the sale of loss damage waivers. The U.S. House of
Representatives has from time to time considered legislation that would regulate
the conditions under which loss damage waivers may be sold by vehicle rental
companies. Approximately 40 states have considered legislation affecting the
loss damage waivers. To date, 24 states have enacted legislation which requires
disclosure to each customer at the time of rental that damage to the rented
vehicle may be covered by the customer's personal automobile insurance and that
loss damage waivers may not be necessary. In addition, in the late 1980's, New
York enacted legislation which eliminated our right to offer loss damage waivers
for sale and limited potential customer liability to $100. Moreover, California
and Nevada have capped rates that may be charged for loss damage waivers to
$9.00 and $10.00 per day, respectively.
We are also subject to regulation under the insurance statutes, including
insurance holding company statutes, of the jurisdictions in which its insurance
company subsidiaries are domiciled. These regulations vary from state to state,
but generally require insurance holding companies and insurers that are
subsidiaries of insurance holding companies to register and file certain reports
including information concerning their capital structure, ownership, financial
condition and general business operations with the state regulatory authority,
and require prior regulatory agency approval of changes in control of an insurer
and intercorporate transfers of assets within the holding company structure.
The payment of dividends to us by our insurance company subsidiaries,
Pathfinder, Global Excess and Constellation, is restricted by government
regulations in Colorado, Bermuda and Barbados affecting insurance companies
domiciled in those jurisdictions.
EMPLOYEES
As of December 31, 2000, we employed approximately 28,000 people fulltime.
Management considers our employee relations to be satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are located in leased space at 9 West 57th
Street, New York, NY 10019 with a lease term expiring in 2013. Many of our
general corporate functions are conducted at a building owned by us and located
at 6 Sylvan Way, Parsippany, New Jersey 07054 and at offices leased by us and
located at 1 Sylvan Way and 10 Sylvan Way, Parsippany, New Jersey 07054 and
Landmark House, Hammersmith Bridge Road, London, England W69EJ. We have recently
entered into a 12-year lease for 377,000 square feet at One Campus Drive,
Parsippany, NJ 07054, where we plan to consolidate many of our corporate
functions.
Our lodging franchise business leases space for its reservations centers and
data warehouse in Winner and Aberdeen, South Dakota; Phoenix, Arizona; Knoxville
and Elizabethton, Tennessee; St. John, New Brunswick, Canada pursuant to leases
that expire in 2000, 2004, 2007, 2004, 2002, and 2009, respectively. In
addition, our lodging franchise business also has approximately three leased
offices spaces located within the United States.
Our timeshare business has two properties which we own; a 200,000 square foot
facility in Carmel, Indiana, which serves as an administrative office and a
property located in Kettering, UK which is RCI's European office. Our timeshare
business also has approximately 11 leased office spaces located within the
United States and approximately 37 additional leased spaces in various countries
outside the United States.
Our real estate franchise business leases seven properties in various locations
that function as sales offices, one of which is shared with our lodging
franchise business.
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Our relocation business has its main corporate operations located in three
leased buildings in Danbury, Connecticut, with lease terms expiring in 2004,
2005 and 2008. There are also five regional offices located in Mission Viejo and
Walnut Creek, California; Oak Brook and Chicago, Illinois; and Irving, Texas,
which provide operation support services. We own the office in Mission Viejo and
the others we operate pursuant to leases that expire in 2004, 2003, 2004 and
2003, respectively. International offices are located in: Hammersmith and
Swindon, United Kingdom; Melbourne, Australia; and Singapore pursuant to leases
that expire in 2012, 2013, 2005 and 2002, respectively.
Our mortgage business has centralized its operations to one main area occupying
various leased offices in Mt. Laurel, New Jersey for a total of approximately
940,000 square feet. The lease terms expire over the next four years. Regional
sales offices are located in Englewood, Colorado and Santa Monica, California,
pursuant to leases that expire in 2002 and 2005, respectively.
Our Vehicle Services segment leases space in Garden City, New York and
Parsippany, New Jersey. The Garden City location is the main operation and
administrative centers for WizCom and Avis.
Our Vehicle Services segment owns a 166,000 square foot facility in Virginia
Beach, Virginia, which serves as a satellite administrative and reservations
facility for WizCom and Avis rental car operations. Our Vehicle Services segment
also leases space for its car reservation centers in Tulsa and Drumright,
Oklahoma; St. John and Fredericton, New Brunswick, Canada pursuant to leases
that expire in 2001, 2000, 2009 and 2009, respectively. In addition, there are
approximately 19 leased office locations in the United States. Internationally,
we lease office space in the United Kingdom and own one building in Birmingham,
UK to support National Car Parks.
We lease or have vehicle rental concessions relating to space at 591 locations
in the United States and 202 locations outside the United States utilized in
connection with our vehicle rental operation. Of those locations, 212 in the
United States and 74 outside the United States are at airports. Typically, an
airport receives a percentage of vehicle rental revenues, with a guaranteed
minimum. Because there is a limited to the number of vehicle rental locations in
an airport, vehicle rental companies frequently bid for the available locations,
usually on the basis of the size of the guaranteed minimums. We and other
vehicle lease firms also lease parking space at or near airports and at their
other vehicle rental locations.
PHH Arval leases office space and marketing centers in eight locations in the
United States and Canada, with approximately 280,000 square feet in the
aggregate. In addition, Wright Express leases approximately 133,000 square feet
of office space in two domestic locations.
PHH Arval maintains a regional/processing office in Hunt Valley, Maryland.
Our insurance/wholesale business leases domestic space in Brentwood and
Franklin, Tennessee; San Carlos, California; and Richmond, Virginia with lease
terms ending in 2002, 2003, 2001 and 2007, respectively. In addition, there are
ten leased locations internationally that function as sales and administrative
offices for Cims with the main office located in Portsmouth, UK.
Our leased space in Parsippany, New Jersey also supports our tax preparation
business.
We believe that such properties are sufficient to meet our present needs and we
do not anticipate any difficulty in securing additional space, as needed, on
acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
A. CLASS ACTION AND OTHER LITIGATION AND GOVERNMENT INVESTIGATIONS
Since the April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Annual Report on Form 10-K/A, approximately 70 lawsuits claiming to be class
actions, three lawsuits claiming to be brought derivatively on our behalf and
several other lawsuits and arbitration proceedings have been filed in various
courts against us and other defendants.
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In re: Cendant Corporation Litigation, Master File No. 98-1664 (WHW) (D.N.J.)
(the "Securities Action"), is a consolidated action consisting of over sixty
constituent class action lawsuits that were originally filed in the United
States District Courts for the District of New Jersey, the District of
Connecticut, and the Eastern District of Pennsylvania. The Securities Action is
brought on behalf of all persons who acquired securities of the Company and CUC,
except our PRIDES securities, between May 31, 1995 and August 28, 1998. The
Court granted the lead plaintiffs' unopposed motion for class certification on
January 27, 1999. Named as defendants are the Company; twenty-eight current and
former officers and directors of the Company, CUC and HFS; and Ernst & Young
LLP, CUC's former independent accounting firm.
The Amended and Consolidated Class Action Complaint in the Securities Action
alleges that, among other things, the lead plaintiffs and members of the class
were damaged when they acquired securities of the Company and CUC because, as a
result of accounting irregularities, the Company's and CUC's previously issued
financial statements were materially false and misleading, and the allegedly
false and misleading financial statements caused the prices of the Company's and
CUC's securities to be inflated artificially. The Amended and Consolidated
Complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933 (the "Securities Act") and Sections 10(b), 14(a), 20(a), and 20A of
the Securities Exchange Act of 1934 (the "Exchange Act"). Lead plaintiffs in the
Securities Action seek damages for themselves in unspecified amounts.
On January 25, 1999, the Company answered the Amended Consolidated Complaint and
asserted Cross-Claims against Ernst & Young. The Company's Cross-Claims allege
that Ernst & Young failed to follow professional standards to discover, and
recklessly disregarded, the accounting irregularities, and is therefore liable
to the Company for damages in unspecified amounts. The Cross-Claims assert
claims for breaches of Ernst & Young's audit agreements with the Company,
negligence, breaches of fiduciary duty, fraud, and contribution.
On March 26, 1999, Ernst & Young filed Cross-Claims against the Company and
certain of the Company's present and former officers and directors, alleging
that any failure to discover the accounting irregularities was caused by
misrepresentations and omissions made to Ernst & Young in the course of its
audits and other reviews of the Company's financial statements. Ernst & Young's
Cross-Claims assert claims for breach of contract, fraud, fraudulent inducement,
negligent misrepresentation and contribution. Damages in unspecified amounts are
sought for the costs to Ernst & Young associated with defending the various
shareholder lawsuits and for harm to Ernst & Young's reputation.
On December 7, 1999, we announced that we reached a preliminary agreement to
settle the Securities Action. (See "Litigation Settlements" below and Note 13 to
the Consolidated Financial Statements).
Welch & Forbes, Inc. v. Cendant Corp., et al., No. 98-2819 (WHW) (the "PRIDES
Action ") is a class action filed on June 15, 1998 and brought on behalf of
purchasers of the Company's PRIDES securities between February 24 and August 28,
1998. The PRIDES Action is a consolidation of Welch & Forbes, Inc. v. Cendant
Corp., et. al. with seven other class action lawsuits filed on behalf of
purchasers of PRIDES. Named as defendants are the Company; Cendant Capital I, a
statutory business trust formed by the Company to participate in the offering of
PRIDES securities; seventeen current and former officers and directors of the
Company, CUC and HFS; Ernst & Young; and the underwriters for the PRIDES
offering, Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith
Incorporated; and Chase Securities Inc.
The allegations in the Amended Consolidated Complaint in the PRIDES Action are
substantially similar to those in the Securities Action, and violations of
Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a)
of the Exchange Act are asserted. Damages in unspecified amounts are sought.
On November 11, 1998, the plaintiffs in the PRIDES Action brought motions for
(i) certification of a proposed class of PRIDES purchasers; (ii) summary
judgment against the Company on liability under Section 11 of the Securities
Act; and (iii) an injunction requiring the Company to place $300 million in a
trust account for the benefit of the PRIDES investors pending final resolution
of their claims. These motions were withdrawn in connection with a partial
settlement of the PRIDES Action (see Litigation Settlements below and Note 17 to
the Consolidated Financial Statements).
Semerenko v. Cendant Corp., et al., Civ. Action No. 98-5384 (D.N.J.) and P.
Schoenfield Asset Management LLC v. Cendant Corp., et al., (Civ. Action No.
98-4734) (D.N.J.) (the "ABI Actions ") were initially commenced in October and
November of 1998, respectively, on behalf of a putative class of persons who
purchased securities
37
of American Bankers Insurance Group, Inc. ("ABI") between January 27, 1998 and
October 13, 1998. Named as defendants are the Company, four former CUC officers
and directors, and Ernst & Young. The complaints in the ABI actions, as amended
on February 8, 1999, assert violations of Sections 10(b), 14(e) and 20(a) of the
Exchange Act, and Rule 10b-5 promulgated thereunder. Plaintiffs allege that they
purchased shares of ABI common stock at artificially inflated prices due to the
accounting irregularities after we announced a cash tender offer for 51% of
ABI's outstanding shares of common stock in January 1998. Plaintiffs also allege
that after the disclosure of the accounting irregularities, we misstated our
intention to complete the tender offer and a second step merger pursuant to
which the remaining shares of ABI stock were to be acquired by us. Plaintiffs
seek, among other things, unspecified compensatory damages. The Company and the
other defendants filed motions to dismiss the ABI Actions on March 10, 1999. The
United States District Court for the District of New Jersey found that the
complaints failed to state a claim upon which relief could be granted and,
accordingly, dismissed the complaints by order dated April 30, 1999. In an
opinion dated August 10, 2000, the United States Court of Appeals for the Third
Circuit vacated the District Court's judgment and remanded the ABI Actions for
further proceedings. Cendant, on December 15, 2000, filed a motion to dismiss
those claims based on ABI purchases after April 15, 1998. In an Opinion and
Order dated May 7, 2001, the District Court granted Cendant's motion. Plaintiffs
subsequently moved for leave to file a Second Amended Complaint. The Court has
not yet ruled on that motion.
B. OTHER LITIGATION
Prior to April 15, 1999, actions making substantially similar allegations to the
allegations in the Securities Action were filed by various plaintiffs on their
own behalf in the United States District Courts for the District of New Jersey,
the Eastern and Central Districts of California, the Southern District of
Florida, the Eastern District of Louisiana, the District of Connecticut and the
Eastern District of Wisconsin. The Company filed motions before the Judicial
Panel on Multidistrict Litigation (the "JPML") to transfer to the District of
New Jersey, for consolidation with the Securities Action, the actions filed in
judicial districts other than the District of New Jersey. The motions to
transfer were granted in August and September, 1999. The District of New Jersey
has granted the Company's motion to dismiss two of these transferred actions:
Stewart v. Cendant Corp., originally filed in the District of Connecticut, and
Wyatt v. Cendant Corp., originally filed in the Southern District of Florida.
The Company has filed Cross-Claims against Ernst & Young in two of the remaining
transferred actions: McLaughlin v. Cendant Corp., originally filed in the
District of New Jersey; and Alexander v. Cendant Corp., originally filed in the
Central District of California. Ernst & Young has filed counterclaims and
Cross-Claims against the Company in each of these actions.
Among the actions transferred is Reliant Trading and Shepherd Trading Ltd. v.
Cendant Corp., originally filed in the Eastern District of Wisconsin. The
plaintiffs in Reliant allegedly purchased certain 4 3/4 % Senior Notes
originally issued by HFS and claim to have converted these notes to shares of
Cendant common stock in April 1998, before our April 15, 1998 announcement
concerning the accounting irregularities. Plaintiffs seek, among other things,
rescission of the conversion of the notes, unspecified compensatory damages
resulting form the conversion, and additional unspecified damages resulting from
the original purchase of the notes at allegedly artificially inflated prices.
On November 2, 1999, the Company moved for judgment on the pleadings dismissing
the Securities Act claims asserted against it. On December 10, 1999, the parties
filed a stipulation dismissing with prejudice claims of violations of Sections
11, 12 and 15 of the Securities Act against all defendants and claims of
violations of Sections 10(b) and 20 of the Exchange Act against certain present
and former Cendant directors. On December 14, 1999, plaintiffs filed a first
Amended Complaint alleging violations of Section 10(b) of the Exchange Act and
breach of contract against the Company and violations of Sections 10(b) and 20
of the Exchange Act against certain former and present officers and directors of
the Company. On January 14, 2000, the Company filed an answer denying all
material allegations in the First Amended Complaint. Additionally, various
counterclaims, cross-claims and third-party claims exist between Ernst & Young
and the Company and certain of its present and former officers and directors.
Kennilworth Partners, L.P. et al., v. Cendant Corp., et al., 98 Civ. 8939 (DC)
(the "Kennilworth Action") was filed on December 18, 1998 on behalf of three
investment companies. Named as defendants are the Company; thirty of its present
and former officers and directors; HFS; and Ernst & Young. The complaint in the
Kennilworth Action, as amended on January 26, 1999, alleges that the plaintiffs
purchased convertible notes issued by HFS pursuant to an indenture dated
February 28, 1996 and were damaged when they converted their
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notes into shares of common stock in the Company shortly prior to the Company's
April 15, 1998 announcement. The amended complaint asserts violations of
Sections 11, 12 and 15 of the Securities Act and Sections 10(b) and 20 of the
Exchange Act; a common-law breach of contract claim is also asserted. Damages
are sought in an amount estimated to be in excess of $13.6 million. On April 29,
1999, the Company moved to dismiss the Securities Act claims brought against it.
On August 10, 1999, the District Court dismissed plaintiffs' claims under
Sections 11 and 12(2) of the Securities Act against us and all of the other
defendants and dismissed the claims under Section 10(b) of the Exchange Act
against the individual officers and directors and Ernst & Young. On August 23,
1999, the Company filed an Answer and Affirmative Defenses, in which it denied
all material allegations in the amended complaint. In January 2000, plaintiffs
filed a Second Amended Complaint, asserting claims against Cendant under Section
10(b) of the Exchange Act and for breach of contract. The Company answered the
Second Amended Complaint on April 3, 2000, and the Company has filed
Cross-Claims against Ernst & Young.
Kevlin, et al v. Cendant Corp., No. C-98-12602-B (the "Kevlin Action"), was
commenced in December 1998 in the County Court of Dallas County, Texas.
According to the complaint, plaintiffs are former shareholders of an entity
known as Kevlin Services, Inc. In 1996, a subsidiary of Cendant acquired all of
the assets of Kevlin Services, Inc. in exchange for approximately 1,155,733
shares of common stock of CUC International Inc. According to the complaint,
plaintiffs were to receive CUC shares worth $26,370,000 and instead received
shares worth substantially less than that amount due to the impact of the
accounting irregularities on the market price for CUC common stock. Plaintiffs
have asserted claims against Cendant, its subsidiary and Ernst & Young for
fraud, negligent misrepresentation, breach of duty of good faith and fair
dealing, breach of contract, conspiracy, negligence and gross negligence.
Plaintiffs seek compensatory and exemplary damages in unspecified amounts.
Cendant and its subsidiary have filed a general denial to the allegations in the
complaint. The parties have commenced discovery in this case.
Raymond H. Stanton II and Raymond H. Stanton III v. Cendant Corp. is an
arbitration proceeding filed by Raymond H. Stanton II and Raymond H. Stanton
III, former owners of Dine-A-Mate, Inc. The Demand for Arbitration alleges that
the Stantons sold Dine-A-Mate stock to CUC in September 1996 in exchange for
929,930 shares of CUC common stock. The Demand alleges that due to the
accounting irregularities the price of CUC stock was artificially inflated at
the time and asserts claims for fraud, fraudulent inducement, breach of
warranty, and violation of Sections 18(a) and 10(b) of the Exchange Act. The
Stantons seek, among other things, damages equal to the differences between
$33,314,736 (the alleged value of the transaction) and the actual value of the
CUC stock they received in the sale, and punitive damages on their claims for
fraud and fraudulent inducement. The arbitration concluded on February 13, 2001
with an award to the Stantons.
Janice G. Davidson and Robert M. Davidson v. Cendant Corp. (JAMS/Endispute--Los
Angeles No. 122002145) is an arbitration proceeding filed on December 17, 1998,
by Janice G. and Robert M. Davidson, former majority shareholders of a
California-based computer software firm acquired by the Company in a July 1996
stock merger (the "Davidson Merger"). The Davidsons' Demand for Arbitration
purported to assert claims against Cendant in connection with the Davidson
Merger and a May 1997 settlement agreement settling all disputes arising out of
the Davidson Merger (the "Davidson Settlement"). The Demand asserts claims for:
(i) securities fraud under federal, state and common law theories relating to
the Davidson Merger, through which the Davidsons received approximately
21,670,000 common shares of CUC stock and options on CUC stock in exchange for
all of their Davidson & Associates, Inc. common shares, based upon CUC's
accounting irregularities and alleged misrepresentations concerning the
Davidsons' employment as CUC executives; (ii) wrongful taking of trust property
based on fraud in connection with the Davidson Merger; (iii) unjust enrichment,
in connection with the Davidson Merger; (iv) rescission of the Davidson
Settlement for fraud under the federal securities laws, California Corporations
Code, and common law, and on grounds of unilateral mistake, failure of
consideration, and prejudice to the public interest; and (v) damages under the
Settlement Agreement for fraud in connection with the grant of CUC stock options
to the Davidsons under that Agreement. The Demand seeks unspecified compensatory
and punitive damages and a declaratory judgment that the Davidsons are entitled
to rescind the Davidson Settlement and that the claims in the Demand are
arbitrable.
Cendant answered the Demand on January 12, 1999, denying all of the material
allegations in the Demand, and also filed a Complaint for Injunctive and
Declaratory Relief against the Davidsons in the United States District Court for
the Central District of California (the "Cendant Complaint"), seeking to enjoin
the arbitration on the grounds that the parties to the Davidson Settlement
agreed therein not to arbitrate ten of the eleven claims contained in the
Demand, and that the arbitration clauses under which the Davidsons bring their
claims are
39
inapplicable to the dispute. In February 1999, Cendant filed a Motion for
Preliminary Injunction seeking to enjoin the arbitration proceedings pending the
court's final resolution of the dispute on the merits. The Davidsons filed a
motion to dismiss the Cendant Complaint or for summary judgment. On April 14,
1999, the court entered an order granting summary judgment in favor of the
Davidsons, denying Cendant's Motion for Preliminary Injunction and dismissing
the Cendant Complaint. The Company's appeal from this order is pending before
the United States Court of Appeals for the Ninth Circuit. The arbitration has
been stayed by agreement of the parties until the Ninth Circuit issues a mandate
on the appeal, except discovery is proceeding on whether the Davidson Settlement
should be rescinded. On April 14, 1999, the Davidsons filed a complaint in the
United States District Court for the Central District of California against
Cendant alleging essentially the same claims asserted in the Demand. The
complaint seeks unspecified compensatory and punitive damages, and was filed
purportedly to toll the statute of limitations pending arbitration of the claims
in the Demand. Cendant's motion to transfer this case to the District Court of
New Jersey was granted by the JPML on August 12, 1999.
In April 2000, the Davidsons filed a motion in the United States District Court
for the District of New Jersey seeking an Order (i) confirming that they are not
members of the Class in the Securities Action and therefore are not bound by the
settlement of that action; and (ii) alternatively, extending the time within
which the Davidsons can exclude themselves from the Class. On May 15, 2000,
Cendant filed papers in opposition to the motion and in support of its
cross-motion seeking to enjoin the Davidsons from proceeding with the
arbitration referred to above insofar as their claims in the arbitration are
premised on their acquisition of shares of CUC common stock. On June 20, 2000,
the District Court issued an order denying the Davidsons' motion and granting
Cendant's cross-motion. Specifically, the District Court (i) ruled that the
Davidsons fell within the Securities Action class definition of persons who
purchased or otherwise acquired publicly traded securities of CUC or Cendant
securities during the class period, (ii) denied the Davidsons' motion to extend
time to opt out of the class, and (iii) granted Cendant's cross-motion to enjoin
the Davidsons' continued prosecution of claims arising out of their acquisition
of publicly-traded CUC or Cendant securities. The Davidsons appealed the Order
to the United States Court of Appeals for the Third Circuit and oral argument
was held on November 16, 2000.
On May 9, 2001, the Third Circuit affirmed in part and reversed in part Judge
Walls' Order. The Court affirmed the Order insofar as it held that the Davidsons
were member of the class and were enjoined from arbitrating any claims falling
within the scope of the class settlement. The Third Circuit further held,
however, that Judge Walls erred in enjoining the Davidsons' arbitration in its
entirety, since the claims outside the scope of the Calpers Action settlement
remained arbitrable. On June 5, 2001, the Third Circuit vacated its May 9
opinion and judgment, and ordered rehearing of the appeal by the Court of
Appeals sitting en banc. No argument date has been set.
Deutch v. Silverman, et al., No. 98-1998 (WHW) (the "Deutch Action"), is a
shareholder derivative action, purportedly filed on behalf of, and for the
benefit of the Company. The Deutch Action was commenced on April 27, 1998 in the
District of New Jersey against certain of the Company's current and former
directors and officers; and, as a nominal party, the Company. The complaint in
the Deutch Action alleges that 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, and by, among other things, causing and/or allowing the Company
to make a series of false and misleading statements regarding the Company's
financial condition, earnings and growth; entering into an agreement to acquire
ABI and later paying $400 million to ABI in connection with termination of that
agreement; re-pricing certain stock options previously granted to certain
Company executives; and entering into certain severance and other agreements
with Walter Forbes, the Company's former Chairman, under which Mr. Forbes
received approximately $51 million from the Company pursuant to an employment
agreement we had entered into with him in connection with the Cendant Merger.
Damages are sought on behalf of Cendant in unspecified amounts.
Corwin v. Silverman et al., No. 16347-NC (the "Corwin Action"), was filed on
April 28, 1998 in the Court of Chancery for the State of Delaware. The Corwin
Action is purportedly brought derivatively, on behalf of the Company, and as a
class action, on behalf of all shareholders of HFS who exchanged their HFS
shares for CUC shares in connection with the Merger. The Corwin Action names as
defendants HFS and twenty-eight individuals who are or were directors of the
Company and HFS. The complaint in the Corwin Action, as amended on July 28,
1998, alleges that HFS and its directors breached their fiduciary duties of
loyalty, good faith, care and candor in connection with the Cendant Merger, in
that they failed to properly investigate the operations and financial statements
of CUC before approving the Merger at an allegedly inadequate price. The amended
complaint also alleges that the Company's directors breached their fiduciary
duties by entering into an employment agreement with our former Chairman, Walter
A. Forbes, in connection with the Merger that purportedly amounted to corporate
waste. The Corwin Action seeks, among other things, rescission of the Merger and
compensation for all losses and damages allegedly suffered in connection
therewith. On October 7, 1998, Cendant filed a motion to dismiss the Corwin
Action or, in the alternative, for a stay of the Corwin Action pending
determination of the Deutch Action. On June 30, 1999, the Court of Chancery for
the State of Delaware stayed the Corwin Action pending a determination of the
Deutch Action.
40
Resnik v. Silverman, et. al., No. 18329 (NC) (Del. Ch.) (the "Resnik Action"),
is a purported derivative action filed in the Court of Chancery for the State of
Delaware on or about September 19, 2000. The Complaint names as defendants those
current and former members of Cendant's Board of Directors (the "Director
Defendants") who were both named as defendants in, and approved the settlement
of, the Securities Action (the "Settlement"). The Complaint alleges that the
decision of the Director Defendants to approve the Settlement constituted a
breach of their fiduciary duties of loyalty and good faith, and seeks a monetary
judgment in an unspecified amount in favor of nominal defendant Cendant. On or
about November 16, 2000, Cendant moved to dismiss the Resnik Action on the
grounds that any challenge to the Director Defendants' decision to approve the
Settlement is not ripe because Cendant has not yet incurred any liability under
the Settlement, and may never do so if the District Court's approval of the
Settlement is not affirmed on appeal. Also on or about November 16, 2000, the
Director Defendants moved to stay the Resnik Action pending resolution of the
Deutch Action. The plaintiff in the Resnik Action has not yet responded to
either of these motions.
The SEC and the United States Attorney for the District of New Jersey conducted
investigations relating to accounting irregularities. As a result of the
findings from our internal investigations, we made all adjustments considered
necessary which are reflected in previously filed financial statements. The
investigation of the SEC as to Cendant concluded on June 14, 2000 when Cendant
consented to an entry of an Order Instituting Public Administration Proceedings
in which the SEC found that Cendant had violated certain record-keeping
provisions of the federal securities laws, Sections 13(a) and 13(b) of the
Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1, and ordered Cendant to
cease and desist from committing or causing any violation and any future
violation of those provisions.
C. LITIGATION SETTLEMENTS.
Settlement of Common Stock Class Action Litigation
On December 7, 1999, the Company announced that it reached a preliminary
agreement to settle the Securities Action pending against the Company in the
U.S. District Court in Newark, New Jersey. In a settlement agreement executed
March 17, 2000, the Company agreed to pay the class members approximately $2.85
billion in cash. The District Court approved the settlement in orders dated
August 15, 2000. Certain parties who objected to the settlement have appealed
the District Court's orders approving the plan of allocation of the settlement
fund and awarding attorney's fees and expenses to counsel for the lead
plaintiffs to the United States Court of Appeals for the Third Circuit. Oral
arguments for all appeals were heard on May 22, 2001; the court reserved its
decision until further notice. We currently plan to fund the settlement through
the use of available cash, the use of existing credit facilities, the issuance
of debt securities and/or the issuance of equity securities. We intend to
finance the cost of the settlement so as to maintain our investment grade
ratings. Please see the Company's Form 8-K, dated December 7, 1999, for a
description of the agreement to settle the common stock class action litigation.
Settlement of PRIDES Class Action Litigation
On March 17, 1999, we entered into a stipulation of settlement with counsel
representing the class of holders of our PRIDES securities who purchased their
securities on or prior to April 15, 1998 ("eligible persons") to settle their
class action lawsuit against us. Under the settlement, each eligible person was
entitled to receive a new security--a Right--for each PRIDES held on April 15,
1998. The settlement did not resolve claims based upon purchases of PRIDES after
April 16, 1998. On June 15, 1999, the United States District Court for the
District of New Jersey issued an order approving the settlement and awarding
fees to class counsel. One objector, who objected to a portion of the settlement
concerning fees to class counsel, filed an appeal to the United States Court of
Appeals to the Third Circuit, which was argued on December 15, 2000 and is
currently pending before the appeals court. We believe this appeal is without
merit.
In April 2000, The Chase Manhattan Bank ("Chase"), acting as custodian of three
mutual funds that sought a total of 2,020,000 Rights, filed a motion seeking
relief from an order of the District Court that rejected the claims filed by
Chase on behalf of the mutual funds. On June 7, 2000, the District Court denied
Chase's motion, but on December 1, 2000 the Third Circuit vacated that order and
remanded the case to the District Court for further proceedings, which are
ongoing. As the Rights expired on February 14, 2001, if Chase's claim is
successful it will be satisfied with our CD Common Stock.
41
Pursuant to the settlement, we distributed 24,107,038 Rights to eligible
persons. The Rights provided that we issue two New PRIDES to every person who
delivered to us by February 14, 2001 three rights and two original PRIDES. The
terms of the New PRIDES were the same as the original PRIDES, except that the
conversion rate was revised so that, at the time the Rights were distributed,
each of the New PRIDES had a value equal to $17.57 more than each original
PRIDES, based upon a generally accepted valuation model. We issued approximately
15,485,000 New PRIDES upon exercise of Rights. Under the terms of the New
PRIDES, each holder of a New PRIDES was required to purchase 2.3036 shares of
our Common Stock on February 16, 2001. In connection with this mandatory
purchase, we distributed approximately 14,745,000 more shares of our Common
Stock on February 16, 2001 than we otherwise would have under the terms of the
original PRIDES.
In connection with the settlement, we recorded a charge of approximately $351
million ($228 million, after tax) in the fourth quarter of 1998. Such charge was
reduced by $41 million ($26 million, after tax) during 2000, resulting from an
adjustment to the original estimate of the number of rights to be issued.
Furthermore, in February 2001, we will record an additional reduction of
approximately $10 million ($6.5 million, after tax), resulting from the number
of rights that expired unexercised on February 16, 2001. The settlements do not
encompass all litigation asserting claims associated with the accounting
irregularities. We do not believe that it is feasible to predict or determine
the final outcome or resolution of these unresolved proceedings. An adverse
outcome from such unresolved proceedings could be material with respect to
earnings in any given reporting period. However, the Company does not believe
that the impact of such unresolved proceedings should result in a material
liability to the Company in relation to its consolidated financial position or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Price on Common Stock
Our common stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "CD". At March 15, 2001 the number of stockholders of record was
approximately 9,171. The following table sets forth the quarterly high and low
sales prices per share of CD common stock as reported by the NYSE for 2000 and
1999.
2000 High Low
---- -------- --------
First Quarter $24.3125 $16.1875
Second Quarter 18.75 12.1563
Third Quarter 14.875 10.625
Fourth Quarter 12.5625 8.5
1999 High Low
---- -------- --------
First Quarter $22 7/16 $15 5/16
Second Quarter 20 3/4 15 1/2
Third Quarter 22 5/8 17
Fourth Quarter 26 9/16 14 9/16
On March 15, 2001, the last sale price of our CD common stock on the NYSE was
$14.36 per share.
Dividend Policy
We expect to retain our earnings for the development and expansion of our
businesses and the repayment of indebtedness and do not anticipate paying
dividends on common stock in the foreseeable future.
42
Item 6. SELECTED FINANCIAL DATA
At or For the Year Ended
December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In millions, except per share data)
Results of Operations
Net revenues $ 4,659 $ 6,076 $ 6,585 $ 5,429 $ 4,370
======== ======== ======== ======== ========
Income (loss) from continuing operations $ 660 $ (229) $ 160 $ 66 $ 314
Income (loss) from discontinued operations,
net of tax -- 174 380 (26) 16
Extraordinary gain (loss), net of tax (2) -- -- 26 --
Cumulative effect of accounting change, net of tax (56) -- -- (283) --
-------- -------- -------- -------- --------
Net income (loss) $ 602 $ (55) $ 540 $ (217) $ 330
======== ======== ======== ======== ========
Per Share Data
CD Common Stock
Income (loss) from continuing operations:
Basic $ 0.92 $ (0.30) $ 0.19 $ 0.08 $ 0.41
Diluted 0.89 (0.30) 0.18 0.08 0.39
Cumulative effect of accounting change:
Basic $ (0.08) $ -- $ -- $ (0.35) $ --
Diluted (0.08) -- -- (0.35) --
Net income (loss):
Basic $ 0.84 $ (0.07) $ 0.64 $ (0.27) $ 0.44
Diluted 0.81 (0.07) 0.61 (0.27) 0.41
Move.com Common Stock
Loss from continuing operations:
Basic and diluted $ (1.76) $ -- $ -- $ -- $ --
Financial Position
Total assets $ 15,072 $ 15,149 $ 20,217 $ 14,073 $ 12,763
Long-term debt 1,948 2,445 3,363 1,246 780
Assets under management and mortgage programs 2,861 2,726 7,512 6,444 5,279
Debt under management and mortgage programs 2,040 2,314 6,897 5,603 5,090
Mandatorily redeemable preferred interest in a
subsidiary 375 -- -- -- --
Mandatorily redeemable preferred securities issued
by subsidiary holding solely senior debentures
issued by the Company 1,683 1,478 1,472 -- --
Stockholders' equity 2,774 2,206 4,836 3,921 3,956
--------
See Note 3--Acquisitions and Dispositions of Businesses and Note 6--Other
Charges to the Consolidated Financial Statements for a detailed discussion of
net gains (losses) on dispositions of businesses and non-recurring or unusual
charges (credits) recorded for the years ended December 31, 2000, 1999, and
1998.
During 1997, restructuring and other unusual charges of $704 million ($505
million, after tax or $0.58 per diluted share) were recorded primarily
associated with the merger of HFS Incorporated and CUC International Inc. and
the merger with PHH Corporation in April 1997.
Income (loss) from discontinued operations, net of tax includes the after tax
results of discontinued operations and the gain on disposal of discontinued
operations.
43
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in our Consolidated Financial Statements and accompanying Notes
thereto included elsewhere herein. Unless otherwise noted, all dollar amounts
are in millions.
RESULTS OF CONSOLIDATED OPERATIONS -- 2000 vs. 1999
Our revenues decreased $1.4 billion, or 23%, primarily as a result of businesses
disposed of during 1999. Excluding the operating results of these disposed
businesses, our revenues increased $135 million, or 3%, which primarily
reflected growth attributable to higher service based fees in our relocation
business, increased mortgage production and loan servicing revenues in our
mortgage business and greater royalty fees generated from our franchised brands
in our real estate franchise business. A detailed discussion of revenue trends
is included in "Reportable Operating Segments."
Our expenses decreased $4.2 billion, or 54%, primarily due to a $2.9 billion
charge recorded during 1999 for the settlement of the principal common
stockholder class action lawsuit and also the impact from businesses disposed of
during 1999. During 2000, we also recorded a non-cash credit of $41 million in
connection with an adjustment to the number of Rights to be issued under the
settlement of the class action lawsuit that was brought on behalf of Feline
PRIDES holders in 1998, which was partially offset by a charge of $20 million
recorded in connection with litigation asserting claims associated with
accounting irregularities in the former business units of CUC International,
Inc. and outside of the principal common stockholder class action lawsuit.
Expenses were also impacted by a decrease in interest expense, as discussed
below.
Also during 2000, our management, with the appropriate level of authority,
formally committed to various strategic initiatives, which were generally aimed
at improving the overall level of organizational efficiency, consolidating and
rationalizing existing processes and reducing cost structures in our underlying
businesses. Accordingly, we incurred a restructuring charge of $60 million.
These initiatives primarily affected our Hospitality and Financial Services
segments and were completed by the end of the first quarter of 2001. Cash
payments of approximately $21 million, funded from operations, were made during
2000. We do not anticipate additional significant cash requirements other than
those already made during 2000. The initiatives are anticipated to increase
pre-tax income by approximately $20 million to $25 million annually, commencing
in 2001. The initial recognition of the charge and the corresponding utilization
from inception is summarized by category as follows:
2000 Balance at
Restructuring Cash Other December 31,
Charge Payments Reductions 2000
------------ ------------ ------------ ------------
Personnel related $ 25 $18 $ 1 $ 6
Asset impairments and contract terminations 26 1 25 ----
Facility related 9 2 1 6
---- --- ---- ----
Total $ 60 $21 $ 27 $ 12
==== === ==== ====
Personnel related costs primarily included severance resulting from the
consolidation of business operations and certain corporate functions. Asset
impairments and contract termination costs were incurred in connection with a
change in our strategic focus to an online business model and primarily
consisted of $25 million associated with the exit of our timeshare software
development business. Facility related costs consisted of facility closures and
lease obligations also resulting from the consolidation of business operations.
During 2000 and 1999, we also incurred unusual charges of $49 million and $25
million, respectively, primarily representing irrevocable contributions to an
independent technology trust responsible for completing the transition of our
lodging franchisees to a company sponsored property management system. Also
during 1999, we incurred an unusual charge of $85 million in connection with the
creation of Netmarket Group, Inc., an independent company that was created to
pursue the development and expansion of interactive businesses.
Netmarket began operations as an independent company during third quarter 1999.
Prior to such date, the results of operations of Netmarket were included in our
consolidated results of operations as a component of our Financial Services
segment. We donated our common stock ownership interest in Netmarket (with a
fair market value of $20 million) to an independent charitable trust to
facilitate the creation of Netmarket as an independent company and we retained
our convertible preferred stock interest. Subsequent to the donation, we
provided an advance of $77 million to Netmarket for the development of
Internet-related products and systems. Repayment of the advance was solely
dependent upon the success of Netmarket's development efforts. As such, we
expensed the advance in 1999. In addition to the development advance of $77
million, transaction costs of $8 million relating to the donation of Netmarket
common shares to the independent charitable trust were recorded.
During third quarter 2000, we exercised our option to convert our preferred
stock interest into common shares and purchased all remaining common shares of
Netmarket from the independent charitable trust for approximately $2 million.
Accordingly, Netmarket's operating results are included in our consolidated
results of operations since the acquisition date.
44
Additionally, we incurred investigation-related costs of $23 million and $21
million during 2000 and 1999, respectively, which were primarily associated with
professional fees and public relations costs incurred in connection with
accounting irregularities in the former business units of CUC and resulting
investigations into such matters. Also during 1999, we incurred $7 million of
charges primarily in connection with the termination of the proposed acquisition
of RAC Motoring Services.
Our net non-vehicle interest expense decreased $51 million, or 26%, primarily as
a result of a decrease in our average debt balance outstanding, partially offset
by interest expense accrued on our stockholder litigation settlement liability
during 2000.
During 2000 and 1999, we recorded a net loss of $43 million and a net gain of
$1,109 million, respectively, in connection with the dispositions of certain
non-strategic businesses. Also during 2000, we recognized $35 million of the
deferred gain, which resulted from the 1999 sale of our fleet management
business, due to the sale of VMS Europe by Avis Group.
Our provision (benefit) for income taxes consisted of a tax provision of $362
million in 2000, or an effective tax rate of 32.7%, compared to a tax benefit of
$406 million in 1999, or an effective tax rate of 70.7%. The effective tax rate
variance represents the impact of the disposition of our fleet businesses in
1999, which was accounted for as a tax-free merger.
As a result of the above-mentioned items, income from continuing operations
increased $889 million.
REPORTABLE OPERATING SEGMENTS -- 2000 vs. 1999
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization and minority interest, adjusted to
exclude certain items, which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific. Our
management believes such discussions are the most informative representation of
how management evaluates performance. However, our presentation of Adjusted
EBITDA may not be comparable with similar measures used by other companies.
As of January 1, 2000, we refined our corporate overhead allocation method.
Expenses that were previously allocated among segments based upon a percentage
of revenue are now recorded by each specific segment if the expense is primarily
associated with that segment. We determined this refinement to be appropriate
subsequent to the completion of our divestiture plan and based upon the
composition of our business units in 2000.
In connection with the acquisition of Avis Group and the disposition of certain
businesses during first quarter 2001, we realigned the operations and management
of certain of our businesses. Accordingly, our segment reporting structure now
encompasses the following four reportable segments: Real Estate Services,
Hospitality, Vehicle Services and Financial Services. Segment information for
all periods presented has been restated to conform to the current reporting
structure.
45
Year Ended December 31,
------------------------------------------------------------------------------------
Adjusted EBITDA
Revenues Adjusted EBITDA Margin
--------------------------- ------------------------------- ------------------
% %
2000 1999 Change 2000(a) 1999 Change 2000 1999
------- ------- ------- ------- ------- ------- ------- -------
Real Estate Services $ 1,461 $ 1,383 6% $ 752 $ 727 3% 51% 53%
Hospitality(b) 1,013 1,011 -- 394 427 (8) 39 42
Financial Services 1,380 1,518 (9) 373 305(c) 22 27 20
Vehicle Services 568 1,430 (60) 306 364 (16) 54 25
------- ------- ------- -------
Total Reportable Segments 4,422 5,342 1,825 1,823
Corporate and Other 237 734 * (100)(d) 96(e) * * *
------- ------- ------- -------
Total Company $ 4,659 $ 6,076 $ 1,725 $ 1,919
======= ======= ======= =======
-------
(*) Not meaningful
(a) Adjusted EBITDA excludes $109 million of restructuring and other unusual
charges ($2 million, $63 million, $31 million and $13 million of charges
were recorded within the Real Estate Services, Hospitality, Financial
Services and Corporate and Other, respectively).
(b) Adjusted EBITDA excludes $12 million of losses in 2000 related to the
dispositions of businesses and a charge of $23 million in 1999 associated
with an irrevocable contribution to an independent technology trust
responsible for completing the transition of our lodging franchisees to a
company sponsored property management system.
(c) Adjusted EBITDA excludes $131 million of gains in 1999 related to the
dispositions of businesses and a charge of $85 million in 1999 associated
with the creation of Netmarket.
(d) Adjusted EBITDA for 2000 excludes (i) a non-cash credit of $41 million in
connection with an adjustment to the number of Rights to be issued under
the PRIDES settlement and (ii) a gain of $35 million, which represents the
recognition of a portion of our previously recorded deferred gain from the
1999 sale of our former fleet businesses to Avis Group due to the
disposition of VMS Europe by Avis Group in 2000; partially offset by (i)
$31 million of losses related to the dispositions of businesses, (ii) $23
million of investigation-related costs and (iii) $20 million in connection
with litigation asserting claims associated with accounting irregularities
in the former business units of CUC and outside of the principal common
stockholder class action lawsuit.
(e) Adjusted EBITDA for 1999 excludes charges of (i) $2,894 million associated
with the settlement of the principal common stockholder class action
lawsuit, (ii) $21 million for investigation related costs, (iii) $7
million related to the termination of a proposed acquisition and (iv) $2
million principally related to the consolidation of European call centers
in Ireland. Such charges were partially offset by a net gain of $978
million related to the dispositions of businesses.
Real Estate Services
Revenues and Adjusted EBITDA increased $78 million, or 6%, and $25 million, or
3%, respectively. The increase in operating results was principally due to
increased royalties from our real estate franchise brands and growth in
service-based fees generated from client relocations. Royalty fees for the
CENTURY 21(R), Coldwell Banker(R), and ERA(R) franchise brands collectively
increased $31 million, or 7%, resulting from an 11% increase in the average
price of homes sold (net of a 3% reduction in the volume of homes sold).
Increases in royalties and franchise fees are recognized with minimal
corresponding increases in expenses due to the significant operating leverage
within our franchise operations. Industry statistics provided by the National
Association of Realtors for the year ended December 31, 2000 indicated that the
volume of existing home sales industry-wide declined by 3% and the average price
of homes sold increased by 5%. Based on these statistics, we out-performed the
industry-wide growth in the dollar volume of homes sold. Service- based fees
from relocation related operations also significantly contributed to the
increase in revenues and Adjusted EBITDA. Service-based relocation fees
increased $33 million and are reflective of increased penetration into both
destination and departure markets and expanded services provided to our clients.
Revenues from mortgage loans closed increased $16 million as the impact of
favorable production margins exceeded the effect of a reduction in mortgage loan
closings. The average production fee increased 25 basis points, or 21%, due to a
reduction in the direct costs per loan. Mortgage loan closings declined $3.4
billion, or 13%, to $22.1 billion, consisting of $20.2 billion in purchase
mortgages and $1.9 billion in refinancing mortgages. The decline in loan
closings was primarily the result of a $4.2 billion reduction in mortgage
refinancings due to the continued high volume of industry-wide refinancing
activity in 1999. Lower loan origination volume during the first half of 2000
contributed to a reduction in the Adjusted EBITDA margin in 2000. Purchase
mortgage closings in our retail lending business (where we interact directly
with the
46
consumer) increased $1.0 billion to $16.6 billion. Retail mortgage lending has
been our primary focus and accounted for more than 80% of loan volume in 2000.
During the fourth quarter of 2000, we entered into an expanded agreement with
Merrill Lynch, under which Merrill Lynch has outsourced its mortgage origination
and servicing operations to us, beginning January 1, 2001. Merrill Lynch closed
approximately $5 billion in retail purchase mortgages during 2000. Assuming
Merrill Lynch's loan volume was part of our operating results for the full year
of 2000, we believe we would have ranked as the second largest retail mortgage
lender in 2000.
Loan servicing revenues in 1999 included an $8 million gain on the sale of
servicing rights. Excluding such gain, recurring loan servicing revenue
increased $19 million, or 20%. The increase in loan servicing revenues was
principally attributable to a corresponding increase in the average servicing
portfolio, which grew approximately $14.3 billion, or 31%.
The aforementioned increases in our core business operations were partially
offset by a reduction of $10 million in gains recognized from the sale of
portions of our preferred stock investments in NRT Incorporated, a $7 million
gain recognized in 1999 on the sale of a minority interest in an insurance
subsidiary, an $8 million gain on the sale of mortgage servicing rights and an a
$9 million increase in corporate overhead allocations due to a refinement of
allocation methods used in 2000. Excluding the aforementioned gains on asset
sales and increase in corporate overhead allocations, revenues and Adjusted
EBITDA increased $103 million (8%), and $59 million (8%), respectively, and the
Adjusted EBITDA margin remained constant at 52%.
Hospitality
Revenues remained relatively constant while Adjusted EBITDA decreased $33
million, or 8%; however, the primary drivers impacting our franchise and
timeshare business operations reflected growth. Royalties from our lodging
business increased $8 million, or 4%, principally due to a 3% increase in
available rooms. Timeshare exchange revenues grew $12 million, or 6%, primarily
due to a 6% growth in memberships and a 6% increase in the average exchange fee.
Timeshare subscription revenues remained constant, despite the membership
growth, due to the impact of the January 1, 2000 implementation of Staff
Accounting Bulletin No. 101, which modified and extended the timing of revenue
recognition for subscriptions and certain other fees. Accounting under SAB No.
101 resulted in non-cash reductions in timeshare subscription revenues and
preferred alliance revenues of $11 million and $6 million, respectively. Also
during 2000, Adjusted EBITDA declined in part due to $24 million of incremental
overhead allocations due to a refinement of allocation methods used in 2000.
During 1999, revenues and Adjusted EBITDA benefited by $11 million from the
execution of a bulk timeshare exchange transaction and also by $6 million from
the generation of a master license agreement and joint venture.
Financial Services
Revenues decreased $138 million, or 9%, while Adjusted EBITDA increased $68
million, or 22%. During 1999, we disposed of four individual membership
businesses. Excluding the operating results of these businesses, revenues and
Adjusted EBITDA increased $36 million, or 3%, and $52 million, or 16%,
respectively. During 2000, our membership solicitation strategy was to focus on
profitability by targeting our marketing efforts and reducing expenses incurred
to reach potential new members. Accordingly, a favorable mix of products and
programs with marketing partners in 2000 positively impacted revenues and
Adjusted EBITDA. Additionally, we acquired and integrated Netmarket Group, an
online membership business, in the fourth quarter of 2000, which contributed $12
million to revenues but also decreased Adjusted EBITDA by $7 million. Such
increases were partially offset by a decrease in membership expirations during
2000 (revenue is generally recognized upon expiration of the membership), which
was partially mitigated by a reduction in operating and marketing expenses,
including commissions, which directly related to servicing fewer members.
Jackson Hewitt, our tax preparation franchise business, contributed incremental
revenues of $16 million, which were recognized with minimal corresponding
increases in expenses due to our significant operating leverage within our
franchise operations. Jackson Hewitt experienced a 33% increase in tax return
volume
47
and a 10% increase in the average price of a return. Additionally, we incurred
costs of approximately $9 million during 2000 to consolidate our domestic
insurance wholesale business operations in Tennessee. The majority of such costs
were offset by economies and related cost savings realized from such
consolidation.
On July 2, 2001, we announced that we had entered into a number of agreements,
including a forty-year outsourcing agreement, with Trilegiant Corporation, a
newly formed company owned by the former management of our Cendant Membership
Services and Cendant Incentives subsidiaries. Under the terms of these
agreements, we will continue to recognize revenue and collect membership fees
and are obligated to provide membership benefits to existing members of our
individual membership business. Trilegiant will provide fulfillment services to
these members in exchange for a servicing fee. Trilegiant will license and/or
lease from us the assets of our individual membership business to service
existing members and to obtain new members for which Trilegiant will retain the
economic benefits and service obligations. Beginning in the third quarter of
2002, we will receive from Trilegiant a royalty from membership fees generated
by their new membership joins. The royalty received will range from a rate of 5%
to 16% of Trilegiant membership revenue. In connection with the foregoing
arrangements, we have also agreed to fund up to a total of approximately $130
million (approximately $100 million in cash and $30 million in non-cash assets)
of Trilegiant's marketing expenses, subject to certain conditions, over the next
four years and have made a $20 million investment in Trilegiant in the form of
convertible preferred stock. As a result of these agreements, we will not
spin-off our individual membership business to our stockholders, as previously
planned.
Vehicle Services
Prior to the acquisition of Avis Group on March 1, 2001, revenues and Adjusted
EBITDA of this segment consisted principally of earnings from our equity
investment in Avis Group, royalties received from Avis Group and the results of
operations of our National Car Parks subsidiary. Subsequent to the acquisition,
the car rental operations and fleet management services businesses of Avis Group
were added to this segment. The car rental operations of Avis Group provide
vehicle rentals to business and leisure customers and the fleet management
business provides fully integrated fleet management services to corporate
customers including vehicle leasing, advisory services, fuel and maintenance
cards, other expense management programs and productivity enhancement.
Revenues and Adjusted EBITDA decreased $862 million, or 60%, and $58 million, or
16%, respectively. Such decreases are significantly due to the disposition of
our fleet businesses in June 1999 which contributed revenues and Adjusted EBITDA
of $881 million and $81 million, respectively, to our 1999 operating results,
prior to its disposition. Excluding the impact of fleet operations in 1999,
revenues and Adjusted EBITDA increased $19 million, or 3%, and $23 million, or
8%, respectively. National Car Parks, our subsidiary in the United Kingdom that
provides car parking services, contributed a $16 million increase in revenues
principally due to increased occupancy of owned and leased car parking spaces
and increased income from property disposals. The existing infrastructure of our
car parks business absorbed the volume increase with no corresponding increases
in expenses. Franchise royalties increased $4 million, or 3%, primarily due to a
4% increase in the volume of car rental transactions at Avis Group.
Additionally, an increase in revenues and Adjusted EBITDA of $10 million, due to
incremental dividend income recognized on our preferred stock investment in Avis
Group, was offset by $11 million of gains recognized in 1999 on the sale of a
portion of our common equity interest in Avis Group.
Corporate and Other
Revenues and Adjusted EBITDA decreased $497 million and $196 million,
respectively. Revenues decreased primarily as a result of the 1999 dispositions
of several businesses, the operating results of which were included through
their respective disposition dates in 1999. The absence of such divested
businesses from 2000 operations resulted in a reduction in revenues and Adjusted
EBITDA of $502 million and $78 million, respectively. Excluding the impact of
divested businesses on 1999 operating results, revenues increased $5 million
while Adjusted EBITDA decreased $118 million in 2000.
Our real estate Internet portal, move.com, which was sold during first quarter
2001 contributed incremental revenues of $41 million, with a reduction in
Adjusted EBITDA of $72 million to a loss of $94 million. The increase in
revenues principally reflects a significant increase in sponsorship revenues
made possible by the
48
launch of the move.com(SM) portal. The decline in Adjusted EBITDA primarily
reflects our increased investment in marketing and development of the move.com
network.
Additionally, revenues and Adjusted EBITDA in 2000 were negatively impacted by
$30 million less income recognized from financial investments and $19 million of
costs incurred to pursue Internet initiatives through our Cendant Internet
Group.
RESULTS OF CONSOLIDATED OPERATIONS -- 1999 vs. 1998
Our revenues decreased $509 million, or 8%, primarily as a result of businesses
disposed of during 1999 despite growth in a majority of our reportable segments.
Significant contributing factors which gave rise to growth in a majority of our
reportable segments included an increase in the amount of royalty fees received
from our franchised brands within both our Hospitality and Real Estate Services
segments and an increase in loan servicing revenues from our mortgage business
also within our Real Estate Services segment. A detailed discussion of revenue
trends is included in "Reportable Operating Segments."
Our expenses increased $1.5 billion, or 24%, primarily as a result of the $2.9
billion charge recorded during 1999 for the settlement of the principal common
stockholder class action lawsuit, partially offset by 1998 charges of $351
million recorded in connection with the PRIDES settlement and $433 million
primarily recorded in connection with the termination of the proposed
acquisition of American Bankers Insurance Group.
Expenses were also impacted by an increase in restructuring and other unusual
charges and an increase in interest expense, as discussed below.
During 1999, we recorded (i) an unusual charge of $85 million in connection with
the creation of Netmarket, (ii) an unusual charge of $25 million, primarily
representing an irrevocable contribution to an independent technology trust
responsible for completing the transition of our lodging franchisees to a
company sponsored property management system and (iii) investigation-related
costs of $21 million, primarily associated with professional fees and public
relations costs incurred in connection with accounting irregularities in the
former business units of CUC and resulting investigations into such matters.
During 1998, we recorded a charge of $53 million associated with the termination
of certain former executives as well as investigation-related costs of $33
million, primarily associated with professional fees and public relations costs
incurred in connection with accounting irregularities in the former business
units of CUC and resulting investigations into such matters. Also due to such
accounting irregularities, we were temporarily prohibited from accessing public
debt markets in 1998. Accordingly, we recorded a charge of $35 million primarily
in connection with fees associated with waivers and various financing
arrangements. Such charges were partially offset by a non-cash credit of $67
million resulting from changes to the original estimate of restructuring costs
recorded during 1997.
Our net non-vehicle interest expense increased $85 million, or 75%, primarily as
a result of an increase in our average debt balance outstanding and a nominal
increase in our cost of funds. In addition, the composition of our average debt
outstanding during 1999 included longer term fixed rate debt carrying higher
interest rates. The weighted average interest rate on long-term debt increased
to 6.4% from 6.2%.
During 1999, we also recorded a net gain of $1,109 million in connection with
the disposition of certain non-strategic businesses.
Our provision (benefit) for income taxes consisted of a tax benefit of $406
million in 1999, or an effective tax rate of 70.7%, compared to a tax provision
of $104 million in 1998, or an effective tax rate of 33.0%. The effective tax
rate variance represents the impact of the disposition of our fleet businesses
in 1999, which was accounted for as a tax-free merger.
As a result of the above-mentioned items, income from continuing operations
decreased $389 million.
49
REPORTABLE OPERATING SEGMENTS-- 1999 vs. 1998
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization and minority interest, adjusted to
exclude certain items, which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific. Our
management believes such discussions are the most informative representation of
how management evaluates performance. However, our presentation of Adjusted
EBITDA may not be comparable with similar measures used by other companies.
Year Ended December 31,
--------------------------------------------------------------------------------------
Adjusted EBITDA
Revenues Adjusted EBITDA Margin
--------------------------- ------------------------------ ---------------------
% %
1999 1998 Change 1999 1998(a) Change 1999 1998
------- ------- ------- ------- ------- ------- ------- -------
Real Estate Services $ 1,383 $ 1,253 10% $ 727 $ 661 10% 53% 53%
Hospitality 1,011 949 7 427(b) 394 8 42 42
Financial Services 1,518 1,433 6 305(c) 97 214 20 7
Vehicle Services 1,430 2,123 (33) 364 404 (10) 25 19
------- ------- ------- -------
Total Reportable Segments 5,342 5,758 1,823 1,556
Corporate and Other 734 827 * 96(d) 34(e) * * *
------- ------- ------- -------
Total Company $ 6,076 $ 6,585 $ 1,919 $ 1,590
======= ======= ======= =======
-------
(*) Not meaningful.
(a) Adjusted EBITDA excludes a net credit of $67 million associated with
changes to the estimate of previously recorded restructuring costs
(comprised of $14 million, $6 million, $1 million and $46 million of
credits within our Real Estate Services, Hospitality, Vehicle Services and
Corporate and Other, respectively).
(b) Adjusted EBITDA excludes a charge of $23 million in 1999 associated with
an irrevocable contribution to an independent technology trust responsible
for completing the transition of our lodging franchisees to a company
sponsored property management system.
(c) Adjusted EBITDA excludes $131 million of gains in 1999 related to the
dispositions of businesses and a charge of $85 million in 1999 associated
with the creation of Netmarket.
(d) Adjusted EBITDA for 1999 excludes charges of (i) $2,894 million associated
with the settlement of the principal common stockholder class action
lawsuit, (ii) $21 million for investigation related costs, (iii) $7
million related to the termination of a proposed acquisition and (iv) $2
million principally related to the consolidation of European call centers
in Ireland. Such charges were partially offset by a net gain of $978
million related to the dispositions of businesses.
(e) Adjusted EBITDA for 1998 excludes charges of (i) $433 million primarily
for the termination of the proposed acquisition of American Bankers
Insurance Group, (ii) $351 million in connection with PRIDES settlement
and (iii) $121 million of investigation related costs, including
incremental financing costs and executive terminations.
Real Estate Services
Revenues and Adjusted EBITDA increased $130 million, or 10%, and $66 million, or
10%, respectively. Royalty fees for the CENTURY 21(R), Coldwell Banker(R) and
ERA(R) franchise brands collectively increased $67 million, or 17%, primarily as
a result of a 5% increase in home sale transactions by franchisees and an 8%
increase in the average price of homes sold. Home sales by franchisees benefited
from strong existing domestic home sales for the majority of 1999, as well as
from expansion of our franchise system. Beginning in the second quarter of 1999,
the financial results of the advertising funds for the Coldwell Banker and ERA
brands were consolidated into the results of our Real Estate Services Segment,
increasing revenues by $31 million and expenses by a like amount, with no impact
on Adjusted EBITDA. Revenues and Adjusted EBITDA in 1999 also benefited $20
million from the sale of portions of our preferred stock investment in NRT, the
independent company we helped form in 1997 to serve as a consolidator of
residential real estate brokerages and $7 million from the sale of a minority
interest in an insurance company subsidiary. Revenues and Adjusted EBITDA were
also favorably impacted from a $32 million increase in loan servicing fees and a
$12 million increase in revenues from loans closed. The average servicing
portfolio increased $10 billion, or 29%, with the average servicing fee
increasing approximately seven basis points because of a reduction in the rate
of amortization on servicing assets. The reduced rate of amortization was caused
by higher mortgage interest rates in 1999. Total mortgage closing volume in 1999
was $25.6 billion, a decline of $400 million from 1998, however production
margins on loans closed were favorable in 1999 compared with the prior
50
year. Purchase mortgage volume (mortgages for home buyers) increased $3.7
billion, or 24%, to $19.1 billion, primarily because of increased purchase
volume from our real estate franchisees. The growth in purchase mortgages was
more than offset by a $4.2 billion reduction in mortgage refinancing volume due
to the unprecedented industry-wide refinancing activity in 1998. The overall
increase in Adjusted EBITDA from the aforementioned real estate operations was
partially offset by increased expenses incurred in 1999 to service the larger
mortgage servicing portfolio and to support capacity for mortgage-related volume
anticipated in future periods.
During third quarter 1998, we sold an asset management company which, prior to
its disposition, contributed revenues and Adjusted EBITDA in 1998 of $21 million
and $16 million, respectively. In 1998, revenues and Adjusted EBITDA also
benefited from an improvement in receivable collections, which permitted an $8
million reduction in billing reserve requirements.
Hospitality
Revenues and Adjusted EBITDA increased $62 million, or 7%, and $33 million, or
8%. Royalties from our lodging business increased $13 million, or 7%, primarily
due to a 5% increase in the amount of weighted average available rooms (24,000
incremental rooms domestically). Timeshare subscription and exchange revenues
increased $18 million, or 5%, primarily as a result of increased volume. Also
contributing to the revenue and Adjusted EBITDA increases was an $11 million
bulk timeshare exchange transaction and $6 million of fees received in
connection with the generation of a master license agreement. Total expenses
increased $26 million, or 5%, primarily due to increased volume; however, such
increase included $14 million of marketing and reservation fund expenses
associated with our lodging franchise business unit which was offset by
increased marketing and reservation revenue received from franchisees.
Financial Services
Revenues and Adjusted EBITDA increased $85 million, or 6%, and $208 million, or
214%, respectively. The Adjusted EBITDA margin improved to 20% from 7% for the
same periods. The revenue growth is principally due to a greater number of
individual memberships added year-over-year, increases in the average price of a
membership and customer growth for insurance wholesale related products. The
increase in the Adjusted EBITDA margin is primarily due to (i) the revenue
increases, since many of the infrastructure costs associated with providing
services to members are not dependent on revenue volume and (ii) a reduction in
membership solicitation spending, as we further refined the targeted audiences
for our direct marketing efforts and achieved greater efficiencies in reaching
potential new members. Additionally, Adjusted EBITDA and margin reflects a $25
million expense reduction related to longer amortization periods for certain
acquisition costs related to customers for insurance products as a result of a
change in accounting estimate. In October 1999, we completed the divestiture of
our North American Outdoor Group business unit, which was included in our
operating results for the entire year of 1998 and through October 1999. Also,
beginning September 15, 1999, certain online businesses were not consolidated
into our Financial Services segment operations as a result of our donation of
Netmarket common stock to the charitable trust. However, the divested businesses
still accounted for a net increase in revenues and Adjusted EBITDA of $11
million and $20 million, respectively, primarily due to growth in the Netmarket
business unit prior to its donation to the trust. Additionally, revenues and
Adjusted EBITDA in 1999 were incrementally benefited by $13 million and $5
million, respectively, from the April 1998 acquisition of a company that, among
other services, provides members with access to their personal credit
information.
Vehicle Services
Prior to the acquisition of Avis Group on March 1, 2001, revenue and Adjusted
EBITDA of this segment consisted principally of earnings from our equity
investment in Avis Group, royalties received from Avis Group and the operations
of our National Car Parks subsidiary. Subsequent to the acquisition, the car
rental operations of Avis Group were added to this segment.
Revenues and Adjusted EBITDA decreased $693 million, or 33%, and $40 million, or
10%. In April 1998, we acquired National Car Parks, the largest car parking
services company in the United Kingdom. National Car Parks, which was accounted
for as a purchase, contributed incremental revenues and Adjusted EBITDA in 1999
of $103 million and $48 million, respectively.
51
In June 1999, we disposed of our existing fleet businesses and therefore the
operations of such businesses were included in our operating results for a full
year in 1998 compared with six months in 1999. Accordingly, revenues and
Adjusted EBITDA declined $807 million and $93 million in 1999 as a result of the
disposition. Excluding the impact from the acquisition of National Car Parks and
the disposition of the fleet businesses, revenues and Adjusted EBITDA increased
$11 million, or 1%, and $5 million, or 1%, respectively. Franchise royalties
increased $7 million, or 7%, primarily due to an increase in car rental days at
Avis Group. Additionally, an increase in revenues and Adjusted EBITDA of $9
million, due to dividend income recognized in 1999 on our preferred stock
investment in Avis Group was partially offset by a $7 million decrease in gains
from the sale of portions of our equity investment in Avis Group.
Corporate and Other
Revenues decreased $93 million while Adjusted EBITDA increased $62 million in
1999 compared with 1998. Revenues and Adjusted EBITDA were favorably impacted by
$39 million of incremental income from financial investments and $13 million
from a litigation settlement. Move.com Group, our real estate Internet portal,
and Welcome Wagon International, which were subsequently sold together in the
same transaction during first quarter 2001, collectively accounted for a decline
in revenues and Adjusted EBITDA of $3 million and $22 million, respectively.
Such results primarily reflect our increased investment in marketing and
development of the portal and retention bonuses paid to Move.com Group
employees. Additionally, throughout 1999, we disposed of several non-strategic
businesses, including Essex Corporation in January 1999, National Leisure Group
and National Library of Poetry in May 1999, Spark Services and Global Refund
Group in August 1999, Central Credit in September 1999 and Entertainment
Publications and Green Flag Group in November 1999. The operating results of
disposed businesses were included through their respective disposition dates in
1999 versus being included for the full year in 1998, except for Green Flag
which was acquired in April 1998. Accordingly, revenues from divested businesses
were incrementally less in 1999 by $138 million while Adjusted EBITDA improved
$15 million. The increase in Adjusted EBITDA also reflects a net reduction in
corporate expenses.
LIQUIDITY AND CAPITAL RESOURCES
Based upon cash flows provided by our operations and access to liquidity through
various other sources, including public debt and equity markets and financial
institutions, we have sufficient liquidity to fund our current business plans
and obligations.
Cash Flows
Year Ended December 31,
-----------------------------------
2000 1999 Change
--------- --------- ---------
Cash provided by (used in) continuing operations:
Operating activities $ 1,417 $ 3,032 $ (1,615)
Investing activities (1,172) 1,860 (3,032)
Financing activities (483) (4,788) 4,305
Effects of exchange rate changes on cash and cash equivalents 18 51 (33)
--------- --------- ---------
Net change in cash and cash equivalents $ (220) $ 155 $ (375)
========= ========= =========
Cash flows from operating activities decreased primarily due to a reduction of
$1.1 billion in net proceeds received from the origination and sale of mortgage
loans and also due to the absence in 2000 of operating results generated from
businesses which were disposed of in 1999.
Cash flows from investing activities resulted in an outflow of $1.2 billion in
2000 compared to an inflow of $1.9 billion in 1999, primarily due to the absence
in 2000 of $3.5 billion of net cash proceeds received from the disposition of
businesses in 1999 and the funding in 2000 of $350 million to the stockholder
litigation settlement trust. Such amounts were partially offset by the absence
in 2000 of a $774 million cash use in 1999 related to our former fleet
businesses and a net inflow of funds generated from advances on homes under
management in 2000.
52
Cash flows used in financing activities decreased primarily due to a decrease of
$2.6 billion in the repurchases of CD common stock and a decrease of $4.3
billion primarily due to a reduction in net borrowing requirements to fund our
investment in assets under management and mortgage programs, partially offset by
the absence in 2000 of $3.0 billion in proceeds received for debt repayment in
connection with the disposal of our former fleet businesses.
Capital Expenditures
Capital expenditures during 2000 amounted to $246 million and were utilized to
support operational growth, enhance marketing opportunities and develop
operating efficiencies through technological improvements. We anticipate a
capital expenditure investment during 2001 ranging from $275 million to $325
million. Such amount represents an increase from 2000 primarily due to the
acquisitions of Avis Group and Fairfield Communities.
Stockholder Litigation Settlement
On August 14, 2000, the U.S. District Court approved our agreement (the
"Settlement Agreement") to settle the principal securities class action pending
against us, which was brought on behalf of purchasers of all Cendant and CUC
publicly traded securities, other than PRIDES, between May 1995 and August 1998.
Under the Settlement Agreement, we will pay the class members approximately
$2.85 billion in cash. Certain parties in the class action have appealed the
District Court's orders approving the plan of allocation of the settlement fund
and awarding of attorneys' fees and expenses to counsel for the lead plaintiffs.
None of the appeals challenged the fairness of the $2.85 billion settlement
amount. The U.S. Court of Appeals for the Third Circuit issued a briefing
schedule for the appeals, which is nearly complete. Oral arguments for all
appeals were heard on May 22, 2001; the court reserved its decision until
further notice. We intend to finance the $2.85 billion settlement amount with
cash generated from our operations, borrowings under our existing credit
facilities and new borrowings.
The Settlement Agreement required us to post collateral in the form of credit
facilities and/or surety bonds by November 13, 2000. We also had the option of
forming a trust established for the benefit of the plaintiffs in lieu of posting
collateral. On November 13, 2000, we posted collateral in the form of letters of
credit and surety bonds in the amounts of $1.71 billion and $790 million,
respectively. We also made a cash deposit of approximately $350 million to the
trust. During first quarter 2001, we made an additional cash deposit of
approximately $250 million to the trust. The credit facilities under which we
posted the collateral also required us to make minimum deposits to this trust
through 2003 as discussed under debt financing.
Debt Financing
Activities of our management and mortgage programs are autonomous and distinct
from our other activities. Therefore, management believes it is more useful to
review the debt financing of management and mortgage programs separately from
the debt financing of our other activities.
Exclusive of Management and Mortgage Programs
Our total long-term debt decreased approximately $900 million to $1.9 billion at
December 31, 2000. Such decrease was attributable to principal payments totaling
$500 million to reduce outstanding borrowings under our term loan facility and
also the redemption of $400 million principal amount of 7 1/2% senior notes. At
December 31, 2000, our long-term debt was principally comprised of $1.1 billion
of 7 3/4% senior notes maturing in December 2003, $548 million of 3% convertible
subordinated notes maturing in February 2002 and $250 million outstanding under
our term loan facility.
We have a $1.75 billion three-year competitive advance and revolving credit
facility maturing in August 2003 and a $750 million five-year revolving credit
facility maturing in October 2001. The three-year facility contains the
committed capacity to issue up to $1.75 billion in letters of credit, of which
$1.71 billion was utilized as part of the collateral arrangements under the
Settlement Agreement. Borrowings under these credit
53
facilities bear interest at LIBOR, plus a margin of approximately 60 basis
points. We are required to pay a per annum facility fee of .15% and .175% under
the three-year facility and five-year facility, respectively. We are also
required to pay a per annum utilization fee of .125% on the three-year facility
if usage under the facility exceeds 33% of aggregate commitments. The interest
rates and facility fees are subject to change based upon credit ratings assigned
by nationally recognized debt rating agencies on our 7 3/4% senior notes. At
December 31, 2000, we had approximately $800 million of availability under these
facilities.
In connection with the $1.71 billion in letters of credit posted as collateral,
we are required to make additional minimum deposits of $600 million, $800
million and $800 million during 2001, 2002 and 2003, respectively, to a trust
established for the benefit of the plaintiffs in our principal common
stockholder class action lawsuit. The escrow deposits will serve to reduce the
amount of collateral previously posted by us, as required by the Settlement
Agreement.
During first quarter 2001, we entered into a $650 million term loan agreement
with terms similar to our other revolving credit facilities. This term loan
amortizes in three equal installments on August 22, 2002, May 22, 2003 and
February 22, 2004. Borrowings under this facility bear interest at LIBOR plus a
margin of 125 basis points. A portion of this term loan was used to finance the
acquisition of Avis Group on March 1, 2001, as discussed under "Strategic
Business Initiatives".
During first quarter 2001, we issued approximately $1.5 billion aggregate
principal amount at maturity of zero-coupon senior convertible notes for
aggregate gross proceeds of approximately $900 million. We used $250 million of
such proceeds to extinguish outstanding borrowings under our term loan facility.
The remaining proceeds were used for general corporate purposes. The notes
mature in 2021 and were issued at a price representing a yield-to-maturity of
2.5%. We will not make periodic payments of interest on the notes, but may be
required to make nominal cash payments in specified circumstances. Each $1,000
principal amount at maturity may be convertible, subject to satisfaction of
specific contingencies, into 33.4 shares of our CD common stock. The notes will
not be redeemable by us prior to February 13, 2004, but will be redeemable
thereafter at the issue price of $608.41 per note plus accrued discount through
the redemption date. In addition, holders of the notes may require us to
repurchase the notes on February 13, 2004, 2009 or 2014. In such circumstance,
we may pay the purchase price in cash, shares of our CD common stock, or any
combination thereof.
During May 2001, we issued zero-coupon zero-yield convertible senior notes to a
qualified institutional buyer in a private offering for gross proceeds of $1.0
billion. We expect to utilize the proceeds for general corporate purposes and to
reduce certain borrowings. The notes mature in 2021. We may be required to
repurchase these notes on May 4, 2002. We are not required to pay interest on
the notes unless an interest adjustment becomes payable, which may occur in
specified circumstances commencing in 2004. Each $1,000 principal amount at
maturity may be convertible, subject to satisfaction of specific contingencies,
into approximately 39 shares of CD common stock.
Coincident with the acquisition of Avis Group on March 1, 2001, we assumed debt
of approximately $900 million, including approximately $300 million which was
outstanding under a $450 million six-year revolving credit facility guaranteed
by us and maturing in June 2005. Borrowings under the six-year credit facility
bear interest at LIBOR plus a margin of approximately 175 basis points. We are
required to pay a per annum facility fee of 37.5 basis points.
Our credit facilities contain certain restrictive covenants, including
restrictions on indebtedness of material subsidiaries, mergers, limitations on
liens, liquidations and sale and leaseback transactions, and also require the
maintenance of certain financial ratios. At December 31, 2000, we had complied
with all the restrictive covenants. At December 31, 2000, our long-term debt
credit ratings are BBB with Standard & Poor's, Baa1 with Moody's and BBB+ with
Fitch IBCA and our short-term debt ratings are P2 with Moody's and F2 with Fitch
IBCA. (A security rating is not a recommendation to buy, sell or hold securities
and is subject to revision or withdrawal at any time.)
Related to Management and Mortgage Programs
54
Activities of our management and mortgage programs include the former fleet
management business and car rental operations of Avis Group, as well as our
mortgage and relocation businesses. Our mortgage, relocation and fleet
management businesses operate as a separate public reporting entity, PHH
Corporation. Our car rental operations also operate as a separate public
reporting entity, Avis Group Holdings, Inc.
The activities of our management and mortgage programs are autonomous and
distinct from our other activities. Therefore, management believes it is more
useful to review the debt financing of management and mortgage programs
separately from the debt financing of our activities.
The origination of mortgages, advances under relocation contracts and the
acquisitions of vehicles and vehicle leases are supported primarily by issuing
commercial paper and medium-term and interest bearing notes and by maintaining
secured obligations, depending upon asset growth and financial market
conditions. Debt related to management and mortgage programs is issued without
recourse to us. Such debt is not classified based on contractual maturities, but
rather is included in liabilities under management and mortgage programs since
the debt corresponds directly with the high quality related assets. PHH and Avis
Group expect to continue to maximize access to global capital markets by
maintaining the quality of their assets under management. This is achieved by
maintaining credit standards to minimize credit risk and the potential for
losses.
Debt related to management and mortgage programs decreased approximately $300
million to $2.0 billion at December 31, 2000. Such decrease was primarily
attributable to a decrease in medium-term notes, partially offset by an increase
in commercial paper. At December 31, 2000, outstanding debt related to
management and mortgage programs was comprised of $1.6 billion of commercial
paper, $292 million of secured obligations (with a total commitment of $500
million and renewable on an annual basis), $117 million of medium-term notes
maturing through 2002 and $75 million of unsecured borrowings maturing in 2001.
During 2000, PHH filed a shelf registration statement registering an additional
$2.625 billion of debt securities, which increased the amount available for
issuing medium-term notes to approximately $3.0 billion at December 31, 2000.
PHH issued $650 million of medium-term notes under this shelf registration in
January 2001 bearing interest at a rate of 8 1/8% per annum and maturing in
February 2003. The senior indenture under which the medium-term notes were
issued prevents PHH from paying dividends and/or making intercompany loans to us
if, after giving effect to those dividends or intercompany loans, PHH's debt to
equity ratio exceeds 6.5 to 1. Furthermore, under the senior indenture, PHH's
ratio of debt to tangible net worth must be maintained at or less than 10 to 1.
A portion of the proceeds from this offering were used to finance the
acquisition of Avis Group on March 1, 2001. Proceeds from future offerings will
be used to finance assets under management and for general corporate purposes.
PHH and Avis Group manage their exposure to interest rate and liquidity risk by
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. To provide additional financial flexibility, PHH's current
policy is to ensure that committed facilities aggregate 100 percent of the
average amount of outstanding commercial paper.
As of December 31, 2000, PHH maintained $1.775 billion of committed and
unsecured revolving credit facilities. These facilities comprise a $750 million
syndicated revolving credit facility maturing in 2001, a $750 million syndicated
revolving credit facility maturing in 2005 and $275 million of other revolving
credit facilities maturing in 2001. Borrowings under these facilities bear
interest at a rate of LIBOR, plus a margin of approximately 40 basis points. PHH
is required to pay a per annum facility fee of approximately .125% under the
facilities. The full amount of these facilities was undrawn and available to
support the average outstanding commercial paper balance at December 31, 2000.
During February 2001, PHH renewed its $750 million syndicated revolving credit
facility, which was due in 2001. The new facility bears interest at LIBOR plus
an applicable margin, as defined in the agreement, and terminates on February
21, 2002. PHH is required to pay a per annum utilization fee of .25% if usage
under the facility exceeds 25% of aggregate commitments. Under the new facility,
any loans outstanding as of February 21, 2002 may be converted into a term loan
with a final maturity of February 21, 2003. The facilities contain certain
restrictive covenants, including
55
restrictions on indebtedness of material subsidiaries, mergers, limitations on
liens, liquidations and sale and leaseback transactions, and also require the
maintenance of certain financial ratios. At December 31, 2000, PHH had complied
with all the restrictive covenants. At December 31, 2000, PHH's long-term credit
ratings are A with Fitch IBCA, A- with Standard & Poor's and Baa1 with Moody's
and PHH's short-term ratings are F1 with Fitch IBCA, A2 with Standard & Poor's
and P2 with Moody's. (A security rating is not a recommendation to buy, sell or
hold securities and is subject to revision or withdrawal at any time.)
In addition to the above-mentioned sources of financing, 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 December
31, 2000, PHH maintained the following agreements whereby managed assets were
sold or transferred to third parties:
Bishops Gate Residential Mortgage Trust. Under this revolving sales agreement,
an unaffiliated bankruptcy remote special purpose entity, Bishops Gate,
committed to purchase for cash, at PHH's option, mortgage loans originated by
PHH on a daily basis, up to Bishops Gate's asset limit of $3.3 billion, through
2008. PHH retains the servicing rights on the mortgage loans sold to Bishops
Gate and arranges for the sale or securitization of the mortgage loans into the
secondary market. Bishops Gate retains the right to select alternative sale or
securitization arrangements. At December 31, 2000 and 1999, PHH was servicing
approximately $1.0 billion and $813 million, respectively, of mortgage loans
owned by Bishops Gate.
Apple Ridge Funding. Under these revolving sales agreements, certain relocation
receivables are transferred for cash, on a revolving basis, to an unaffiliated
bankruptcy remote special purpose entity, Apple Ridge, until March 31, 2007. PHH
retains a subordinated residual interest and the related servicing rights and
obligations in the relocation receivables. At December 31, 2000, PHH was
servicing approximately $591 million of receivables under these agreements. At
December 31, 1999, PHH had not transferred any assets to Apple Ridge.
We closely evaluate not only the credit of the banks providing PHH's sources of
financing, but also the terms of the various agreements to ensure on-going
availability. We believe that our current policy provides adequate protection
should volatility in the financial markets limit PHH's access to commercial
paper or medium-term notes funding. PHH continuously seeks additional sources of
liquidity to accommodate its asset growth and to provide further protection from
volatility in the financial markets. In the event that the public debt market is
unable to meet PHH's funding needs, we believe that PHH has appropriate
alternative sources to provide adequate liquidity, including current and
potential future securitizations and its revolving credit facilities.
Coincident with the acquisition of Avis Group on March 1, 2001, we assumed debt
of approximately $6.8 billion principally comprising $3.7 billion of medium-term
notes, $1.6 billion of interest bearing notes and $957 million of commercial
paper. During first quarter 2001, our Avis car rental subsidiary issued $750
million of floating rate rental car asset backed notes. The notes are secured by
rental vehicles owned by such subsidiary. The notes bear interest at a rate of
LIBOR plus 20 basis points per annum and mature in April 2004. During second
quarter 2001, our Avis car rental subsidiary also registered $500 million of
auction rate rental car asset backed notes. These notes are also secured by
rental vehicles owned by such subsidiary. The notes bear interest at a rate of
LIBOR plus or minus an applicable margin determined from time to time through an
auction. We issued approximately $200 million under this registration statement
and utilized such proceeds to reduce outstanding commercial paper borrowings.
Other Liquidity
During 2000, we received $375 million in cash in connection with the issuance of
a mandatorily redeemable preferred interest, which is mandatorily redeemable 15
years from the date of issuance and may be redeemed by us after 5 years, or
earlier in certain circumstances. Also during 2000, Liberty Media Corporation
invested a total of $450 million in cash to purchase 24.4 million shares of CD
common stock. Additionally, Liberty Media's Chairman, John C. Malone Ph.D,
purchased one million shares of CD common stock for approximately $17 million in
cash.
56
During first quarter 2001, we issued 46 million shares of our CD common stock at
$13.20 per share for aggregate proceeds of approximately $607 million, which
reduced our availability under existing shelf registration statements to $1.6
billion. These proceeds were used to fund the acquisitions of Avis Group on
March 1, 2001 and Fairfield Communities on April 2, 2001.
During first quarter 2001, the purchase contracts underlying our FELINE PRIDES
settled. Accordingly, we issued approximately 61 million shares of our CD common
stock in satisfaction of our obligation to deliver common stock to beneficial
owners of the PRIDES. See Note 17-Mandatorily Redeemable Trust Preferred
Securities Issued by a Subsidiary Holding Solely Senior Debentures Issued by the
Company for a detailed discussion regarding the issuances of PRIDES and the
related settlement provisions.
Under our common share repurchase program, we have approximately $488 million
remaining availability. Although we have no current plan to utilize this
availability, depending upon market conditions and other factors, we may chose
to repurchase stock at anytime.
During June 2001, the Company bought back 1,598,030 shares of Move.com common
stock held by Liberty Digital in exchange for 1,164,048 shares of Homestore
common stock (valued at approximately $31 million) and approximately $19 million
in cash.
Strategic Business Initiatives
On June 18, 2001, we announced that we had entered into a definitive agreement
to acquire all of the outstanding common stock of Galileo International, Inc., a
leading provider of electronic global distribution services for the travel
industry, at an expected value of $33 per share, or approximately $2.9 billion
in aggregate. As part of the acquisition, we will also assume approximately $600
million of Galileo net debt. The final acquisition price will be paid in a
combination of CD common stock and cash. The number of shares of CD common stock
to be paid to Galileo stockholders will fluctuate, between 116 million and 137
million shares, within a collar of $17 to $20 per share of CD common stock. The
remainder of the purchase price, approximately $562 million, will be paid in
cash and may fluctuate if the average price per share of CD common stock during
a stipulated period is above or below the collar. We anticipate funding the cash
portion of the final acquisition price from available cash, lines of credit or
debt issuances. The transaction is subject to customary regulatory approvals and
the approval of Galileo's stockholders. Although no assurances can be given, we
expect the transaction to close in the fall of 2001.
On April 2, 2001, we acquired all of the outstanding shares of Fairfield
Communities, one of the largest vacation ownership companies in the United
States, for approximately $750 million in cash, including transaction costs and
expenses and the conversion of Fairfield employee stock options into CD common
stock options. The acquisition was funded from available cash.
On March 1, 2001, we acquired all of the outstanding shares of Avis Group that
were not currently owned by us at a price of $33.00 per share in cash, or
approximately $994 million, including $40 million of transaction costs and
expenses.
On February 16, 2001, we completed the sale of our real estate Internet portal,
move.com, along with certain ancillary businesses to Homestore.com, Inc. in
exchange for approximately 21 million shares of Homestore common stock valued at
$718 million. We recorded a gain of $548 million on the sale of these
businesses.
We continually explore and conduct discussions with regard to acquisitions and
other strategic corporate transactions in our industries and in other franchise,
franchisable or service businesses in addition to transactions previously
announced. As part of our regular on-going evaluation of acquisition
opportunities, we currently are 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 CD common
stock or other of our securities, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other things,
initiate and complete satisfactorily our 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;
57
and, if necessary, secure financing. No assurance can be given with respect to
the timing, likelihood or business effect of any possible transaction. In the
past, we have been involved in both relatively small acquisitions and
acquisitions which have been significant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 1999, the Emerging Issues Task Force released Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Interests in Securitized Financial Assets." EITF Issue No. 99-20 modifies the
accounting for interest income and impairment of beneficial interests in
securitization transactions for quarters beginning after March 15, 2001, whereby
beneficial interests determined to have an other-than-temporary impairment are
required to be written down to fair value. We adopted EITF Issue No. 99-20 on
January 1, 2001, which resulted in a non-cash charge of $46 million ($27
million, after tax) to account for the cumulative effect of the accounting
change in the first quarter of 2001.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments and hedging activities. All
derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated in a fair-value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated in a cash-flow hedge, the changes in the fair value of the
derivative will be recorded in other comprehensive income and will be recognized
in the income statement when the hedged item affects earnings. SFAS No. 133
defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, the changes in
fair value will be recognized in earnings.
As of January 1, 2001, we recorded a $16 million ($11 million, after tax)
non-cash charge as a cumulative transition adjustment to earnings relating to
derivatives not designated as hedges prior to adopting SFAS No. 133 and to
derivatives designated in fair-value-type hedges. As provided for in SFAS No.
133, we also reclassified certain investment securities as trading securities at
January 1, 2001. This reclassification resulted in a pre-tax benefit of
approximately $10 million, which was also recorded in first quarter 2001.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--a replacement
of FASB Statement No. 125." SFAS No. 140 revises criteria for accounting for
securitizations, other financial-asset transfers and collateral and introduces
new disclosures, but otherwise carries forward most of the provisions of SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" without amendment. We adopted the disclosure
requirements of SFAS No. 140 on December 31, 2000, as required. All other
provisions of SFAS No. 140 were adopted during second quarter 2001, as required
by the standard. The impact of adopting the remaining provisions of this
standard was not material to our financial position or results of operations.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Annual Report on Form 10-K/A are subject to
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements 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. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
58
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical acts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements:
o the effect of economic conditions and interest rate changes on the economy
on a national, regional or international basis and the impact thereof on
our businesses;
o the effects of changes in current interest rates, particularly on our real
estate franchise and mortgage businesses;
o the resolution or outcome of our unresolved pending litigation relating to
the previously announced accounting irregularities and other related
litigation;
o our ability to develop and implement operational and financial systems to
manage growing operations and to achieve enhanced earnings or effect cost
savings;
o competition in our existing and potential future lines of business and the
financial resources of, and products available to, competitors;
o our ability to integrate and operate successfully acquired and merged
businesses and risks associated with such businesses, including the
pending acquisition of Galileo and the acquisitions of Avis Group and
Fairfield Communities, the compatibility of the operating systems of the
combining companies, and the degree to which our existing administrative
and back-office functions and costs and those of the acquired companies
are complementary or redundant;
o our ability to obtain financing on acceptable terms to finance our growth
strategy and to operate within the limitations imposed by financing
arrangements and rating agencies;
o competitive and pricing pressures in the vacation ownership and travel
industries, including the car rental industry;
o changes in the vehicle manufacturer repurchase arrangements between
vehicle manufacturers and Avis Group in the event that used vehicle values
decrease; and
o changes in laws and regulations, including changes in accounting standards
and privacy policy regulation.
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. Most of these factors are
difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
59
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use various financial instruments, particularly interest rate swaps, forward
delivery commitments and futures and options contracts to manage and reduce the
interest rate risk related specifically to our committed mortgage pipeline,
mortgage loan inventory, mortgage servicing rights, mortgage-backed securities,
debt and certain other interest bearing liabilities. Foreign currency forwards
are also used to manage and reduce the foreign currency exchange rate risk
related to our foreign currency denominated translational and transactional
exposures.
We are exclusively an end user of these instruments, which are commonly referred
to as derivatives. We do not engage in trading, market-making, or other
speculative activities in the derivatives markets. Our derivative financial
instruments are designated as hedges of underlying exposures, as those
instruments demonstrate high correlation in relation to the asset or transaction
being hedged. More detailed information about these financial instruments is
provided in Note 22--Financial Instruments to our Consolidated Financial
Statements.
Our principal market exposures are interest and foreign currency rate risks.
o Interest rate movements in one country as well as relative interest
rate movements between countries can materially impact our
profitability. Our primary interest rate exposure is to interest rate
fluctuations in the United States, specifically long-term U.S.
Treasury and mortgage interest rates due to their impact on mortgage
prepayments, mortgage loans held for sale, and anticipated mortgage
production arising from commitments issued and also LIBOR and
commercial paper interest rates due to their impact on variable rate
borrowings and other interest rate sensitive liabilities. We
anticipate that such interest rates will remain a primary market
exposure for the foreseeable future.
o Our primary foreign currency rate exposure is to exchange rate
fluctuations in the British pound sterling. We anticipate that such
foreign currency exchange rate risk will remain a primary market
exposure for the foreseeable future.
We assess our market risk based on changes in interest and foreign currency
exchange rates utilizing a sensitivity analysis. The sensitivity analysis
measures the potential loss in earnings, fair values and cash flows based on a
hypothetical 10% change (increase and decrease) in interest and currency rates.
We use a discounted cash flow model in determining the fair value of relocation
receivables, equity advances on homes, mortgage loans, commitments to fund
mortgages, mortgage servicing rights and mortgage-backed securities. The primary
assumptions used in these models are prepayment speeds and discount rates. In
determining the fair value of mortgage servicing rights and mortgage-backed
securities, the models also utilize credit losses and mortgage servicing
revenues and expenses as primary assumptions. In addition, for commitments to
fund mortgages, the borrower's propensity to close their mortgage loan under the
commitment is used as a primary assumption. For mortgage loans and commitments
to fund mortgages forward delivery contracts and options, we use an
option-adjusted spread ("OAS") model in determining the impact of interest rate
shifts. We also utilize the OAS model to determine the impact of interest rate
shifts on mortgage servicing rights and mortgage-backed securities. The primary
assumption in an OAS model is the implied market volatility of interest rates
and prepayment speeds and the same primary assumptions used in determining fair
value.
We use a duration-based model in determining the impact of interest rate shifts
on our debt portfolio, certain other interest bearing liabilities and interest
rate derivatives portfolios. The primary assumption used in these models is that
a 10% increase or decrease in the benchmark interest rate produces a parallel
shift in the yield curve across all maturities.
We use a current market pricing model to assess the changes in the value of the
U.S. dollar on foreign currency denominated monetary assets and liabilities and
derivatives. The primary assumption used in these
60
models is a hypothetical 10% weakening or strengthening of the U.S. dollar
against all our currency exposures at December 31, 2000.
Our total market risk is influenced by a wide variety of factors including the
volatility present within the markets and the liquidity of the markets. There
are certain limitations inherent in the sensitivity analyses presented. While
probably the most meaningful analysis permitted, these "shock tests" are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and the inability to include the complex market
reactions that normally would arise from the market shifts modeled.
We used December 31, 2000 and 1999 market rates on our instruments to perform
the sensitivity analyses separately for each of our market risk
exposures--interest and currency rate instruments. The estimates are based on
the market risk sensitive portfolios described in the preceding paragraphs and
assume instantaneous, parallel shifts in interest rate yield curves and exchange
rates.
We have determined that the impact of a 10% change in interest and foreign
currency exchange rates and prices on our earnings, fair values and cash flows
would not be material.
While these results may be used as benchmarks, they should not be viewed as
forecasts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement Index commencing on page F-1
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Annual Proxy Statement under the
sections titled "Executive Officers", "Election of Directors", "Executive
Officers" and "Compliance with Section 16(a) of the Exchange Act" are
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's Annual Proxy Statement under the
section titled "Executive Compensation and Other Information" is incorporated
herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's Annual 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 Annual Proxy Statement under the
section titled "Certain Relationships and Related Transactions" is incorporated
herein by reference in response to this item.
61
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 G-1 hereof.
ITEM 14(B) REPORTS ON FORM 8-K
On October 23, 2000, we filed a current report on Form 8-K to report under Item
5 third quarter 2000 financial results.
On October 26, 2000, we filed a current report on Form 8-K to report under Item
5 the reclassification of our Individual Membership segment as a discontinued
operation and selected financial information thereof.
On November 3, 2000, we filed a current report on Form 8-K to report under Item
5 our agreement with Homestore.com, Inc. to sell our real estate Internet
portal, move.com, along with certain ancillary businesses certain businesses and
our agreement to acquire Fairfield Communities, Inc.
On November 20, 2000, we filed a current report on Form 8-K to report under Item
5 our agreement to acquire Avis Group Holdings, Inc.
On November 29, 2000, we filed a current report on Form 8-K to report under Item
5 the restatement of our consolidated financial statements at December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
to reflect the reclassification of our individual membership business as a
discontinued operation.
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
Vice Chairman and General Counsel
Date: July 2, 2001
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, Chief Executive July 2, 2001
(Henry R. Silverman) Officer and Director
/s/ JAMES E. BUCKMAN Vice Chairman, General
------------------------------------------------- Counsel and Director July 2, 2001
(James E. Buckman)
/s/ STEPHEN P. HOLMES Vice Chairman and Director July 2, 2001
-------------------------------------------------
(Stephen P. Holmes)
/s/ KEVIN M. SHEEHAN Senior Executive Vice
------------------------------------------------- President and Chief July 2, 2001
(Kevin M. Sheehan) Financial Officer
/s/ TOBIA IPPOLITO Executive Vice President and
------------------------------------------------- Chief Accounting Officer July 2, 2001
(Tobia Ippolito)
/s/ MYRA J. BIBLOWIT Director July 2, 2001
-------------------------------------------------
(Myra J. Biblowit)
/s/ THE HONORABLE WILLIAM S. COHEN Director July 2, 2001
-------------------------------------------------
(The Honorable William S. Cohen)
/s/ LEONARD S. COLEMAN Director July 2, 2001
-------------------------------------------------
(Leonard S. Coleman)
/s/ MARTIN L. EDELMAN Director July 2, 2001
-------------------------------------------------
(Martin L. Edelman)
/s/ DR. JOHN C. MALONE Director July 2, 2001
-------------------------------------------------
(Dr. John C. Malone)
/s/ CHERYL D. MILLS Director July 2, 2001
-------------------------------------------------
(Cheryl D. Mills)
63
Signature Title Date
--------- ----- ----
/s/ THE RT. HON. BRIAN MULRONEY Director July 2, 2001
-------------------------------------------------
(The Rt. Hon. Brian Mulroney, P.C., L.L.D.)
/s/ ROBERT E. NEDERLANDER Director July 2, 2001
-------------------------------------------------
(Robert E. Nederlander)
/s/ ROBERT W. PITTMAN Director July 2, 2001
-------------------------------------------------
(Robert W. Pittman)
/s/ SHELI Z. ROSENBERG Director July 2, 2001
-------------------------------------------------
(Sheli Z. Rosenberg)
/s/ ROBERT F. SMITH Director July 2, 2001
-------------------------------------------------
(Robert F. Smith)
64
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998 F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cendant Corporation
We have audited the accompanying consolidated balance sheets of Cendant
Corporation and subsidiaries (the "Company") as of December 31, 2000 and
1999 and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of the Company at December 31, 2000 and 1999 and the consolidated
results of its operations and its cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2000, the Company revised certain revenue recognition policies
regarding the recognition of non-refundable one-time fees and pro rata
refundable subscription revenue.
As discussed in Note 1, the accompanying consolidated financial statements
have been restated to reflect the individual membership business as a
continuing operation for all periods presented.
/s/ Deloitte & Touche LLP
New York, New York
July 2, 2001
F-2
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Year Ended December 31,
---------------------------------
2000 1999 1998
------- ------- -------
Revenues
Membership and service fees, net $ 4,512 $ 5,187 $ 5,102
Fleet leasing -- 700 1,369
Other 147 189 114
------- ------- -------
Net revenues 4,659 6,076 6,585
------- ------- -------
Expenses
Operating 1,426 1,795 1,870
Marketing and reservation 898 1,017 1,158
General and administrative 610 671 666
Vehicle depreciation, lease charges and interest, net -- 674 1,301
Non-vehicle depreciation and amortization 352 371 323
Other charges (credits):
Restructuring and other unusual charges 109 110 (67)
Investigation-related costs 23 21 33
Litigation settlement and related costs (21) 2,894 351
Termination of proposed acquisitions -- 7 433
Executive terminations -- -- 53
Investigation-related financing costs -- -- 35
Non-vehicle interest, net 148 199 114
------- ------- -------
Total expenses 3,545 7,759 6,270
------- ------- -------
Net gain (loss) on dispositions of businesses (8) 1,109 --
------- ------- -------
Income (loss) before income taxes and minority interest 1,106 (574) 315
Provision (benefit) for income taxes 362 (406) 104
Minority interest, net of tax 84 61 51
------- ------- -------
Income (loss) from continuing operations 660 (229) 160
Discontinued operations:
Loss from discontinued operations, net of tax -- -- (25)
Gain on disposal of discontinued operations, net of tax -- 174 405
------- ------- -------
Income (loss) before extraordinary loss and cumulative effect of
accounting change 660 (55) 540
Extraordinary loss, net of tax (2) -- --
------- ------- -------
Income (loss) before cumulative effect of accounting change 658 (55) 540
Cumulative effect of accounting change, net of tax (56) -- --
------- ------- -------
Net income (loss) $ 602 $ (55) $ 540
======= ======= =======
CD common stock income (loss) per share
Basic
Income (loss) from continuing operations $ 0.92 $ (0.30) $ 0.19
Net income (loss) $ 0.84 $ (0.07) $ 0.64
Diluted
Income (loss) from continuing operations $ 0.89 $ (0.30) $ 0.18
Net income (loss) $ 0.81 $ (0.07) $ 0.61
Move.com common stock loss per share
Basic
Loss from continuing operations $ (1.76)
Net loss $ (1.76)
Diluted
Loss from continuing operations $ (1.76)
Net loss $ (1.76)
See Notes to Consolidated Financial Statements.
F-3
Cendant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
December 31,
----------------------
2000 1999
-------- --------
Assets
Current assets
Cash and cash equivalents $ 944 $ 1,164
Receivables (net of allowance for doubtful accounts of $58 and $68) 753 1,026
Deferred income taxes 174 1,427
Other current assets 857 975
-------- --------
Total current assets 2,728 4,592
Property and equipment (net of accumulated depreciation of $547 and $390) 1,345 1,347
Stockholder litigation settlement trust 350 --
Deferred income taxes 1,108 --
Franchise agreements (net of accumulated amortization of $264 and $216) 1,462 1,410
Goodwill (net of accumulated amortization of $388 and $297) 3,176 3,271
Other intangibles (net of accumulated amortization of $151 and $143) 647 662
Other assets 1,395 1,141
-------- --------
Total assets exclusive of assets under programs 12,211 12,423
-------- --------
Assets under management and mortgage programs
Relocation receivables 329 530
Mortgage loans held for sale 879 1,112
Mortgage servicing rights 1,653 1,084
-------- --------
2,861 2,726
-------- --------
Total assets $ 15,072 $ 15,149
======== ========
Liabilities and stockholders' equity
Current liabilities
Accounts payable and other current liabilities $ 1,446 $ 1,319
Current portion of long-term debt -- 400
Stockholder litigation settlement -- 2,852
Deferred income 1,020 1,039
-------- --------
Total current liabilities 2,466 5,610
Long-term debt 1,948 2,445
Stockholder litigation settlement 2,850 --
Deferred income 411 413
Deferred income taxes -- 306
Other noncurrent liabilities 49 67
-------- --------
Total liabilities exclusive of liabilities under programs 7,724 8,841
-------- --------
Liabilities under management and mortgage programs
Debt 2,040 2,314
Deferred income taxes 476 310
-------- --------
2,516 2,624
-------- --------
Mandatorily redeemable preferred interest in a subsidiary 375 --
-------- --------
Mandatorily redeemable preferred securities issued by subsidiary holding
solely senior debentures issued by the Company 1,683 1,478
-------- --------
Commitments and contingencies (Note 18)
Stockholders' equity
Preferred stock, $.01 par value-authorized 10 million shares; none issued and outstanding -- --
CD common stock, $.01 par value - authorized 2 billion shares; issued 914,655,918 and
870,399,635 shares 9 9
Move.com common stock, $.01 par value - authorized 500 million shares and none; issued
and outstanding 2,181,586 shares and none; notional issued shares with respect to Cendant
Group's retained interest 22,500,000 and none -- --
Additional paid-in capital 4,540 4,102
Retained earnings 2,027 1,425
Accumulated other comprehensive loss (234) (42)
CD treasury stock, at cost, 178,949,432 and 163,818,148 shares (3,568) (3,288)
-------- --------
Total stockholders' equity 2,774 2,206
-------- --------
Total liabilities and stockholders' equity $ 15,072 $ 15,149
======== ========
See Notes to Consolidated Financial Statements.
F-4
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Operating Activities
Net income (loss) $ 602 $ (55) $ 540
Adjustments to arrive at income (loss) from continuing operations 58 (174) (380)
-------- -------- --------
Income (loss) from continuing operations 660 (229) 160
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities from continuing operations:
Depreciation and amortization 352 371 323
Non-cash portion of other charges, net 24 2,869 188
Net (gain) loss on dispositions of businesses 8 (1,109) --
Deferred income taxes (1) 252 (111)
Net change in assets and liabilities:
Receivables 182 (193) (126)
Income taxes 343 (133) (98)
Accounts payable and other current liabilities (223) (500) 96
Deferred income (77) (88) 82
Other, net (236) (209) (186)
-------- -------- --------
Net cash provided by operating activities from continuing operations
exclusive of management and mortgage programs 1,032 1,031 328
-------- -------- --------
Management and mortgage programs:
Depreciation and amortization 153 698 1,260
Origination of mortgage loans (24,196) (25,025) (26,572)
Proceeds on sale of and payments from mortgage loans held for sale 24,428 26,328 25,792
-------- -------- --------
385 2,001 480
-------- -------- --------
Net cash provided by operating activities from continuing operations 1,417 3,032 808
-------- -------- --------
Investing Activities
Property and equipment additions (246) (277) (355)
Funding of stockholder litigation settlement trust (350) -- --
Proceeds from sales of marketable securities 379 741 --
Purchases of marketable securities (441) (672) --
Purchases of investments (90) (18) (24)
Net assets acquired (net of cash acquired) and acquisition-related payments (111) (205) (2,852)
Net proceeds from dispositions of businesses 4 3,509 314
Other, net 5 47 107
-------- -------- --------
Net cash provided by (used in) investing activities from continuing
operations exclusive of management and mortgage programs (850) 3,125 (2,810)
-------- -------- --------
F-5
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
Year Ended December 31,
---------------------------------
2000 1999 1998
------- ------- -------
Management and mortgage programs:
Equity advances on homes under management $(2,505) $(7,608) $(6,484)
Repayment on advances on homes under management 2,877 7,688 6,624
Additions to mortgage servicing rights (778) (727) (524)
Proceeds from sales of mortgage servicing rights 84 156 119
Investment in leases and leased vehicles -- (2,378) (2,447)
Payments received on investment in leases and leased vehicles -- 1,529 987
Proceeds from sales and transfers of leases and leased vehicles to
third parties -- 75 183
------- ------- -------
(322) (1,265) (1,542)
------- ------- -------
Net cash provided by (used in) investing activities from continuing
operations (1,172) 1,860 (4,352)
------- ------- -------
Financing Activities
Principal payments on borrowings (897) (2,213) (2,596)
Proceeds from borrowings -- 1,719 4,809
Proceeds from mandatorily redeemable preferred interest in a subsidiary 375 -- --
Proceeds from mandatorily redeemable preferred securities issued by
subsidiary holding solely senior debentures issued by the Company 91 -- 1,447
Issuances of common stock 603 127 171
Repurchases of CD common stock (381) (2,863) (258)
------- ------- -------
Net cash provided by (used in) financing activities from continuing
operations exclusive of management and mortgage programs (209) (3,230) 3,573
------- ------- -------
Management and mortgage programs:
Proceeds from borrowings 4,208 5,263 4,300
Principal payments on borrowings (5,420) (7,838) (3,090)
Net change in short-term borrowings 938 (2,000) (93)
Proceeds received for debt repayment in connection with disposal of
fleet businesses -- 3,017 --
------- ------- -------
(274) (1,558) 1,117
------- ------- -------
Net cash provided by (used in) financing activities from continuing
operations (483) (4,788) 4,690
------- ------- -------
Effect of changes in exchange rates on cash and cash equivalents 18 51 (16)
------- ------- -------
Net cash used in discontinued operations -- -- (188)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (220) 155 942
Cash and cash equivalents, beginning of period 1,164 1,009 67
------- ------- -------
Cash and cash equivalents, end of period $ 944 $ 1,164 $ 1,009
======= ======= =======
Supplemental Disclosure of Cash Flow Information
Interest payments $ 263 $ 451 $ 543
======= ======= =======
Income tax refunds, net $ (67) $ (46) $ (23)
======= ======= =======
See Notes to Consolidated Financial Statements.
F-6
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
Accumulated
Common Stock Additional Other Total
--------------- Paid-in Retained Comprehensive Treasury Stockholders'
Shares Amount Capital Earnings Loss Stock Equity
------ ------ ---------- -------- ------------- ------- -------------
Balance at January 1, 1998 838 $8 $ 3,085 $ 940 $(38) $ (74) $ 3,921
Comprehensive income:
Net income -- -- -- 540 -- --
Currency translation
adjustment -- -- -- -- (11) --
Total comprehensive income 529
Exercise of stock options 17 1 168 -- -- -- 169
Tax benefit from exercise of
stock options -- -- 147 -- -- -- 147
Conversion of convertible
notes 6 -- 114 -- -- -- 114
Repurchases of CD common
stock -- -- -- -- -- (258) (258)
Mandatorily redeemable
preferred securities issued
by subsidiary holding solely
senior debentures issued by
the Company -- -- (66) -- -- -- (66)
Common stock received as
consideration in sale of
discontinued operations -- -- -- -- -- (135) (135)
Rights issuable -- -- 350 -- -- -- 350
Other -- -- 65 -- -- -- 65
--- -- ------- ------- ---- ------- -------
Balance at December 31, 1998 861 9 3,863 1,480 (49) (467) 4,836
Comprehensive loss:
Net loss -- -- -- (55) -- --
Currency translation
adjustment -- -- -- -- (69) --
Unrealized gain on
marketable securities, net
of tax of $22 -- -- -- -- 37 --
Reclassification adjustments,
net of tax of $13 -- -- -- -- 39 --
Total comprehensive loss (48)
Exercise of stock options 9 -- 81 -- -- 42 123
Tax benefit from exercise of
stock options -- -- 52 -- -- -- 52
Repurchases of CD common
stock -- -- -- -- -- (2,863) (2,863)
Modifications of stock option
plans due to dispositions of
businesses -- -- 83 -- -- -- 83
Rights issuable -- -- 22 -- -- -- 22
Other -- -- 1 -- -- -- 1
--- -- ------- ------- ---- ------- -------
Balance at December 31, 1999 870 9 4,102 1,425 (42) (3,288) 2,206
--- -- ------- ------- ---- ------- -------
F-7
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(In millions)
Accumulated
Common Stock Additional Other Total
----------------- Paid-in Retained Comprehensive Treasury Stockholders'
Shares Amount Capital Earnings Loss Stock Equity
------ ------ ---------- -------- ------------- -------- -------------
Balance at December 31, 1999 870 $9 $ 4,102 $1,425 $ (42) $(3,288) $ 2,206
Comprehensive income:
Net income -- -- -- 602 -- --
Currency translation
adjustment -- -- -- -- (107) --
Unrealized loss on
marketable securities, net
of tax of ($40) -- -- -- -- (65) --
Reclassification adjustments,
net of tax of ($12) -- -- -- -- (20) --
Total comprehensive income 410
Issuances of CD common
stock 28 -- 476 -- -- -- 476
Issuances of Move.com
common stock 4 -- 93 -- -- -- 93
Exercise of stock options 17 -- 56 -- -- 26 82
Tax benefit from exercise of
stock options -- -- 66 -- -- -- 66
Repurchases of CD common
stock -- -- -- -- -- (306) (306)
Repurchases of Move.com
common stock (2) -- (100) -- -- -- (100)
Mandatorily redeemable
preferred securities issued
by subsidiary holding solely
senior debentures issued by
the Company -- -- (108) -- -- -- (108)
Rights issuable -- -- (41) -- -- -- (41)
Other -- -- (4) -- -- -- (4)
--- -- ------- ------ ----- ------- -------
Balance at December 31, 2000 917 $9 $ 4,540 $2,027 $(234) $(3,568) $ 2,774
=== == ======= ====== ===== ======= =======
See Notes to Consolidated Financial Statements.
F-8
Cendant Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
Cendant Corporation is a global provider of a wide range of complementary
consumer and business services. The Consolidated Financial Statements
include the accounts of Cendant Corporation and its subsidiaries
(collectively, "the Company"). In presenting the Consolidated Financial
Statements, management makes estimates and assumptions that affect the
amounts reported and related disclosures. Estimates, by their nature, are
based on judgment and available information. Accordingly, actual results
could differ from those estimates. Certain reclassifications have been
made to prior year amounts to conform to the current year presentation. In
connection with the acquisition of Avis Group Holdings, Inc. ("Avis
Group") on March 1, 2001, the Company changed its presentation of fleet
leasing revenues to a gross presentation with the associated costs
included as a component of expenses in the accompanying Consolidated
Statements of Operations for all periods presented.
On July 2, 2001, the Company entered into a number of agreements,
including a forty-year outsourcing agreement, with a third party whereby
the Company will have an ongoing interest in its individual membership
business. Prior to entering into these agreements, the Company had planned
to spin-off this business to its stockholders and therefore had treated
the results of this business as a discontinued operation. As a result of
this change in plan and the Company's ongoing involvement in this
business, the Consolidated Financial Statements and Notes thereto have
been amended to reverse the classification of the Company's individual
membership business as a discontinued operation. Accordingly, the account
balances and activities of the individual membership business have been
reclassified from discontinued operations to continuing operations for all
periods presented. The amended Consolidated Financial Statements presented
herein are the Company's historical financial statements for all periods
presented.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investments in Affiliates
Investments in affiliates over which the Company has significant influence
but not a controlling interest are carried on the equity method of
accounting.
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is computed
utilizing the straight-line method over the estimated useful lives of the
related assets. Useful lives range from 5 to 60 years for buildings and
improvements and 3 to 10 years for furniture, fixtures and equipment.
Amortization of leasehold improvements is computed utilizing the
straight-line method over the estimated benefit period of the related
assets or the lease term, if shorter, ranging from 2 to 15 years.
Franchise agreements for hotel, real estate brokerage, car rental and tax
return preparation services are amortized on a straight-line basis over
the estimated periods to be benefited, ranging from 12 to 40 years. Other
intangibles are amortized on a straight-line basis over the estimated
periods to be benefited, ranging from 3 to 40 years.
Goodwill
F-9
Goodwill, which represents the excess of cost over fair value of net
assets acquired in purchase business combinations, is amortized on a
straight-line basis over the estimated periods to be benefited,
substantially ranging from 25 to 40 years.
Asset Impairments
The Company periodically evaluates the recoverability of its long-lived
assets, identifiable intangibles and goodwill, comparing the respective
carrying values to the current and expected future cash flows, on an
undiscounted basis, to be generated from such assets. Property and
equipment is evaluated separately within each business. The recoverability
of goodwill and franchise agreements is evaluated on a separate basis for
each acquisition and franchise brand, respectively. Any enterprise
goodwill and franchise agreements are also evaluated using the
undiscounted cash flow method.
Based on an evaluation of its intangible assets and in connection with the
Company's regular forecasting processes during 1998, the Company
determined that $37 million of goodwill associated with a Company
subsidiary, National Library of Poetry, was permanently impaired. This
impairment is classified as an operating expense in the Consolidated
Statements of Operations.
Derivative Instruments
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with
fluctuations in interest rates, foreign currency exchange rates, prices of
mortgage loans held for sale, anticipated mortgage loan closings arising
from commitments issued and changes in the value of mortgage servicing
rights. As a matter of policy, the Company does not use derivatives for
trading or speculative purposes.
o The differential to be paid or received on interest rate swaps
hedging interest sensitive liabilities is accrued and
recognized as an adjustment to interest expense in the
Consolidated Statements of Operations.
o Gains and losses on foreign currency forwards that are
effective as hedges of net assets in foreign subsidiaries are
offset against currency translation adjustments as accumulated
other comprehensive income (loss).
o Gains and losses on foreign currency hedges of anticipated
transactions, forecasted earnings of foreign subsidiaries and
hedges of certain monetary assets and liabilities are
recognized in other revenues in the Consolidated Statements of
Operations, on a mark-to-market basis, as exchange rates
change.
o Gains and losses on forward delivery contracts and options
used to reduce the risk of adverse price fluctuations
affecting the Company's mortgage loans held for sale and
anticipated mortgage production arising from commitments
issued are deferred and included in the Company's lower of
cost or market valuation of the hedged items.
o Gains and losses on derivative instruments used to manage the
financial impact of interest rate movements associated with
the Company's mortgage servicing portfolio are deferred and
recorded as adjustments to the basis of the hedged item.
Premiums paid/received on the hedged instruments are
capitalized and amortized over the life of the contracts.
Although these contracts are effective economic hedges, many will not
qualify for hedge accounting treatment upon the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 133.
Revenue Recognition
F-10
Franchising. Franchise revenue principally consists of royalties, as well
as marketing and reservation fees, which are primarily based on a
percentage of franchisee revenue. Royalty, marketing and reservation fees
are accrued as the underlying franchisee revenue is earned. Annual rebates
given to certain franchisees on royalty fees are recorded as a reduction
to revenues and are accrued in direct proportion to the recognition of the
underlying gross franchise revenue. Franchise revenue also includes
initial franchise fees, which are recognized as revenue when all material
services or conditions relating to the sale have been substantially
performed, which is generally when a franchised unit is opened.
Timeshare. Timeshare revenue principally consists of exchange fees and
subscription revenue. Exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscribing members.
Subscription revenue represents the fees from subscribing members. There
is no separate fee charged for the participation in the timeshare exchange
network. Beginning on January 1, 2000, subscription revenue is recognized
as revenue on a straight line basis over the subscription period during
which delivery of publications and other services are provided to the
subscribing members. Prior to 2000, the Company recognized subscription
revenue as discussed in "Change in Accounting Policy." Subscriptions are
cancelable and refundable on a pro rata basis. Subscription procurement
costs are expensed as incurred. Such costs were $32 million, $31 million
and $31 million for 2000, 1999 and 1998.
Individual Membership. Membership revenue is generally recognized upon the
expiration of the membership period. Memberships are generally cancelable
for a full refund of the membership fee during the entire membership
period, generally one year. Certain memberships are subject to a pro rata
refund. Revenues for such memberships are recognized ratably over the
membership period.
Insurance/Wholesale. Commissions received from the sale of third party
accidental death and dismemberment insurance are recognized over the
underlying policy period. The Company also receives a share of the excess
of premiums paid to insurance carriers less claims experience to date,
claims incurred but not reported and carrier management expenses. The
Company's share of this excess is accrued based on claims experience to
date, including an estimate of claims incurred but not reported.
During 1999, the Company changed the amortization period for customer
acquisition costs related to accidental death and dismemberment insurance
products, which resulted in a reduction in expenses of $16 million ($10
million, after tax or $0.01 per diluted share). The change was based upon
new information becoming available to determine customer retention rates.
Relocation. Revenues and related costs associated with the purchase and
resale of a transferee's residence are recognized as services are
provided. Relocation services revenue is generally recorded net of costs
reimbursed by client corporations and interest expense incurred to fund
the purchase of a transferee's residence. Revenue for other fee-based
programs, such as home marketing assistance, household goods moves and
destination services, are recognized over the periods in which the
services are provided and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection with
the sale of loans and certain direct loan origination costs associated
with loans are deferred until such loans are sold. Mortgage loans are
recorded at the lower of cost or market value on an aggregate basis. Sales
of mortgage loans are generally recorded on the date a loan is delivered
to an investor. Gains or losses on sales of mortgage loans are recognized
based upon the difference between the selling price and the carrying value
of the related mortgage loans sold.
Fees received for servicing loans owned by investors are credited to
income when earned. Costs associated with loan servicing are charged to
expense as incurred.
Mortgage servicing rights ("MSRs") are amortized over the estimated life
of the related loan portfolio in proportion to projected net servicing
revenues. Such amortization is recorded as a reduction of net servicing
F-11
revenue in the Consolidated Statements of Operations. The Company
estimates future prepayment rates based on current interest rate levels,
other economic conditions and market forecasts, as well as relevant
characteristics of the servicing portfolio, such as loan types, interest
rate stratification and recent prepayment experience. Gains or losses on
the sale of MSRs are recognized when title and all risks and rewards have
irrevocably passed to the buyer and there are no significant unresolved
contingencies. For purposes of performing its impairment evaluation, the
Company stratifies its portfolio on the basis of interest rates of the
underlying mortgage loans. The Company measures impairment for each
stratum by comparing estimated fair value to the recorded book value.
Temporary impairment is recorded through a valuation allowance in the
period of occurrence.
Fleet. The Company primarily leased its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). Each lease was either
classified as an operating lease or a direct financing lease, as
appropriate. Lease revenues were recognized based on rentals. Revenues
from fleet management services other than leasing were recognized over the
period in which services were provided and the related expenses were
incurred.
Advertising Expenses
Advertising costs, including direct response advertising related to
membership programs, are generally expensed in the period incurred.
Advertising expenses in 2000, 1999 and 1998 were $502 million, $589
million and $685 million, respectively.
Stock-Based Compensation
The Company utilizes the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for its stock option plans to employees. Under APB No. 25,
compensation expense is recognized when the exercise prices of the
Company's employee stock options are less than the market prices of the
underlying Company stock on the date of grant.
Change in Accounting Policy
On January 1, 2000, the Company revised certain revenue recognition
policies regarding the recognition of non-refundable one-time fees and the
recognition of pro rata refundable subscription revenue as a result of the
adoption of Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." The Company previously recognized
non-refundable one-time fees at the time of contract execution and cash
receipt. This policy was changed to the recognition of non-refundable
one-time fees on a straight line basis over the life of the underlying
contract. The Company previously recognized pro rata refundable
subscription revenue equal to procurement costs upon initiation of a
subscription. Additionally, the amount in excess of procurement costs was
recognized over the subscription period. This policy was changed to the
recognition of pro rata refundable subscription revenue on a straight line
basis over the subscription period. Procurement costs will continue to be
expensed as incurred. The percentage of annual revenues that were earned
from non-refundable one-time fees and from pro rata refundable
subscription revenue was not material to the Company's consolidated net
revenues or to its consolidated income from continuing operations. The
adoption of SAB No. 101 also resulted in a non-cash charge of
approximately $89 million ($56 million, after tax) on January 1, 2000 to
account for the cumulative effect of the accounting change.
Recently Issued Accounting Pronouncements
F-12
In November 1999, the Emerging Issues Task Force ("EITF") released Issue
No. 99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Interests in Securitized Financial Assets." EITF Issue No. 99-20
modifies the accounting for interest income and impairment of beneficial
interests in securitization transactions for quarters beginning after
March 15, 2001, whereby beneficial interests determined to have an
other-than-temporary impairment are required to be written down to fair
value. The Company adopted the provisions of EITF Issue No. 99-20 on
January 1, 2001. The adoption resulted in the recognition of a non-cash
charge of $46 million ($27 million, after tax) during first quarter 2001
to account for the cumulative effect of the accounting change.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments and hedging activities. All derivatives, whether designated in
hedging relationships or not, will be required to be recorded on the
balance sheet at fair value. If the derivative is designated in a
fair-value hedge, the changes in the fair value of the derivative and the
hedged item will be recognized in earnings. If the derivative is
designated in a cash-flow hedge, the changes in the fair value of the
derivative will be recorded in other comprehensive income (loss) and will
be recognized in the income statement when the hedged item affects
earnings. SFAS No. 133 defines new requirements for designation and
documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does
not qualify as a hedge, the changes in fair value will be recognized in
earnings.
The Company adopted the provisions of SFAS No. 133 on January 1, 2001. The
adoption resulted in the recognition of a non-cash charge of $16 million
($11 million, after tax) to account for the cumulative effect of the
accounting change as of January 1, 2001 relating to derivatives not
designated as hedges prior to adopting SFAS No. 133 and to derivatives
designated in fair value-type hedges. As provided for in SFAS No. 133, the
Company also reclassified certain financial investments as trading
securities at January 1, 2001, which resulted in the recognition of a
pre-tax benefit of $10 million during first quarter 2001.
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities--a replacement of FASB Statement
No. 125." SFAS No. 140 revises criteria for accounting for
securitizations, other financial-asset transfers and collateral and
introduces new disclosures, but otherwise carries forward most of the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" without amendment.
The Company adopted the disclosure requirements of SFAS No. 140 on
December 31, 2000, as required. All other provisions of SFAS No. 140 will
be adopted after March 31, 2001, as required by the standard. The impact
of adopting the remaining provisions of this standard was not material to
the Company's financial position or results of operations.
2. Earnings Per Share
On March 21, 2000, the Company's stockholders approved a proposal
authorizing a new series of common stock to track the performance of the
Move.com Group. The Company's existing common stock was reclassified as CD
common stock, which reflects the performance of the Company's other
businesses and also a retained interest in the Move.com Group
(collectively referred to as the "Cendant Group").
Earnings per share ("EPS") for periods after March 31, 2000, the date of
the original issuance of Move.com common stock, has been calculated using
the two-class method. The two-class method is an earnings allocation
formula that determines EPS for each class of common stock according to
the related earnings participation rights. Under the two-class method,
basic EPS for Move.com common stock is calculated by dividing (a) the
product of the earnings applicable to Move.com Group multiplied by the
outstanding Move.com "fraction" by (b) the weighted average number of
shares outstanding during the period. The Move.com "fraction" is a
fraction, the numerator of which is the number of shares of Move.com
common
F-13
stock outstanding and the denominator of which is the number of shares
that, if issued, would represent 100% of the equity (and would include the
22,500,000 notional shares of Move.com common stock representing Cendant
Group's retained interest in Move.com Group) in the earnings or losses of
Move.com Group.
The following table summarizes the Company's outstanding common stock
equivalents which were antidilutive and therefore excluded from the
computation of diluted EPS:
December 31,
-------------------------------
2000 1999 1998
---- ---- ----
CD Common Stock
Options(a) 110 183 38
Warrants(b) 2 2 --
Convertible debt -- 18 18
FELINE PRIDES 63 41 --
Move.com Common Stock
Options(c) 6
----------
(a) The weighted average exercise prices for antidilutive options at
December 31, 2000, 1999 and 1998 were $22.27, $15.24 and $29.58,
respectively.
(b) The weighted average exercise prices for antidilutive warrants at
December 31, 2000 and 1999 were $21.31 and $16.77, respectively.
(c) The weighted average exercise price for antidilutive options at
December 31, 2000 was $18.60.
Income (loss) per common share from continuing operations for each class
of common stock was computed as follows:
Year Ended December 31,
---------------------------
2000 1999 1998
----- ----- -----
CD Common Stock
Income (loss) from continuing operations:
Cendant Group $ 722 $(215) $ 161
Cendant Group's retained interest in Move.com Group (56) (14) (1)
----- ----- -----
Income (loss) from continuing operations for basic EPS 666 (229) 160
Convertible debt interest, net of tax 11 -- --
----- ----- -----
Income (loss) from continuing operations for diluted EPS $ 677 $(229) $ 160
----- ----- -----
Weighted average shares outstanding:
Basic 724 751 848
Stock options, warrants and non-vested shares 20 -- 32
Convertible debt 18 -- --
----- ----- -----
Diluted 762 751 880
===== ===== =====
F-14
Year Ended
December 31,
2000
------------
Move.com Common Stock
Loss from continuing operations:
Move.com Group $(62)
Less: Cendant Group's retained interest in Move.com Group (56)
----
Loss from continuing operations for basic and diluted EPS $ (6)
====
Weighted average shares outstanding:
Basic and Diluted 3
====
Income (loss) per share of CD common stock from discontinued operations is
summarized as follows:
Year Ended December 31,
-----------------------
1999 1998
--------- -----------
Loss from discontinued operations:
Basic $ -- $(0.03)
Diluted -- (0.03)
Gain on disposal of discontinued operations:
Basic $0.23 $0.48
Diluted 0.23 0.46
Basic and diluted loss per share of CD common stock from the cumulative
effect of an accounting change was $0.08 for the year ended December 31,
2000.
3. Acquisitions and Dispositions of Businesses
Acquisitions
Galileo International, Inc. On June 18, 2001, the Company announced that
it had entered into a definitive agreement to acquire all of the
outstanding common stock of Galileo International, Inc. ("Galileo"), a
leading provider of electronic global distribution services for the travel
industry, at an expected value of $33 per share, or approximately $2.9
billion in aggregate. As part of the acquisition, the Company will also
assume approximately $600 million of Galileo net debt. The final
acquisition price will be paid in a combination of CD common stock and
cash. The number of shares of CD common stock to be paid to Galileo
stockholders will fluctuate, between 116 million and 137 million shares,
within a collar of $17 to $20 per share of CD common stock. The remainder
of the purchase price, approximately $562 million, will be paid in cash
and may fluctuate if the average price per share of CD common stock during
a stipulated period is above or below the collar. The transaction is
subject to customary regulatory approvals and the approval of Galileo's
stockholders. Although no assurances can be given, the Company expects the
transaction to close in the fall of 2001.
Avis Group Holdings, Inc. On March 1, 2001, the Company acquired all of
the outstanding shares of Avis Group Holdings, Inc. ("Avis Group") that it
did not already own for $33.00 per share in cash, or approximately $994
million, including $40 million of transaction costs and expenses.
Fairfield Communities, Inc. On April 2, 2001, the Company acquired all of
the outstanding shares of Fairfield Communities, Inc. ("Fairfield"), one
of the largest vacation ownership companies in the United States, for
approximately $750 million in cash, including transaction costs and
expenses and the conversion of Fairfield employee stock options into CD
common stock options.
F-15
Dispositions
2000. On February 16, 2001, the Company completed the sale of its real
estate Internet portal, move.com, along with certain ancillary businesses
to Homestore.com, Inc. ("Homestore") in exchange for approximately 21
million shares of Homestore common stock valued at $718 million. The
operations of these businesses were not material to the Company's
financial position, results of operations or cash flows. The Company
recorded a gain of $548 million on the sale of these businesses, of which
$436 million ($262 million, after tax) was recognized at the time of
closing. The Company deferred $112 million of the gain, which represents
the portion that was equivalent to its common equity ownership percentage
in Homestore at the time of closing.
During 2000, the Company recorded a net loss of $43 million in connection
with the dispositions of certain non-strategic businesses.
1999. During 1999, the Company completed the sale of its Green Flag
business unit and approximately 85% of its Entertainment Publications,
Inc. business unit for cash of $401 million (including $37 million of
dividends) and $281 million, respectively. The Company realized a net gain
of approximately $27 million and $156 million ($8 million and $78 million,
after tax), respectively.
During 1999, the Company also completed the disposition of its fleet
businesses, whereby Avis Group acquired the net assets of the fleet
businesses through the assumption of and subsequent repayment of $1.44
billion of intercompany debt and the issuance to the Company of $360
million of non-voting convertible preferred stock of Avis Fleet Leasing
and Management Corporation, a wholly-owned subsidiary of Avis Group.
Coincident with the closing of the transaction, Avis Group refinanced the
assumed debt which was payable to the Company. Accordingly, the Company
received additional consideration of $3.0 billion of cash and a $30
million receivable from Avis Group.
The Company realized a net gain on the disposal of its fleet businesses of
$881 million ($866 million, after tax), of which $715 million ($702
million, after tax) was recognized at the time of closing and $166 million
($164 million, after tax) was deferred at the date of disposition. The
realized gain is net of approximately $90 million of transaction costs.
The Company deferred the portion of the realized net gain equivalent to
its common equity ownership percentage in Avis Group at the time of
closing. The deferred net gain is included in deferred income in the
Consolidated Balance Sheets at December 31, 2000 and 1999. The deferred
gain is being recognized into income over forty years, which is consistent
with the period Avis Group is amortizing the goodwill generated from the
transaction. During 2000, the Company also recognized $35 million of the
deferred gain due to the sale of VMS Europe by Avis Group in 2000. During
1999, the Company recognized $9 million of the deferred gain due to the
sale of a portion of the Company's equity ownership in Avis Group in 1999.
The Company completed the dispositions of certain other businesses,
including North American Outdoor Group, Central Credit, Inc., Global
Refund Group, Spark Services, Inc., Match.com, National Leisure Group and
National Library of Poetry. Aggregate consideration received on such
dispositions was comprised of approximately $407 million in cash,
including $21 million of dividends, and $43 million of marketable
securities. The Company realized a net gain of $202 million ($81 million,
after tax) on the dispositions of these businesses.
4. Discontinued Operations
During 1999, the Company completed the sale of Cendant Software
Corporation ("CDS"), which was classified as a discontinued operation for
the year ended December 31, 1998, for net cash proceeds of $770 million.
F-16
During 1998, the Company completed the sale of Hebdo Mag International,
Inc. ("Hebdo Mag"), which was classified as a discontinued operation for
the year ended December 31, 1998. The Company received $315 million in
cash and 7 million shares of CD common stock valued at $135 million
(approximately $19 per share market value) on the date of sale.
Summarized financial data of discontinued operations for the years ended
December 31, consisted of:
Hebdo
CDS Mag
------------ ------
1999 1998 1998
---- ----- -----
Net revenues $ -- $ 346 $ 202
==== ===== =====
Income (loss) before income taxes $ -- $ (57) $ 17
Provision (benefit) for income taxes -- (23) 8
---- ----- -----
Income (loss) from discontinued operations, net of tax -- (34) 9
---- ----- -----
Gain on disposal of discontinued operations 299 24 155
Provision (benefit) for income taxes 125 (174) (52)
---- ----- -----
Gain on disposal of discontinued operations, net of tax 174 198 207
---- ----- -----
$174 $ 164 $ 216
==== ===== =====
5. Franchising and Marketing/Reservation Activities
Franchising revenues received from lodging properties, car rental
locations, tax preparation offices and real estate brokerage offices were
$857 million, $839 million and $703 million for 2000, 1999 and 1998,
respectively. The Company also receives marketing and reservation fees
from several of its lodging and real estate franchisees, which are
calculated based on a specified percentage of gross room revenues or based
on a specified percentage of gross closed commissions earned on the sale
of real estate. As provided in the franchise agreements and generally 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. Marketing and reservation fees, included
within membership and service fee revenues, of $290 million, $280 million
and $228 million were recorded during 2000, 1999 and 1998, respectively,
and are net of annual rebates of $45 million, $43 million and $35 million,
respectively.
6. Other Charges
Restructuring and Other Unusual Charges
2000 Restructuring Charge. During the first quarter of 2000, the Company's
management, with the appropriate level of authority, formally committed to
various strategic initiatives, which were generally aimed at improving the
overall level of organizational efficiency, consolidating and
rationalizing existing processes, and reducing cost structures in the
Company's underlying businesses. Accordingly, the Company incurred a
restructuring charge of $60 million. These initiatives primarily affected
the Company's Hospitality and Financial Services segments and were
completed by the end of the first quarter of 2001. Liabilities associated
with these initiatives are classified as a component of accounts payable
and other current liabilities. The initial recognition of the charge and
the corresponding utilization from inception is summarized by category as
follows:
F-17
2000 Balance at
Restructuring Cash Other December 31,
Charge Payments Reductions 2000
------------- -------- ---------- ------------
Personnel related $25 $18 $ 1 $ 6
Asset impairments and contract terminations 26 1 25 --
Facility related 9 2 1 6
--- --- --- ---
Total $60 $21 $27 $12
=== === === ===
Personnel related costs primarily include severance resulting from the
consolidation of business operations and certain corporate functions. The
Company formally communicated to 971 employees, representing a wide range
of employee groups, as to their separation from the Company. As of
December 31, 2000, approximately 855 employees were terminated. Asset
impairments and contract terminations were incurred in connection with a
change in the Company's strategic focus to an online business model and
consisted of $25 million of asset impairments primarily associated with
the exit of a timeshare software development business and $1 million of
contract termination costs. Facility related costs consist of facility
closures and lease obligations resulting from the consolidation of
business operations.
2000 Unusual Charges. During 2000, the Company also incurred unusual
charges totaling $49 million. Such charges included $21 million of costs
to fund an irrevocable contribution to an independent technology trust
responsible for completing the transition of the Company's lodging
franchisees to a Company sponsored property management system, $11 million
of executive termination costs, $7 million of costs principally related to
the abandonment of certain computer system applications, $3 million of
costs related to stock option contract modifications, $3 million of costs
for the postponement of the initial public offering of Move.com common
stock and $4 million of other costs.
1999 Unusual Charges. During 1999, the Company incurred unusual charges
totaling $110 million. Such charges included $85 million of costs in
connection with the creation of Netmarket Group, Inc. ("NGI"), an
independent company that was created to pursue the development and
expansion of interactive businesses, and $23 million of costs to fund an
irrevocable contribution to an independent technology trust responsible
for completing the transition of the Company's lodging franchisees to a
Company sponsored property management system.
NGI began operations as an independent company during third quarter 1999.
Prior to such date, the results of operations of NGI were included in the
Company's Consolidated Financial Statements as a component of the
Financial Services segment. The Company donated its common stock ownership
interest in NGI (with a fair market value of $20 million) to an
independent charitable trust to facilitate the creation of NGI as an
independent company and retained its convertible preferred stock interest,
which was accounted for using the cost method. Subsequent to the donation,
the Company provided an advance of $77 million to NGI for the development
of Internet-related products and systems. Repayment of the advance was
solely dependent upon the success of NGI's development efforts. As such,
the Company expensed the advance in 1999. In addition to the development
advance of $77 million, transaction costs of $8 million relating to the
donation of NGI common shares to the independent charitable trust were
recorded.
During third quarter 2000, the Company exercised its option to convert its
preferred stock interest into common shares and purchased all remaining
common shares of NGI from the independent charitable trust for
approximately $2 million. The acquisition was accounted for using the
purchase method of accounting. Accordingly, NGI's operating results are
included in the Company's Consolidated Financial Statements since the
acquisition date.
1997 Restructuring Charges. During 1997, the Company incurred
restructuring charges totaling $455 million substantially associated with
the merger of HFS Incorporated ("HFS") and CUC International Inc. ("CUC")
and the merger in October 1997 with Hebdo Mag. Cash outlays of $2 million,
$8 million and $103 million were applied against this restructuring
liability during 2000, 1999 and 1998, respectively. Additionally, the
Company recorded a net increase of $2 million and a net decrease of $27
million to these charges during 1999 and 1998, respectively, primarily as
a result of changes to the original estimate of costs to be incurred. Such
adjustments were recorded in the periods in which events occurred or
information became available requiring accounting recognition. Liabilities
of $59 million remained at December 31, 2000 and were primarily
F-18
attributable to executive termination benefits, which the Company
anticipates will be settled upon resolution of related contingencies.
During 1997, the Company also incurred restructuring charges of $283
million primarily associated with the merger in April 1997 of HFS and PHH
Corporation ("PHH"). Cash outlays of $1 million, $5 million and $20
million were applied against this restructuring liability during 2000,
1999 and 1998, respectively. Additionally, the Company recorded a net
decrease of $40 million to these charges during 1998 primarily as a result
of a change in the original estimate of costs to be incurred. Such
adjustment was recorded in the period in which events occurred or
information became available requiring accounting recognition. Liabilities
of $10 million remained at December 31, 2000 and were primarily
attributable to executive termination benefits, which the Company
anticipates will be settled upon resolution of related contingencies.
Investigation-Related Costs
During 2000, 1999 and 1998, the Company incurred charges of $23 million,
$21 million and $33 million, respectively, primarily for professional fees
and public relations costs incurred in connection with accounting
irregularities in the former business units of CUC and resulting
investigations into such matters.
Litigation Settlements and Related Costs
During 2000, the Company incurred charges of $20 million in connection
with litigation asserting claims associated with accounting irregularities
in the former business units of CUC and outside of its principal common
stockholder class action lawsuit. During 1999, the Company incurred
charges of approximately $2.89 billion in connection with the agreement to
settle its principal common stockholder class action lawsuit. See Note
13--Stockholder Litigation Settlement for a detailed discussion regarding
this settlement.
In connection with the settlement of the Company's class action lawsuit
that was brought on behalf of the PRIDES holders who purchased their
securities on or prior to April 15, 1998, holders were eligible to receive
a "Right" for each PRIDES security held. Accordingly, the Company recorded
a non-cash charge of $351 million during 1998. During 2000, the Company
recorded a non-cash credit of $41 million, which represented an adjustment
to the number of Rights to be issued. See Note 17--Mandatorily Redeemable
Trust Preferred Securities Issued by Subsidiary Holding Solely Senior
Debentures Issued by the Company for a detailed discussion regarding this
settlement.
Termination of Proposed Acquisitions
During 1999 and 1998, the Company incurred charges of $7 million and $433
million, respectively, primarily in connection with the termination of the
proposed acquisition of RAC Motoring Services in 1999 and the proposed
acquisition of American Bankers Insurance Group in 1998.
Executive Terminations
During 1998, the Company incurred charges of $53 million related to the
termination of certain former executives, primarily Walter A. Forbes, who
resigned as Chairman and member of the Company's Board of Directors.
Investigation-Related Financing Costs
In connection with the accounting irregularities in the former business
units of CUC, the Company was temporarily prohibited from accessing public
debt markets in 1998. As a result, the Company recorded a charge of $35
million primarily in connection with fees associated with waivers and
various financing arrangements.
7. Income Taxes
F-19
The income tax provision (benefit) consists of:
Year Ended December 31,
-----------------------------
2000 1999 1998
----- ----- -----
Current
Federal $ 81 $ 306 $(159)
State 19 9 1
Foreign 52 44 56
----- ----- -----
152 359 (102)
----- ----- -----
Deferred
Federal 220 (748) 176
State (9) (24) 29
Foreign (1) 7 1
----- ----- -----
210 (765) 206
----- ----- -----
Provision (benefit) for income taxes $ 362 $(406) $ 104
===== ===== =====
Pre-tax income (loss) for domestic and foreign operations consisted of the
following:
Year Ended December 31,
------------------------------------
2000 1999 1998
------ ----- ----
Domestic $ 896 $(793) $ 78
Foreign 210 219 237
------ ----- ----
Pre-tax income (loss) $1,106 $(574) $315
====== ===== ====
Deferred income tax assets and liabilities are comprised of:
December 31,
------------------
2000 1999
---- ------
Current deferred income tax assets
Stockholder litigation settlement $ -- $1,058
Unrealized loss on marketable securities 46 --
Accrued liabilities and deferred income 200 348
Provision for doubtful accounts 25 23
Restructuring liabilities 21 17
Net operating loss carryforwards -- 75
---- ------
Current deferred income tax assets 292 1,521
---- ------
Current deferred income tax liabilities
Insurance retention refund 20 18
Franchise acquisition costs 12 10
Other 86 66
---- ------
Current deferred income tax liabilities 118 94
---- ------
Current net deferred income tax asset $174 $1,427
==== ======
F-20
December 31,
-------------------
2000 1999
------- -----
Noncurrent deferred income tax assets
Stockholder litigation settlement $ 922 $ --
Net operating loss carryforwards 616 84
State net operating loss carryforwards 193 151
Restructuring liabilities 19 29
Accrued liabilities and deferred income 48 29
Foreign tax credit carryforward 10 10
Other 13 28
Valuation allowance(a) (161) (161)
------- -----
Noncurrent deferred income tax assets 1,660 170
------- -----
Noncurrent deferred income tax liabilities
Depreciation and amortization 533 476
Other 19 --
------- -----
Noncurrent deferred income tax liabilities 552 476
------- -----
Noncurrent net deferred income tax asset (liability) $ 1,108 $(306)
======= =====
----------
(a) The valuation allowance at both December 31, 2000 and 1999 relates
to deferred tax assets for state net operating loss carryforwards
and foreign tax credit carryforwards of $151 million and $10
million, respectively. The valuation allowance will be reduced when
and if the Company determines that the deferred income tax assets
are likely to be realized.
December 31,
-------------
2000 1999
---- ----
Management and mortgage program deferred income tax assets
Depreciation $ 13 $ 7
Accrued liabilities -- 11
Other 4 --
---- ----
Management and mortgage program deferred income tax assets 17 18
---- ----
Management and mortgage program deferred income tax liabilities
Unamortized mortgage servicing rights 473 328
Accrued liabilities 20 --
---- ----
Management and mortgage program deferred income tax liabilities 493 328
---- ----
Net deferred income tax liability under management and mortgage programs $476 $310
==== ====
Net operating loss carryforwards at December 31, 2000 expire as follows:
2008, $4 million; 2009, $5 million; 2010, $8 million; 2018, $808 million
and 2019, $935 million. The Company also has alternative minimum tax
credit carryforwards of $16 million.
No provision has been made for U.S. federal deferred income taxes on
approximately $302 million of accumulated and undistributed earnings of
foreign subsidiaries at December 31, 2000 since it is the present
intention of management to reinvest the undistributed earnings
indefinitely in foreign operations. In addition, the determination of the
amount of unrecognized U.S. federal deferred income tax liability for
unremitted earnings is not practicable.
F-21
The Company's effective income tax rate for continuing operations differs
from the U.S. federal statutory rate as follows:
Year Ended December 31,
------------------------------
2000 1999 1998
---- ----- ----
Federal statutory rate 35.0% (35.0)% 35.0%
State and local income taxes, net of federal tax benefits 0.6 (1.8) 6.2
Amortization of non-deductible goodwill 1.6 2.9 5.9
Taxes on foreign operations at rates different than U.S. federal
statutory rate (1.3) (5.3) (8.0)
Nontaxable gain on disposal (1.4) (31.0) --
Recognition of excess tax basis on assets held for sale -- -- (2.7)
Other (1.8) (0.5) (3.4)
---- ----- ----
32.7% (70.7)% 33.0%
==== ===== ====
8. Property and Equipment, net
Property and equipment, net consisted of:
December 31,
-------------------
2000 1999
------ ------
Land $ 391 $ 402
Building and leasehold improvements 450 446
Furniture, fixtures and equipment 1,051 889
------ ------
1,892 1,737
Less: accumulated depreciation and amortization 547 390
------ ------
$1,345 $1,347
====== ======
9. Other Intangibles, net
Other intangibles, net consisted of:
December 31,
-------------------
2000 1999
---- ----
Avis trademark $402 $402
Other trademarks 162 161
Customer lists 173 154
Other 61 88
---- ----
798 805
Less: accumulated amortization 151 143
---- ----
$647 $662
==== ====
10. Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. The Company sells
mortgage loans insured or guaranteed by various government sponsored
entities and private insurance agencies. The insurance or guaranty is
provided primarily on a non-recourse basis to the Company, except where
limited by the Federal Housing Administration and Veterans Administration
and their respective loan programs. At December 31, 2000 and 1999,
mortgage loans sold with recourse amounted to approximately $138 million
and $52 million, respectively. The Company believes adequate allowances
are maintained to cover any potential losses.
F-22
11. Mortgage Servicing Rights
Capitalized MSRs consisted of:
Amount
------
Balance, January 1, 1998 $ 373
Additions to MSRs 475
Additions to hedge 49
Amortization (82)
Write-down/recovery 5
Sales (99)
Deferred hedge, net (85)
-------
Balance, December 31, 1998 636
Additions to MSRs 693
Additions to hedge 23
Amortization (118)
Write-down/recovery 5
Sales (161)
Deferred hedge, net 6
-------
Balance, December 31, 1999 1,084
Additions to MSRs 765
Additions to hedge 213
Amortization (153)
Write-down/recovery 2
Sales (127)
Deferred hedge, net (131)
-------
Balance, December 31, 2000 $ 1,653
=======
12. Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consisted of:
December 31,
----------------------
2000 1999
------ ------
Accounts payable $ 235 $ 320
Restructuring and other unusual 128 127
Accrued payroll and related 297 263
Income taxes payable 158 --
Advances from relocation clients -- 80
Other 628 529
------ ------
$1,446 $1,319
====== ======
13. Stockholder Litigation Settlement
On August 14, 2000, the U.S. District Court approved the Company's
agreement (the "Settlement Agreement") to settle the principal securities
class action pending against the Company, which was brought on behalf of
purchasers of all Cendant and CUC publicly traded securities, other than
PRIDES, between May 1995 and August 1998. Under the Settlement Agreement,
the Company will pay the class members approximately $2.85 billion in
cash. Certain parties in the class action have appealed the District
Court's orders approving the plan of allocation of the settlement fund and
awarding of attorneys' fees and expenses to counsel for the lead
plaintiffs. None of the appeals challenged the fairness of the $2.85
billion settlement amount. The U.S. Court of Appeals for the Third Circuit
issued a briefing schedule for the appeals, which is nearly complete. Oral
arguments for all appeals were heard on May 22, 2001; the court reserved
its decision until further notice.
F-23
The Settlement Agreement required the Company to post collateral in the
form of credit facilities and/or surety bonds by November 13, 2000. The
Company also had the option of forming a trust established for the benefit
of the plaintiffs in lieu of posting collateral. On November 13, 2000, the
Company posted collateral in the form of letters of credit and surety
bonds in the amounts of $1.71 billion and $790 million, respectively. The
Company also made a cash deposit of approximately $350 million to the
trust, which is classified as a noncurrent asset on the Consolidated
Balance Sheet at December 31, 2000. The credit facilities under which the
Company posted collateral also require the Company to make minimum
deposits of $600 million, $800 million and $800 million to this trust
during 2001, 2002 and 2003, respectively. Such deposits will serve to
reduce the amount of collateral required to be posted under the Settlement
Agreement.
At December 31, 2000, the Company reclassified the $2.85 billion
settlement amount to noncurrent liabilities. Such amount is classified as
noncurrent based upon the Company's current expectation of the timing of
when the appeals process will be resolved and its ability to finance the
$600 million minimum deposit due in 2001 with borrowings available under
its $1.75 billion three-year competitive advance and revolving credit
facility.
14. Long-term Debt and Borrowing Arrangements
Long-term debt consisted of:
December 31,
----------------------
2000 1999
------ ------
7 3/4% senior notes $1,149 $1,148
3% convertible subordinated notes 548 547
Term loan facility 250 750
7 1/2% senior notes -- 400
Other 1 --
------ ------
1,948 2,845
Less: current portion -- 400
------ ------
$1,948 $2,445
====== ======
7 3/4% Senior Notes
During 1998, the Company issued $1.15 billion of senior notes due December
2003. Such notes may be redeemed, in whole or in part, at any time at the
option of the Company, at a redemption price plus accrued interest through
the date of redemption. The redemption price will be equal to the greater
of (i) 100% of the principal amount of the notes being redeemed or (ii)
the sum of the present values of the remaining scheduled payments of
principal and interest (calculated at the interest rate on the notes on
the date of issuance, regardless of any interest rate adjustment at any
time) discounted at the treasury rate plus 50 basis points, plus accrued
interest through the date of redemption.
3% Convertible Subordinated Notes
During 1997, the Company completed a public offering of $550 million of 3%
convertible subordinated notes due in February 2002. Each $1,000 principal
amount of these notes is convertible into 32.65 shares of CD common stock
subject to adjustment in certain events. The notes may be redeemed at the
option of the Company at any time, in whole or in part, at the appropriate
redemption prices, as defined in the applicable indenture, plus accrued
interest through the redemption date. The notes will be subordinated in
right of payment to all existing and future senior debt as defined in the
applicable indenture of the Company.
Term Loan Facility
During 1999, the Company replaced its $3.25 billion 364-day term loan
facility with a $1.25 billion two-year term loan facility. The new
facility bears interest at a rate of LIBOR plus a margin of 100 basis
points and is payable in quarterly installments through the first quarter
of 2001. The weighted average interest rates on the facility were 7.4% and
6.2% at December 31, 2000 and 1999, respectively. The facility contains
certain
F-24
restrictive covenants, including restrictions on indebtedness of material
subsidiaries, mergers, limitations on liens, liquidations and sale and
leaseback transactions, and requires the maintenance of certain financial
ratios.
During 2000 and 1999, the Company made principal payments of $500 million
in each year to reduce its outstanding borrowings under its two-year term
loan facility.
During February 2001, the Company issued debt securities, maturing in
2021, in part to refinance outstanding borrowings under the two-year term
loan facility at December 31, 2000 on a long-term basis. Accordingly, such
amount remained classified as long-term debt at December 31, 2000. See
Note 27--Subsequent Events for a detailed discussion regarding these debt
securities.
7 1/2% Senior Notes
During 1998, the Company issued $400 million of senior notes, which were
due December 1, 2000. During the first quarter of 2000, the Company
redeemed these notes at 100.695% of par plus accrued interest. In
connection with the redemption, the Company recorded an extraordinary loss
of $4 million ($2 million, after tax) in 2000.
Debt Maturities
As of December 31, 2000, aggregate maturities of debt are as follows:
Year Amount
---- ------
2001 $ --
2002 549
2003 1,149
2004 --
2005 --
Thereafter 250
------
$1,948
======
Other Credit Facilities
The Company's other credit facilities consist of a $1.75 billion
three-year competitive advance and revolving credit facility (the
"Three-Year Facility") maturing in August 2003 and a $750 million
five-year revolving credit facility (the "Five-Year Facility") maturing in
October 2001. The Three-Year Facility contains the committed capacity to
issue up to $1.75 billion in letters of credit, which can be used as part
of the collateral required to be posted under the Settlement Agreement.
Letters of credit of $1.71 billion were utilized for this purpose and were
outstanding at December 31, 2000. As previously discussed, in connection
with the $1.71 billion of collateral posted from this facility, the
Company is required to make minimum deposits throughout 2003 to a trust
established for the benefit of the plaintiffs in the Company's principal
common stockholder class action lawsuit.
Borrowings under these credit facilities bear interest at LIBOR, plus a
margin of approximately 60 basis points. The Company is required to pay a
per annum facility fee of .15% and .175% under the Three-Year Facility and
Five-Year Facility, respectively. The Company is also required to pay a
per annum utilization fee of .125% on the Three-Year Facility if usage
under the facility exceeds 33% of aggregate commitments. The interest
rates and facility fees are subject to change based upon credit ratings
assigned by nationally recognized debt rating agencies on the Company's
7 3/4% senior notes and its two-year term loan facility.
There were no outstanding borrowings under these credit facilities at
December 31, 2000 and 1999.
F-25
The facilities contain certain restrictive covenants, including
restrictions on indebtedness of material subsidiaries, mergers,
limitations on liens, liquidations and sale and leaseback transactions,
and also require the maintenance of certain financial ratios.
15. Liabilities Under Management and Mortgage Programs and Borrowing
Arrangements
Borrowings to fund assets under management and mortgage programs, which
are not classified based on contractual maturities since such debt
corresponds directly with assets under management and mortgage programs,
consisted of:
December 31,
-------------------------
2000 1999
------ ------
Commercial paper $1,556 $ 619
Secured obligation 292 345
Medium-term notes 117 1,248
Other 75 102
------ ------
$2,040 $2,314
====== ======
Commercial Paper
Commercial paper matures within 180 days and is supported by committed
revolving credit agreements described below and short-term lines of
credit. The weighted average interest rate on the Company's outstanding
commercial paper at December 31, 2000 and 1999 was 6.7%.
Secured Obligations
Secured obligations are collateralized by underlying mortgage loans held
in safekeeping by the custodian to the agreement. The total commitment
under this agreement is $500 million and is renewable on an annual basis
at the discretion of the lender. The weighted average interest rates on
such obligations were 6.1% and 6.0% at December 31, 2000 and 1999,
respectively. Mortgage loans financed under this agreement at December 31,
2000 and 1999 totaled $292 million and $345 million, respectively, and are
included in mortgage loans held for sale in the Consolidated Balance
Sheets.
Medium-term Notes
Medium-term notes primarily represent unsecured loans which mature through
2002. The weighted average interest rates on such medium-term notes were
6.8% and 6.4% at December 31, 2000 and 1999, respectively.
Other
Other liabilities under management and mortgage programs are comprised of
an unsecured borrowing maturing in 2001.
Credit Facilities
As of December 31, 2000, the Company, through its PHH subsidiary,
maintained $1.775 billion of committed and unsecured credit facilities.
The facilities comprise a $750 million syndicated revolving credit
facility maturing in 2001, a $750 million syndicated revolving credit
facility maturing in 2005 and $275 million of other revolving credit
facilities maturing in 2001. Borrowings under these facilities bear
interest at a rate of LIBOR, plus a margin of approximately 40 basis
points. The Company is required to pay a per annum facility fee of
approximately .125% under the facilities. There were no outstanding
borrowings under these credit facilities at December 31, 2000 and 1999.
F-26
The facilities contain certain restrictive covenants, including
restrictions on dividends paid to the Company and indebtedness of material
subsidiaries, mergers, limitations on liens, liquidations, and sale and
leaseback transactions, and also require the maintenance of certain
financial ratios.
Securitization Agreements
During 2000 and 1999, the Company maintained revolving sales agreements
under which certain managed assets were transferred to third parties.
Mortgage. Under this revolving sales agreement, an unaffiliated bankruptcy
remote special purpose entity, Bishops Gate Residential Mortgage Trust
(the "Buyer"), committed to purchase for cash, at the Company's option,
mortgage loans originated by the Company on a daily basis, up to the
Buyer's asset limit of $3.3 billion, through 2008. The Company retains the
servicing rights on the mortgage loans sold to the Buyer and arranges for
the sale or securitization of the mortgage loans into the secondary
market. The Buyer retains the right to select alternative sale or
securitization arrangements. At December 31, 2000 and 1999, the Company
was servicing approximately $1.0 billion and $813 million, respectively,
of mortgage loans owned by the Buyer.
Relocation. Under these revolving sales agreements, certain relocation
receivables are transferred for cash, on a revolving basis, to an
unaffiliated bankruptcy remote special purpose entity, Apple Ridge Funding
LLC ("Apple Ridge"), until March 31, 2007. The Company retains a
subordinated residual interest and the related servicing rights and
obligations in the relocation receivables. At December 31, 2000, the
Company was servicing approximately $591 million of receivables under
these agreements. As of December 31, 1999, the Company had not transferred
any assets to Apple Ridge.
16. Mandatorily Redeemable Preferred Interest in a Subsidiary
During 2000, a Company-formed limited liability corporation ("LLC") issued
a mandatorily redeemable preferred interest ("Senior Preferred Interest")
in exchange for $375 million in cash. The Senior Preferred Interest is
classified as a mandatorily redeemable preferred interest in a subsidiary
in the Consolidated Balance Sheet. The Senior Preferred Interest is
mandatorily redeemable 15 years from the date of issuance and may be
redeemed by the Company after 5 years, or earlier in certain
circumstances. Distributions on the Senior Preferred Interest are based on
the three-month LIBOR plus an applicable margin (1.77%) and are reflected
as minority interest in the Consolidated Statement of Operations.
Simultaneous with the issuance of the Senior Preferred Interest, the
Company transferred certain assets to the LLC. After the sale of the
Senior Preferred Interest, the Company owned 100% of both the common
interest and the junior preferred interest in the LLC. In the event of
default, holders of the Senior Preferred Interest have certain liquidation
preferences.
17. Mandatorily Redeemable Trust Preferred Securities Issued by Subsidiary
Holding Solely Senior Debentures Issued by the Company
During 1998, Cendant Capital I (the "Trust"), a wholly-owned subsidiary of
the Company, issued 30 million PRIDES and 2 million trust preferred
securities in exchange for gross proceeds of approximately $1.5 billion.
The Trust invested these proceeds in 6.45% Senior Debentures issued by the
Company and due in 2003 (the "Debentures"). The Debentures are the sole
asset of the Trust. The obligations of the Trust related to the PRIDES and
trust preferred securities are unconditionally guaranteed by the Company
to the extent the Company makes payments pursuant to the Debentures. Upon
the issuance of the PRIDES and the trust preferred securities, the Company
recorded a liability of $43 million with a corresponding reduction to
stockholders' equity, representing the present value of the total future
contract adjustment payments to be made under the PRIDES. The PRIDES, upon
issuance, consisted of 28 million Income PRIDES and 2 million Growth
PRIDES, both with a face amount of $50 per PRIDES.
F-27
The Income PRIDES consist of trust preferred securities and forward
purchase contracts under which the holders are required to purchase CD
common stock from the Company in February 2001. The Growth PRIDES consist
of zero coupon U.S. Treasury securities and forward purchase contracts
under which the holders are also required to purchase CD common stock from
the Company in February 2001. The stand-alone trust preferred securities
and the trust preferred securities forming a part of the Income PRIDES
bear interest, in the form of preferred stock dividends, at the annual
rate of 6.45% payable in cash. Payments under the forward purchase
contract forming a part of the Income PRIDES will be made by the Company
in the form of a contract adjustment payment at an annual rate of 1.05%.
Payments under the forward purchase contract forming a part of the Growth
PRIDES will be made by the Company in the form of a contract adjustment
payment at an annual rate of 1.30%.
In connection with the accounting irregularities in the former business
units of CUC, the Company reached an agreement to settle the class action
lawsuit brought on behalf of purchasers of PRIDES securities on or prior
to April 15, 1998. Under the PRIDES settlement, each holder was eligible
to receive a "Right" with a calculated value of $11.71 per Right. Right
holders may sell or exercise the Rights by delivering to the Company three
Rights together with two PRIDES in exchange for two new PRIDES (the "New
PRIDES") for a period beginning upon distribution of the Rights and
concluding upon expiration of the Rights (February 2001). The terms of the
New PRIDES are the same as the original PRIDES, except that the conversion
rate was revised and fixed so that, at the time of the issuance of the
Rights, the New PRIDES had a value equal to $17.57 more than the original
PRIDES. Only holders who owned PRIDES at the close of business on April
15, 1998 were eligible to receive a new additional Right for each PRIDES
security held.
During 2000, the Company also issued 4 million additional PRIDES (the
"Additional PRIDES") with a face value of $50 per Additional PRIDES in
exchange for approximately $91 million in cash proceeds. Only Additional
Income PRIDES (having identical terms to the originally issued Income
PRIDES) were issued. Of the Additional Income PRIDES, 3,619,374 were
coupled with 5,429,061 Rights and immediately converted into 3,619,374 New
Income PRIDES and 380,626 Additional Income PRIDES remained unexercised.
Upon the issuance of the Additional Income PRIDES, the Company recorded a
reduction to stockholders' equity of $108 million, representing the total
future contract adjustment payments to be made.
Preferred stock dividends of $106 million ($66 million, after tax), $96
million ($60 million, after tax) and $80 million ($49 million, after tax)
were recorded during 2000, 1999 and 1998, respectively, and are presented
as minority interest, net of tax, in the Consolidated Statements of
Operations.
Also pursuant to the PRIDES settlement, the Company agreed to offer up to
an additional 15 million special PRIDES (the "Special PRIDES"), which
could be issued by the Company at any time for cash. The Company offered
the Special PRIDES at a price in cash equal to 105% of their theoretical
value, or $20.56 per Special PRIDES, during the last 30 days prior to the
expiration of the Rights in February 2001. The Special PRIDES have the
same terms as the currently outstanding PRIDES and could be used to
exercise Rights. Pursuant to such offer, the Company issued 104,890
Special PRIDES, for proceeds of approximately $2 million, which were
immediately converted into 241,624 shares of CD common stock.
See Note 27--Subsequent Events for a detailed discussion regarding the
satisfaction of the Company's obligation under the PRIDES.
F-28
18. Commitments and Contingencies
The Company has noncancelable operating leases covering various facilities
and equipment. Future minimum lease payments required under noncancelable
operating leases as of December 31, 2000 are as follows:
Year Amount
---- ------
2001 $ 97
2002 89
2003 76
2004 67
2005 55
Thereafter 169
----
$553
====
Rental expense during 2000, 1999 and 1998 was $187 million, $200 million
and $178 million, respectively. The Company incurred contingent rental
expenses in 2000, 1999 and 1998 of $45 million, $49 million and $44
million, respectively, which is included in total rental expense,
principally based on rental volume or profitability at certain parking
facilities. The Company has been granted rent abatements for varying
periods on certain facilities. Deferred rent relating to those abatements
is amortized on a straight-line basis over the applicable lease terms.
Commitments under capital leases are not significant.
The June 1999 disposition of the Company's fleet businesses was structured
as a tax-free reorganization and, accordingly, no tax provision was
recorded on a majority of the gain. However, pursuant to a recent
interpretive ruling, the Internal Revenue Service ("IRS") has taken the
position that similarly structured transactions do not qualify as tax-free
reorganizations under the Internal Revenue Code Section 368(a)(1)(A). If
the transaction is not considered a tax-free reorganization, the resultant
incremental liability could range between $10 million and $170 million
depending upon certain factors, including utilization of tax attributes.
Notwithstanding the IRS interpretive ruling, the Company believes that,
based upon analysis of current tax law, its position would prevail, if
challenged.
The Company is involved in litigation asserting claims associated with the
accounting irregularities discovered in former CUC business units outside
of the principal common stockholder class action litigation (see Note
13--Stockholder Litigation Settlement). The Company does not believe that
it is feasible to predict or determine the final outcome or resolution of
these unresolved proceedings. An adverse outcome from such unresolved
proceedings could be material with respect to earnings in any given
reporting period. However, the Company does not believe that the impact of
such unresolved proceedings should result in a material liability to the
Company in relation to its consolidated financial position or liquidity.
The Company is involved in pending litigation in the usual course of
business. In the opinion of management, such other litigation will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
F-29
19. Stockholders' Equity
Accumulated Other Comprehensive Loss
The after-tax components of accumulated other comprehensive loss are as
follows:
Unrealized Accumulated
Currency Gains/(Losses) Other
Translation on Marketable Comprehensive
Adjustments Securities Loss
----------- -------------- -------------
Balance, January 1, 1998 $ (38) $ -- $ (38)
Current period change (11) -- (11)
----- ---- -----
Balance, December 31, 1998 (49) -- (49)
Current period change (9) 16 7
----- ---- -----
Balance, December 31, 1999 (58) 16 (42)
Current period change (107) (85) (192)
----- ---- -----
Balance, December 31, 2000 $(165) $(69) $(234)
===== ==== =====
The currency translation adjustments exclude income taxes since they
relate to indefinite investments in foreign subsidiaries.
CD Common Stock Transactions
During 2000, Liberty Media Corporation ("Liberty Media") invested a total
of $450 million in cash to purchase 24.4 million shares of CD common
stock. Additionally, Liberty Media's Chairman, John C. Malone, Ph.D.,
purchased one million shares of CD common stock for approximately $17
million in cash.
The Company is authorized to repurchase $2.8 billion under its common
share repurchase program. During 2000, 1999 and 1998, the Company
repurchased $306 million (17.5 million shares), $1.75 billion (90.4
million shares) and $258 million (13.4 million shares), respectively, of
CD common stock under the program. The Company currently has approximately
$488 million remaining availability for repurchases under this common
share repurchase program.
During 1999, pursuant to a Dutch Auction self-tender offer to the
Company's CD common stockholders, the Company repurchased 50 million
shares of its CD common stock at a price of $22.25 per share.
Move.com Common Stock Transactions
The Company issued shares of Move.com common stock in several private
financings, including:
NRT Incorporated Investment. During 2000, NRT Incorporated ("NRT")
purchased 319,591 shares of Move.com common stock for $31.29 per share or
approximately $10 million in cash. During February 2001, the Company
repurchased these shares from NRT for approximately $10 million in cash.
Chatham Street Holdings, LLC Investment. In connection with the
recapitalization of NRT, the Company entered into an agreement with
Chatham Street Holdings, LLC ("Chatham") during 1999 as consideration for
certain amendments made with respect to the NRT franchise agreements,
which amendments provided for additional payments of certain royalties to
the Company. Pursuant to this agreement, Chatham was granted the right,
until September 2001, to purchase 1,561,000 shares of Move.com common
stock. During 2000, Chatham exercised this contractual right and purchased
1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash. In connection with such exercise,
Chatham received warrants to purchase 780,500 shares of Move.com common
stock at $64.08 per share and 780,500 shares of Move.com common stock at
$128.16 per share. Also during 2000, the Company invested $25 million in
F-30
convertible preferred stock of WMC Finance Co. ("WMC"), an online provider
of sub-prime mortgages and an affiliate of Chatham, and was granted an
option to purchase approximately 5 million shares of WMC common stock.
During December 2000, Chatham sold these shares and warrants back to the
Company in exchange for consideration consisting of $75 million in cash
and the investment the Company held in WMC preferred stock valued at $25
million. The Company also agreed to pay Chatham an additional $15 million
within 90 days after consummation of the Homestore Transaction.
Liberty Digital, Inc. Investment. During 2000, Liberty Digital, Inc.
("Liberty Digital") purchased 1,598,030 shares of Move.com common stock
for $31.29 per share in exchange for consideration consisting of $10
million in cash and 813,215 shares of Liberty Digital Class A common stock
valued at approximately $40 million. During June 2001, Liberty Digital
sold these shares back to the Company in exchange for 1,164,048 shares of
Homestore common stock (valued at approximately $31 million) and
approximately $19 million in cash.
20. Stock Plans
Under its existing stock plans, the Company may grant stock options, stock
appreciation rights and restricted shares to its employees, including
directors and officers of the Company and its affiliates. Options granted
under these plans generally have a ten-year term and have vesting periods
ranging from 20% to 33% per year. The Company is authorized to grant up to
246 million shares of its common stock under these plans. At December 31,
2000 and 1999, approximately 53 million and 56 million shares,
respectively, were available for future grants under the terms of these
plans.
The annual activity of the Company's stock option plans consisted of:
CD common stock
------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Balance at beginning of year 183 $15.24 178 $14.64 172 $18.66
Granted
Equal to fair market value 37 19.33 30 18.09 84 19.16
Greater than fair market
value -- -- 1 16.04 21 17.13
Canceled (14) 18.93 (13) 19.91 (82) 29.36
Exercised (19) 4.26 (13) 9.30 (17) 10.01
--- --- -----
Balance at end of year 187 $16.90 183 $15.24 $ 178 $14.64
=== === =====
Move.com common stock
----------------------------------------------
2000 1999
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
Balance at beginning of year 2 $11.59 -- $ --
Granted
Less than fair market value 1 15.40 1 10.00
Equal to fair market value 3 24.21 1 13.16
--- ---
Balance at the end of year(a) 6 $18.59 2 $11.59
=== ===
----------
(a) In connection with the sale of the Company's real estate Internet
portal, move.com, holders of options outstanding at December 31,
2000 will receive either cash or stock options of Homestore.
F-31
The table below summarizes information regarding the Company's stock
options outstanding and exercisable as of December 31, 2000:
CD common stock
-------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise of Contractual Exercise of Exercise
Prices Options Life Price Options Price
-------------------- ------- ----------- -------- ------- --------
$0.01 to $10.00 60 4.7 $ 8.43 46 $ 8.05
$10.01 to $20.00 65 6.7 16.57 32 16.60
$20.01 to $30.00 42 6.9 22.46 22 22.81
$30.01 to $40.00 20 6.1 31.98 17 31.91
--- ---
187 6.0 $16.90 117 $16.60
=== ===
Move.com common stock
-------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise of Contractual Exercise of Exercise
Prices Options Life Price Options Price
-------------------- ------- ----------- -------- ------- --------
$0.01 to $10.00 1 8.8 $10.00 1 $10.00
$10.01 to $20.00 2 8.9 13.29 1 13.16
$20.01 to $30.00 3 9.2 23.97 -- 24.40
$30.01 to $40.00 --- -- -- --- --
--- ---
6 9.0 $18.59 2 $13.29
=== ===
The weighted-average grant-date fair value of CD common stock options
granted during 2000 and 1999 were $9.99 and $11.36, respectively. The
weighted-average grant-date fair value of Move.com common stock options
granted during 2000 and 1999 were $24.37 and $7.28, respectively. The
weighted-average grant-date fair value of CD common stock options granted
during 1998, which were repriced with exercise prices equal to and higher
than the underlying stock price at the date of repricing, were $19.69 and
$18.10, respectively. The weighted-average grant-date fair value of CD
common stock options granted during 1998, which were not repriced, was
$10.16.
Had the Company elected to recognize and measure compensation expense for
its stock option plans to employees based on the calculated fair value at
the grant dates for awards under such plans, consistent with the method
prescribed by SFAS No. 123, net income (loss) and per share data would
have been as follows:
2000 1999 1998
-------------------- ---------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------ -------- ------- -------- ------
Net income (loss) $ 602 $ 502 $ (55) $ (213) $ 540 $ 393
Basic income (loss) per share 0.84 0.70 (0.07) (0.28) 0.64 0.46
Diluted income (loss) per share 0.81 0.68 (0.07) (0.28) 0.61 0.46
The fair values of the Company's stock options are estimated on the dates
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for stock options granted in 2000, 1999 and
1998:
CD Move.com Group
------------------------------- -----------------
2000 1999 1998 2000 1999
---- ---- ----- ---- ----
Dividend yield -- -- -- -- --
Expected volatility 55.0% 60.0% 55.0% -- --
Risk-free interest rate 5.0% 6.4% 4.9% 5.2% 6.4%
Expected holding period (years) 4.7 6.2 6.3 8.5 6.2
Although the Company generally grants employee stock options at fair
value, certain options were granted below fair value during 2000 and 1999.
As such, compensation expense is being recognized over the applicable
vesting period. The compensation expense recognized during 2000 and 1999
was not material.
F-32
Also during 2000, the Company issued 2 million restricted shares to
certain of its employees, with a weighted-average grant-date fair value of
$11.95. Deferred compensation of approximately $18 million was recorded,
of which approximately $5 million was recognized as compensation expense
during 2000.
21. Employee Benefit Plans
The Company sponsors several defined contribution pension plans that
provide certain eligible employees of the Company an opportunity to
accumulate funds for retirement. The Company matches the contributions of
participating employees on the basis specified in the plans. The Company's
cost for contributions to these plans was $29 million, $31 million and $24
million during 2000, 1999 and 1998, respectively.
The Company maintains a domestic non-contributory defined benefit pension
plan covering certain eligible employees employed prior to July 1, 1997.
Additionally, the Company sponsors contributory defined benefit pension
plans in certain United Kingdom subsidiaries with participation in the
plans at the employees' option. Under both the domestic and foreign plans,
benefits are based on an employee's years of credited service and a
percentage of final average compensation. The Company's policy for all
plans is to contribute amounts sufficient to meet the minimum requirements
plus other amounts as deemed appropriate. The projected benefit
obligations of the plans were $149 million and $145 million at December
31, 2000 and 1999, respectively. The fair value of the plan assets was
$146 million and $147 million at December 31, 2000 and 1999, respectively.
The net pension cost and recorded liability were not material to the
accompanying Consolidated Financial Statements.
During 1999, the Company recognized a net curtailment gain of $10 million
as a result of the disposition of its fleet businesses and the freezing of
pension benefits related to the Company's PHH subsidiary defined benefit
pension plan.
22. Financial Instruments
Derivatives
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.
The Company enters into interest rate swap agreements to manage the
contractual costs of debt financing and certain other interest bearing
liabilities, resulting from interest rate movements. The terms of the swap
agreements correlate with the maturity and rollover of the hedged items by
effectively matching a fixed or floating interest rate with the stipulated
interest stream generated from the hedged items.
At December 31, 1999, the Company had $610 million aggregate notional
amount of interest rate swaps outstanding relating to liabilities under
management and mortgage programs with weighted average receive and pay
rates of 5.57% and 6.29%, respectively. The Company had no outstanding
interest rate swaps relating to liabilities under management and mortgage
programs at December 31, 2000.
In order to manage its exposure to fluctuations in foreign currency
exchange rates, the Company enters into foreign exchange contracts on a
selective basis. Such contracts are primarily utilized to hedge
intercompany loans to foreign subsidiaries and certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. The
Company also hedges certain anticipated transactions denominated in
foreign currencies and forecasted earnings of foreign subsidiaries. The
principal currency hedged by the Company is the British pound sterling.
The Company enters into options and futures contracts on U.S. Treasury
instruments and mortgage-backed securities to reduce the risk of adverse
price fluctuations and interest rate risk associated with its mortgage
F-33
loans held for sale and anticipated mortgage production arising from
commitments issued. The Company is not required to satisfy margin or
collateral requirements for any of these financial instruments.
The Company uses U.S. Treasury instruments, constant maturity treasury
floors, LIBOR swaps, interest rate swaps and other derivative instruments
to manage the financial impact of potential prepayment activity resulting
from interest rate movements and associated with its mortgage servicing
rights. The Company is required to deposit cash into margin accounts
maintained by counterparties for unrealized losses on futures contracts.
Fair Value
The carrying amounts of cash, cash equivalents, accounts receivable,
relocation receivables, accounts payable and accrued liabilities
approximate fair value due to the short-term maturities of these assets
and liabilities.
The fair value of financial instruments is generally determined by
reference to market values resulting from trading on a national securities
exchange or in an over-the-counter market. In cases where quoted market
prices are not available, fair value is based on estimates using present
value or other valuation techniques, as appropriate.
F-34
The carrying amounts and estimated fair values of financial instruments,
including derivative financial instruments at December 31, are as follows:
2000 1999
---------------------------------- -----------------------------------
Notional/ Estimated Notional/ Estimated
Contract Carrying Fair Contract Carrying Fair
Amount Amount Value Amount Amount Value
--------- -------- --------- --------- -------- ---------
Assets
Cash and cash equivalents $ -- $ 944 $ 944 $ -- $ 1,164 $ 1,164
Marketable securities(a) -- 272 272 -- 286 286
Preferred stock investments(b) -- 388 388 -- 369 369
Assets under management and
mortgage programs
Mortgage loans held for sale -- 879 909 -- 1,112 1,124
Mortgage servicing rights -- 1,653 1,724 -- 1,084 1,202
Debt
Current portion of debt -- -- -- -- 400 402
Long-term debt -- 1,948 1,883 -- 2,445 2,443
Liabilities under management
and mortgage programs
Debt -- 2,040 2,040 -- 2,314 2,314
Mandatorily redeemable
preferred interest in a
subsidiary -- 375 375 -- -- --
Mandatorily redeemable
preferred securities issued by
subsidiary holding solely senior
debentures issued by the
Company -- 1,683 623 -- 1,478 1,113
Off balance sheet derivatives
Foreign exchange forwards 91 1 1 173 (1) (1)
Off balance sheet derivatives
relating to management and
mortgage programs
Assets
Commitments to fund
mortgages 1,940 -- 24 1,283 -- 1
Forward delivery
commitments (c) 2,776 (6) (29) 2,434 6 20
Commitments to complete
securitizations(c) 1,017 (2) 17 813 -- (2)
Option contracts 1,468 4 4 858 3 3
Treasury futures(d) -- -- -- 152 -- (5)
Constant maturity treasury
floors(d) 6,105 18 177 4,420 57 13
Interest rate swaps(d) 1,105 -- 6 350 -- (26)
Principal only swaps(d) 656 -- 9 324 -- (15)
Swaptions 2,083 69 123 -- -- --
Liabilities
Interest rate swaps -- -- -- 610 -- 1
Foreign exchange forwards 161 (1) (1) 21 -- --
----------
(a) Realized gains or losses on marketable securities, which the Company
classified as available-for-sale, are calculated on a specific
identification basis. The Company reported realized gains in other
revenues in the Consolidated Statements of Operations of $32
million, $65 million and $27 million in 2000, 1999 and 1998,
respectively (which included the change in net unrealized holding
gains on trading securities of $8 million and $16 million in 1999
and 1998, respectively).
F-35
(b) It is not practicable to estimate the fair value of the Company's
preferred stock investments (with carrying amounts aggregating $718
million), other than its investment in Avis Group, because of the
lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs. Accordingly, amounts
represent solely the Company's preferred stock investment in Avis
Group.
(c) Carrying amounts and gains (losses) on mortgage-related positions
are already included in the determination of respective carrying
amounts and fair values of mortgage loans held for sale. Forward
delivery commitments are used to manage price risk on sale of all
mortgage loans to end investors, including commitments to complete
securitizations on loans held by an unaffiliated buyer.
(d) Carrying amounts and gains (losses) on mortgage servicing right
hedge positions are capitalized and recorded as a component of MSRs.
Gains (losses) on such positions are included in the determination
of the respective carrying amounts and fair value of MSRs.
Credit Risk and Exposure
The Company is exposed to risk in the event of nonperformance by
counterparties. The Company manages such risk by periodically evaluating
the financial position of counterparties and spreading its positions among
multiple counterparties. The Company presently does not anticipate
nonperformance by any of the counterparties and no material loss would be
expected from such nonperformance. However, in the event of
nonperformance, changes in fair value of the hedge instruments would be
reflected in the Consolidated Statements of Operations during the period
the nonperformance occurred. There were no significant concentrations of
credit risk with any individual counterparties or groups of counterparties
at December 31, 2000 and 1999.
23. Transfers and Servicing of Financial Assets
The Company sells receivables in securitizations of its residential
mortgage loans and its relocation receivables and may retain the following
interests in the securitized receivables: interest-only strips,
principal-only strips, one or more subordinated tranches, and servicing
rights. Gains or losses on the sale of these securitized receivables
depend, in part, on the carrying amount of the financial assets
transferred. Gains or losses relating to residential mortgages are
allocated between the assets sold and the retained interests based on
their relative fair values at the date of transfer. Gains or losses
relating to relocation receivables are based on the value of the assets
sold. The Company generally estimates fair value based upon the present
value of expected future cash flows. During 2000, the Company recognized
pre-tax gains of $252 million and $1 million on the securitizations of
residential mortgage loans and relocation receivables, respectively.
The Company receives annual servicing fees on residential mortgage loans
of approximately 46 basis points of the outstanding balance arising after
the investors have received the return for which they contracted. The
Company receives servicing fees of approximately 75 basis points of the
outstanding balance relating to the relocation receivables. The investors
have no recourse to the Company's other assets for failure of debtors to
pay when due. In certain cases, the Company's retained interests are
subordinate to the investors' interests. The value of these retained
interests is subject to the prepayment and interest rate risks of the
transferred financial assets.
Key economic assumptions used during 2000 to measure the fair value of the
Company's retained interests at the time of securitization were as
follows:
Residential Mortgage Loans
----------------------------
Mortgage-Backed Relocation
Securities MSRs Receivables
--------------- --------- -----------
Weighted-average life (in years) 7.7 - 9.1 1.7 - 9.8 .1 - .3
Prepayment speed (annual rate) 9 - 11% 7 - 27% -%
Discount rate (annual rate) 6 - 16% 7 - 14% 8%
Key economic assumptions used in subsequently measuring the fair value of
the Company's retained interests at December 31, 2000 and the effect on
the fair value of those interests from adverse changes in those
assumptions are as follows:
F-36
Residential Mortgage Loans
----------------------------
Mortgage-Backed Relocation
Securities MSRs(a) Receivables
--------------- -------- -----------
Fair value of retained interests $ 138 $ 1,409 $ 131
Weighted-average life (in years) 5.9 6.4 0.2
Prepayment speed (annual rate) 6 - 27% 15 - 39% --%
Impact of 10% adverse change $ (7) $ (51) $ --
Impact of 20% adverse change (11) (97) --
Discount rate (annual rate) 6 - 15% 8.2% 8 - 9%
Impact of 10% adverse change $ (5) $ (46) $ --
Impact of 20% adverse change (9) (87) (1)
Weighted average yield to maturity
Impact of 10% adverse change $ -- $ -- $ (1)
Impact of 20% adverse change -- -- (2)
----------
(a) Excludes fair value of MSR hedge position of $315 million.
These sensitivities are hypothetical and presented for illustrative
purposes only. Changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of
the change in assumption to the change in fair value may not be linear.
Also, the effect of a variation in a particular assumption is calculated
without changing any other assumption; in reality, changes in one
assumption may result in changes in another, which may magnify or
counteract the sensitivities.
The following table summarizes cash flow activity between securitization
trusts and the Company during 2000:
Residential Relocation
Mortgage Loans Receivables
-------------- -----------
Proceeds from new securitizations $ 21,937 $1,420
Proceeds from collections reinvested in securitization -- 2,322
Servicing fees received 228 4
Other cash flows received on retained interests(a) 22 131
Purchases of delinquent or forecasted loans (95) --
Servicing advances (352) --
Repayment of servicing advances 331 --
Cash received upon release of reserve account -- 2
----------
(a) Represents cash flows received on retained interests other than
servicing fees.
The following table presents information about delinquencies and
components of securitized and other managed assets for 2000:
Principal Amount
Total Principal 60 Days or More
Amount Past Due(a)
--------------- ----------------
Residential mortgage loans $82,187 $773
Relocation receivables 879 20
------- ----
Total securitized and other managed assets $83,066 $793
======= ====
Comprised of:
Assets securitized(b) $81,868
Assets held for sale or securitization 811
Assets held in portfolio 387
----------
(a) Amounts are based on total securitized and other managed assets at
December 31, 2000.
(b) Represents the principal amounts of the assets. All retained
interests in securitized assets have been excluded from the table.
24. Related Party Transactions
F-37
NRT Incorporated
The Company maintains a relationship with NRT, a corporation created to
acquire residential real estate brokerage firms. During 1999, the Company
executed new agreements with NRT, which among other things, increased the
term of each of the three franchise agreements under which NRT operates
from 40 years to 50 years. NRT is party to other agreements and
arrangements with the Company. Under these agreements, the Company
acquired $182 million of NRT preferred stock, of which $24 million will be
convertible, at the Company's option, upon the occurrence of certain
events, into no more than 50% of NRT's common stock. The Company also
acquired an additional $50 million of NRT preferred stock in 2000. During
2000 and 1999, approximately $21 million and $8 million of the preferred
dividend income increased the basis of the underlying preferred stock
investment. Additionally, the Company sold $1 million and $2 million of
its convertible preferred interest and recognized a gain of $10 million
and $20 million during 2000 and 1999, respectively, which is also included
in other revenue in the Consolidated Statements of Operations.
Accordingly, at December 31, 2000, the Company owned $258 million of NRT
preferred stock. The Company recognized preferred dividend income of $17
million, $16 million and $15 million during 2000, 1999 and 1998,
respectively, which is included in other revenue in the Consolidated
Statements of Operations. The Company accounts for this preferred stock
investment using the cost method. During 2000, 1999 and 1998, total
franchise royalties earned by the Company from NRT and its predecessors
were $198 million, $172 million and $122 million, respectively. Certain
officers of the Company serve on the Board of Directors of NRT.
The Company, at its election, will participate in NRT's acquisitions by
acquiring up to an aggregate $946 million (plus an additional $500 million
if certain conditions are met) of intangible assets, and in some cases
mortgage operations of real estate brokerage firms acquired by NRT. As of
December 31, 2000, the Company acquired $607 million of such mortgage
operations and intangible assets, primarily franchise agreements
associated with real estate brokerage companies acquired by NRT, which
brokerage companies will become subject to the NRT 50-year franchise
agreements. In February 1999, NRT and the Company entered into an
agreement under which the Company has made upfront payments of $35 million
to NRT for services to be provided by NRT to the Company related to the
identification of potential acquisition candidates, the negotiation of
agreements and other services in connection with future brokerage
acquisitions by NRT. Such fee is refundable in the event the services are
not provided.
The Company has the option to purchase from an investor group in NRT 6.6
million shares of NRT common stock for $20 million. The option is
exercisable from August 11, 2002 to December 5, 2005 and conditional upon
the investor group receiving an aggregate payment of $166 million from NRT
on August 11, 2002. To exercise the option prior to August 11, 2002, the
Company would be required to satisfy NRT's obligation to pay this
distribution. In addition, if NRT is unable to make the distribution to
the investor group on August 11, 2002, the Company would be required to
make the payment to the investor group on behalf of NRT and would receive
additional preferred stock securities in NRT.
Avis Group Holdings, Inc.
During 2000, the Company maintained a common equity interest in Avis
Group. During 1999 and 1998, the Company sold approximately 2 million and
1 million shares, respectively, of Avis Group common stock and recognized
a pre-tax gain of approximately $11 million and $18 million, respectively,
which is included in other revenue in the Consolidated Statements of
Operations. During 2000, 1999 and 1998, the Company recorded its equity in
the earnings of Avis Group of $17 million, $18 million and $14 million,
respectively, as a component of other revenue in the Consolidated
Statements of Operations. At December 31, 2000, the Company's common
equity interest in Avis Group was approximately 18%.
In connection with the Company's disposition of its fleet businesses
during 1999, the Company received as part of the total consideration, $360
million of non-voting convertible preferred stock in a subsidiary of Avis
F-38
Group. During 2000 and 1999, the Company received dividends of $19 million
and $9 million, respectively, which increased the basis of the underlying
preferred stock investment. Such amount is included as a component of
other revenue in the Consolidated Statements of Operations. At December
31, 2000, the Company accounts for its convertible preferred stock
investment as an available for sale security. Conversion of the
convertible preferred stock is at the Company's option subject to earnings
and stock price thresholds with specified intervals of time. As of
December 31, 2000, the conversion conditions have not been satisfied.
The Company licenses its Avis(R) trademark to Avis Group pursuant to a
50-year master license agreement and receives royalty fees based upon 4%
of Avis Group revenue, escalating to 4.5% of Avis Group revenue over a
5-year period. During 2000, 1999 and 1998, total franchise royalties
earned by the Company from Avis Group were $103 million, $102 million and
$92 million, respectively. In addition, the Company operates the
telecommunications and computer processing system, which services Avis
Group for reservations, rental agreement processing, accounting and fleet
control, for which the Company charges Avis Group at cost. As of December
31, 2000 and 1999, the Company had accounts receivable of $49 million and
$34 million, respectively, due from Avis Group. Certain officers of the
Company serve on the Board of Directors of Avis Group.
Summarized historical financial information for Avis Group is presented as
follows:
Year Ended
December 31,
------------------
2000 1999
------ ------
Revenues $4,244 $3,333
Vehicle depreciation and lease charges, net 1,695 1,175
Other expenses 2,333 1,992
------ ------
Income before provision for income taxes 216 166
Provision for income taxes 95 73
------ ------
Net income $ 121 $ 93
====== ======
December 31,
------------------
2000 1999
------ ------
Vehicles, net $6,967 $6,501
Other assets 3,447 4,577
Vehicle related debt and preferred membership interest 7,122 7,069
Other liabilities 2,147 2,977
25. Segment Information
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation and amortization and
minority interest calculation. For this purpose, Adjusted EBITDA is
defined as earnings before non-operating interest, income taxes,
depreciation and amortization and minority interest, adjusted to exclude
certain items which are of a non-recurring or unusual nature and are not
measured in assessing segment performance or are not segment specific.
As of January 1, 2000, the Company refined its corporate overhead
allocation method. Expenses that were previously allocated among segments
based upon a percentage of revenue are now recorded by each specific
segment if the expense is primarily associated with that segment. The
Company determined this refinement to be appropriate subsequent to the
completion of the Company's divestiture plan and based upon the
composition of its business units in 2000.
In connection with the acquisition of Avis Group and the disposition of
certain businesses during first quarter 2001, the Company realigned the
operations and management of certain of its businesses. Accordingly, the
Company's segment reporting structure now encompasses the following four
reportable segments: Real Estate
F-39
Services, Hospitality, Vehicle Services and Financial Services. Segment
information for all periods presented has been restated to conform to the
current reporting structure.
A description of the services provided within each of the Company's
reportable segments is as follows:
Real Estate Services
The Real Estate Services segment consists of the Company's three real
estate brands and its mortgage and relocation businesses. The real estate
franchise business licenses the owners and operators of independent real
estate brokerage businesses to use its brand names. Operational and
administrative services are provided to franchisees, which are designed to
increase franchisee revenue and profitability. Such services include
advertising and promotions, referrals, training and volume purchasing
discounts.
The mortgage business originates, sells and services residential mortgage
loans. The Company markets a variety of mortgage products to consumers
through relationships with corporations, affinity groups, financial
institutions, real estate brokerage firms and other mortgage banks. The
Company customarily sells all mortgages it originates to investors (which
include a variety of institutional investors) either as individual loans,
as mortgage-backed securities or as participation certificates issued or
guaranteed by Fannie Mae, the Federal Home Loan Mortgage Corporation or
the Government National Mortgage Association while generally retaining
mortgage servicing rights. Mortgage servicing consists of collecting loan
payments, remitting principal and interest payments to investors, holding
escrow funds for payment of mortgage-related expenses such as taxes and
insurance, and otherwise administering the Company's mortgage loan
servicing portfolio.
Relocation services are provided to client corporations for the transfer
of their employees. Such services include appraisal, inspection and
selling of transferees' homes, providing equity advances to transferees
(generally guaranteed by the corporate customer), purchasing of a
transferee's home which is sold within a specified time period for a price
that is at least equivalent to the appraised value, certain home
management services, assistance in locating a new home for the transferee
at the transferee's destination, consulting services and other related
services. The transferee's home is purchased under a contract of sale and
the Company obtains a deed to the property; however, it does not generally
record the deed or transfer title. Transferring employees are provided
equity advances on the home based on their ownership equity of the
appraised home value. The mortgage is generally retired concurrently with
the advance of the equity and the purchase of the home. Based on its
client agreements, the Company is given parameters under which it
negotiates for the ultimate sale of the home. The gain or loss on resale
is generally borne by the client corporation. In certain transactions, the
Company will assume the risk of loss on the sale of homes; however, in
such transactions, the Company will control all facets of the resale
process, thereby, limiting its exposure.
Hospitality
The Hospitality segment consists of the Company's nine lodging brands and
its timeshare and travel agency businesses. As a franchiser of guest
lodging facilities, the Company licenses the independent owners and
operators of hotels to use its brand names. Operation and administrative
services are provided to franchisees, which include access to a national
reservation system, national advertising and promotional campaigns,
co-marketing programs and volume purchasing discounts. As a provider of
vacation and timeshare exchange services, the Company enters into
affiliation agreements with resort property owners/developers to allow
owners of weekly timeshare intervals to trade their owned weeks with other
subscribers. In addition, the Company provides publications and other
travel-related services to both developers and subscribers.
Vehicle Services
The Vehicle Services segment consists of the Company's car rental
franchise business and its fleet management and car park facility
businesses. The Company owns and operates the Avis car rental franchise
F-40
system. The car rental franchise business provides vehicle rentals to
business and individual customers. During 1999 and 1998, the Company also
provided fleet and fuel card related products and services to corporate
clients and government agencies. These services included management and
leasing of vehicles, fuel card payment and reporting and other fee-based
services for clients' vehicle fleets. The Company leased vehicles
primarily to corporate fleet users under operating and direct financing
lease arrangements. The Company owns and operates off-street commercial
parking facilities and on-street parking in the United Kingdom.
Financial Services
The Financial Services segment consists of the Company's individual
membership, insurance-related and tax preparation services businesses and
also its real estate Internet portal, Move.com Group. The Company provides
customers with access to a variety of services and discounted products in
such areas as retail shopping, auto, dining, home improvement and credit
information. The Company affiliates with business partners, such as
leading financial institutions and retailers, to offer membership as an
enhancement to their credit card customers. Individual memberships are
marketed primarily using direct marketing techniques. The Company also
markets and administers competitively priced insurance products, primarily
accidental death and dismemberment insurance and term life insurance, and
provides services such as checking account enhancement packages, various
financial products and discount programs, to financial institutions,
which, in turn, provide these services to their customers. The Company
affiliates with financial institutions, including credit unions and banks,
to offer their respective customer bases such products and services. The
Company also provides tax preparation services through its Jackson Hewitt
subsidiary.
Year Ended December 31, 2000
Real Estate Financial
Services Hospitality(a) Services
----------- -------------- ---------
Net revenues(d) $1,461 $ 1,013 $ 1,380
Adjusted EBITDA 752 394 373
Depreciation and amortization 103 82 59
Segment assets 6,123 1,928 1,525
Capital expenditures 39 39 74
Vehicle Corporate
Services(b) and Other (c) Total
----------- ------------- -------
Net revenues(d) $ 568 $ 237 $ 4,659
Adjusted EBITDA 306 (100) 1,725
Depreciation and amortization 52 56 352
Segment assets 2,694 2,802 15,072
Capital expenditures 55 39 246
F-41
Year Ended December 31, 1999
Real Estate Financial
Services Hospitality(a) Services
----------- -------------- ---------
Net revenues(d) $1,383 $ 1,011 $ 1,518
Adjusted EBITDA 727 427 305
Depreciation and amortization 95 78 58
Segment assets 5,951 1,929 1,415
Capital expenditures 69 52 47
Vehicle Corporate
Services(b) and Other(c) Total
----------- ------------- -------
Net revenues(d) $1,430 $ 734 $ 6,076
Adjusted EBITDA 364 96 1,919
Depreciation and amortization 68 72 371
Segment assets 2,762 3,092 15,149
Capital expenditures 62 47 277
Year Ended December 31, 1998
Real Estate Financial
Services Hospitality(a) Services
----------- -------------- ---------
Net revenues(d) $1,253 $ 949 $ 1,433
Adjusted EBITDA 661 394 97
Depreciation and amortization 79 69 47
Segment assets 6,649 1,848 1,563
Capital expenditures 112 82 44
Vehicle Corporate
Services and Other Total(e)
-------- ---------- --------
Net revenues(d) $2,123 $ 827 $ 6,585
Adjusted EBITDA 404 34 1,590
Depreciation and amortization 65 63 323
Segment assets 7,181 2,602 19,843
Capital expenditures 69 48 355
----------
(a) Net revenues and Adjusted EBITDA include the equity in earnings from
the Company's investment in Avis Group of $17 million, $18 million
and $14 million in 2000, 1999 and 1998, respectively. Net revenues
and Adjusted EBITDA for 1999 and 1998 include a pre-tax gain of $11
million and $18 million, respectively, as a result of the sale of a
portion of the Company's equity interest. Segment assets include
such equity method investment in the amount of $132 million, $118
million and $139 million at December 31, 2000, 1999 and 1998,
respectively.
(b) Net revenues include gains of $33 million and $23 million during
2000 and 1999, respectively, on the sales of car parking facilities.
(c) Segment assets include the Company's equity investment of $1 million
and $17 million in Entertainment Publication, Inc. at December 31,
2000 and 1999, respectively.
(d) Inter-segment net revenues were not significant to the net revenues
of any one segment.
(e) Segment assets exclude net assets of discontinued operations of $374
million.
F-42
Provided below is a reconciliation of Adjusted EBITDA to income (loss)
before income taxes and minority interest.
Year Ended December 31,
-----------------------------------
2000 1999 1998
------- ------- -------
Adjusted EBITDA $ 1,725 $ 1,919 $ 1,590
Depreciation and amortization (352) (371) (323)
Other (charges) credits:
Restructuring and other unusual charges (109) (110) 67
Investigation-related costs (23) (21) (33)
Litigation settlement and related costs 21 (2,894) (351)
Termination of proposed acquisitions -- (7) (433)
Executive terminations -- -- (53)
Investigation-related financing costs -- -- (35)
Interest, net (148) (199) (114)
Net gain (loss) on dispositions of businesses (8) 1,109 --
------- ------- -------
Income (loss) before income taxes and minority interest $ 1,106 $ (574) $ 315
======= ======= =======
The geographic segment information provided below is classified based on
the geographic location of the Company's subsidiaries.
United United All Other
States Kingdom Countries Total
------ ------- --------- -----
2000
Net revenues $ 3,955 $ 500 $204 $ 4,659
Assets 13,026 1,924 122 15,072
Net property and equipment 672 637 36 1,345
1999
Net revenues $ 4,916 $ 869 $291 $ 6,076
Assets 11,722 3,215 212 15,149
Net property and equipment 590 723 34 1,347
1998
Net revenues $ 5,375 $ 899 $311 $ 6,585
Assets 16,251 3,707 259 20,217
Net property and equipment 646 768 19 1,433
26. Selected Quarterly Financial Data--(unaudited)
Provided below is the selected unaudited quarterly financial data for 2000
and 1999. The underlying diluted per share information is calculated from
the weighted average common and common stock equivalents outstanding
during each quarter, which may fluctuate based on quarterly income levels,
market prices, and share repurchases. Therefore, the sum of the quarters
per share information may not equal the total year amounts presented on
the Consolidated Statements of Operations.
F-43
2000
--------------------------------------------------------
First(a) Second Third(b) Fourth
-------- --------- --------- ---------
Net revenues $ 1,128 $ 1,137 $ 1,225 $ 1,169
-------- --------- --------- ---------
Income from continuing operations $ 127 $ 175 $ 214 $ 144
Extraordinary loss, net of tax (2) -- -- --
Cumulative effect of accounting change, net of tax (56) -- -- --
-------- --------- --------- ---------
Net income $ 69 $ 175 $ 214 $ 144
======== ========= ========= =========
CD common stock per share information:
Basic
Income from continuing operations $ 0.18 $ 0.25 $ 0.30 $ 0.20
Net income $ 0.10 $ 0.25 $ 0.30 $ 0.20
Weighted average shares 717 722 725 731
Diluted
Income from continuing operations $ 0.17 $ 0.24 $ 0.29 $ 0.20
Net income $ 0.09 $ 0.24 $ 0.29 $ 0.20
Weighted average shares 769 762 759 757
Move.com common stock per share information:
Basic and Diluted
Loss from continuing operations $ (0.67) $ (0.55) $ (0.54)
Net loss $ (0.67) $ (0.55) $ (0.54)
Weighted average shares 4 4 3
CD common stock market prices:
High $24 5/16 $ 18 3/4 $ 14 7/8 $ 12 9/16
Low $16 3/16 $ 12 5/32 $ 10 5/8 $ 8 1/2
1999
--------------------------------------------------------
First(c) Second(d) Third(e) Fourth(f)
-------- --------- --------- ---------
Net revenues $ 1,646 $ 1,737 $ 1,410 $ 1,283
-------- --------- --------- ---------
Income (loss) from continuing operations $ 169 $ 874 $ 209 $ (1,481)
Gain (loss) on sale of discontinued operations, net
of tax 193 (12) (7) --
-------- --------- --------- ---------
Net income (loss) $ 362 $ 862 $ 202 $ (1,481)
======== ========= ========= =========
CD common stock per share information:
Basic
Income (loss) from continuing operations $ 0.21 $ 1.14 $ 0.29 $ (2.08)
Net income (loss) $ 0.45 $ 1.12 $ 0.28 $ (2.08)
Weighted average shares 800 770 726 711
Diluted
Income (loss) from continuing operations $ 0.20 $ 1.06 $ 0.27 $ (2.08)
Net income (loss) $ 0.43 $ 1.05 $ 0.26 $ (2.08)
Weighted average shares 854 824 780 711
CD common stock market prices:
High $22 7/16 $ 20 3/4 $ 22 5/8 $ 26 9/16
Low $15 5/16 $ 15 1/2 $ 17 $ 14 9/16
----------
(a) Includes (i) restructuring and other unusual charges of $106 million
($70 million, after tax or $0.09 per diluted share) in connection
with various strategic initiatives and (ii) a non-cash credit of $41
million ($26 million, after tax or $0.03 per diluted share) in
connection with an adjustment to the PRIDES settlement.
F-44
(b) Includes (i) a gain of $35 million ($35 million, after tax or $0.05
per diluted share) resulting from the recognition of a portion of
the Company's previously recorded deferred gain from the sale of its
fleet businesses, (ii) losses of $32 million ($20 million, after tax
or $0.03 per diluted share) related to the dispositions of
businesses, (iii) a charge of $20 million ($12 million, after tax or
$0.02 per diluted share) in connection with litigation asserting
claims associated with accounting irregularities in the former
business units of CUC and outside of the principal common
stockholder class action lawsuit and (iv) $3 million ($2 million,
after tax) of losses in connection with the postponement of the
initial public offering of Move.com common stock.
(c) Includes a charge of $7 million ($4 million, after tax or $0.01 per
diluted share) in connection with the termination of a proposed
acquisition.
(d) Includes (i) a net gain of $750 million ($709 million, after tax or
$0.86 per diluted share) related to the dispositions of businesses
and (ii) a charge of $23 million ($15 million, after tax or $0.02
per diluted share) in the connection with the transition of the
Company's lodging franchisees to a Company sponsored property
management system.
(e) Includes (i) a charge of $85 million ($49 million, after tax or $.06
per diluted share) in connection with the creation of NGI, (ii) a
net gain of $75 million ($28 million after tax, or $0.04 per diluted
share) related to the dispositions of businesses and (iii) a charge
of $5 million ($3 million, after tax) principally related to the
consolidation of European call centers in Ireland.
(f) Includes (i) a charge of $2,894 million ($1,839 million, after tax
or $2.59 per diluted share) associated with the agreement to settle
the principal common stockholder class action lawsuit and (ii) a net
gain of $284 million ($142 million, after tax or $0.20 per diluted
share) related to the dispositions of businesses.
27. Subsequent Events
Debt Issuances
Convertible Senior Notes. During first quarter 2001, the Company issued
approximately $1.5 billion aggregate principal amount at maturity of
zero-coupon senior convertible notes for aggregate gross proceeds of
approximately $900 million. The notes mature in 2021 and were issued at a
price representing a yield-to-maturity of 2.5%. The Company will not make
periodic payments of interest on the notes, but may be required to make
nominal cash payments in specified circumstances. Each $1,000 principal
amount at maturity may be convertible, subject to satisfaction of specific
contingencies, into 33.4 shares of CD common stock.
During May 2001, the Company issued zero-coupon zero-yield convertible
senior notes to a qualified institutional buyer in a private offering for
gross proceeds of $1.0 billion. The notes mature in 2021. The Company may
be required to repurchase these notes on May 4, 2002. The Company is not
required to pay interest on the notes unless an interest adjustment
becomes payable, which may occur in specified circumstances commencing in
2004. Each $1,000 principal amount at maturity may be convertible, subject
to satisfaction of specific contingencies, into approximately 39 shares of
CD common stock.
Term Loan. During first quarter 2001, the Company entered into a $650
million term loan agreement with terms similar to its other revolving
credit facilities. This term loan amortizes in three equal installments on
August 22, 2002, May 22, 2003 and February 22, 2004. Borrowings under this
facility bear interest at LIBOR plus a margin of 125 basis points.
Medium-Term Notes. During first quarter 2001, PHH issued $650 million of
medium-term notes under an existing shelf registration statement. These
notes bear interest at a rate of 8 1/8% per annum and mature in February
2003.
Asset-Backed Notes. During first quarter 2001, the Company's Avis car
rental subsidiary issued $750 million of floating rate rental car asset
backed notes. The notes are secured by rental vehicles owned by such
subsidiary. The notes bear interest at a rate of LIBOR plus 20 basis
points per annum and mature in April 2004. During second quarter 2001, the
Company's Avis car rental subsidiary registered $500 million of auction
rate rental car asset backed notes. These notes are also secured by rental
vehicles owned by such subsidiary. The notes bear interest at a rate of
LIBOR plus or minus an applicable margin determined from time to time
through an auction. The Company issued approximately $200 million under
this registration statement.
F-45
Debt Redemption
During first quarter 2001, the Company made a principal payment of $250
million to extinguish outstanding borrowings under its then existing term
loan facility.
Credit Facilities
During first quarter 2001, PHH renewed its $750 million syndicated
revolving credit facility, which was due in 2001. The new facility bears
interest at LIBOR plus an applicable margin, as defined in the agreement,
and terminates on February 21, 2002. PHH is required to pay a per annum
utilization fee of .25% if usage under the facility exceeds 25% of
aggregate commitments. Under the new facility, any loans outstanding as of
February 21, 2002 may be converted into a term loan with a final maturity
of February 21, 2003.
PRIDES
During first quarter 2001, the purchase contracts underlying the Company's
FELINE PRIDES settled. Accordingly, the Company issued approximately 61
million shares of its CD common stock in satisfaction of its obligation to
deliver common stock to beneficial owners of the PRIDES.
CD Common Stock
During first quarter 2001, the Company issued 46 million shares of its CD
common stock at $13.20 per share for aggregate proceeds of approximately
$607 million.
----------
F-46
EXHIBITS:
Exhibit No. Description
----------- -----------
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 dated December 17, 1997 to
the Registration Statement on Form S-4, Registration No.
333-34517, dated August 28, 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 (Incorporated by reference to Exhibit
4.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, dated March 29, 2001)
4.2 Indenture dated as of February 11, 1997, between CUC
International Inc. and Marine Midland Bank, as trustee
(Incorporated by reference to Exhibit 4(a) to the Company's
Current Report on Form 8-K dated February 13, 1997)
4.3(a) Indenture dated February 24, 1998 between the Company and The
Bank of Nova Scotia Trust Company of New York, as Trustee
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3, Registration No. 333-45227,
dated January 29, 1998)
4.3(b) Global Note (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated December 4, 1998)
4.4(a) Indenture dated November 6, 2000 between PHH Corporation and Bank
One Trust Company, N.A., as Trustee (Incorporated by reference to
Exhibit 4.0 to PHH Corporation's Current Report on Form 8-K dated
December 12, 2000)
4.4(b) Supplemental Indenture No. 1 dated November 6, 2000 between PHH
Corporation and Bank One Trust Company, N.A., as Trustee
(Incorporated by reference to Exhibit 4.1 to PHH Corporation's
Current Report on Form 8-K dated December 12, 2000)
4.4(c) Supplemental Indenture No. 2 dated January 30, 2001 between PHH
Corporation and Bank One Trust Company, N.A., as Trustee
(Incorporated by reference to Exhibit 4.1 to PHH Corporation's
Current Report on Form 8-K dated February 8, 2001)
4.5(a) Indenture dated February 13, 2001 between the Company and The
Bank of New York, as Trustee (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated
February 20, 2001)
4.5(b) Supplemental Indenture No. 1 dated June 13, 2001 between Cendant
Corporation and The Bank of New York, as Trustee (Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form
8-K dated June 13, 2001)
4.6 Purchase Agreement (including as Exhibit A the form of the
Warrant for the Purchase of Shares of Common Stock), dated
December 15, 1999, between Cendant Corporation and Liberty Media
Corporation (Incorporated by reference to Exhibit 4.11 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999)
4.7 Resale Registration Rights Agreement dated as of February 13,
2001 between the Company and Lehman Brothers Inc. (Incorporated
by reference to Exhibit 4.7 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, dated March 29,
2001)
4.8 Indenture dated May 4, 2001 between the Company and The Bank of
New York, as Trustee (Incorporated by reference to Exhibit 4.7 to
the Company's Current Report on Form 8-K dated May 10, 2001)
G-1
10.1(a) Agreement with Henry R. Silverman, dated June 30, 1996 and as
amended through December 17, 1997 (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-4,
Registration No. 333-34517 dated August 28, 1997)
10.1(b) Amendment to Agreement with Henry R. Silverman, dated December
31, 1998 (Incorporated by reference to Exhibit 10.1(b) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998)
10.1(c) Amendment to Agreement with Henry R. Silverman, dated August 2,
1999 (Incorporated by reference to Exhibit 10.1(c) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999)
10.1(d) Amendment to Agreement with Henry R. Silverman, dated May 15,
2000 (Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30,
2000)
10.2(a) Agreement with Stephen P. Holmes, dated September 12, 1997
(Incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-4, Registration No. 333-34517
dated August 28, 1997)
10.2(b) Amendment to Agreement with Stephen P. Holmes, dated January 11,
1999 (Incorporated by reference to Exhibit 10.2(b) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998)
10.3(a) Agreement with James E. Buckman, dated September 12, 1997
(Incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-4, Registration No. 333-34517
dated August 28, 1997)
10.3(b) Amendment to Agreement with James E. Buckman, dated January 11,
1999 (Incorporated by reference to Exhibit 10.4(b) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998)
10.4 Agreement with Richard A. Smith, dated September 3, 1998
(Incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.5 Agreement with John W. Chidsey, amended and restated March 8,
2000 (Incorporated by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.6 Agreement with Samuel L. Katz, amended and restated June 5, 2000
(Incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.7(a) 1987 Stock Option Plan, as amended (Incorporated by reference to
Exhibit 10.16 to the Company's Form 10-Q for the period ended
October 31, 1996)
10.7(b) Amendment to 1987 Stock Option Plan dated January 3, 2001
(Incorporated by reference to Exhibit 10.7(b) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.8 1990 Directors Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.17 to the Company's Quarterly Report on
Form 10-Q for the period ended October 31, 1996)
10.9 1992 Directors Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.18 to the Company's Quarterly Report on
Form 10-Q for the period ended October 31, 1996)
10.10 1994 Directors Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.19 to the Company's Quarterly Report on
Form 10-Q for the period ended October 31, 1996)
G-2
10.11(a) 1997 Stock Option Plan (Incorporated by reference to Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q for the
period ended April 30, 1997)
10.11(b) Amendment to 1997 Stock Option Plan dated January 3, 2001
(Incorporated by reference to Exhibit 10.11(b) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.12(a) 1997 Stock Incentive Plan (Incorporated by reference to Appendix
E to the Joint Proxy Statement/Prospectus included as part of
the Company's Registration Statement on Form S-4, Registration
No. 333-34517 dated August 28, 1997)
10.12(b) Amendment to 1997 Stock Incentive Plan dated March 27, 2000
(Incorporated by reference to Exhibit 10.12(b) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.12(c) Amendment to 1997 Stock Incentive Plan dated March 28, 2000
(Incorporated by reference to Exhibit 10.12(c) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.12(d) Amendment to 1997 Stock Incentive Plan dated January 3, 2001
(Incorporated by reference to Exhibit 10.12(d) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.13(a) HFS Incorporated's Amended and Restated 1993 Stock Option Plan
(Incorporated by reference to Exhibit 4.1 to HFS Incorporated's
Registration Statement on Form S-8, Registration No. 33-83956)
10.13(b) First Amendment to the Amended and Restated 1993 Stock Option
Plan dated May 5, 1995 (Incorporated by reference to Exhibit 4.1
to HFS Incorporated's Registration Statement on Form S-8,
Registration No. 33-094756)
10.13(c) Second Amendment to the Amended and Restated 1993 Stock Option
Plan dated January 22, 1996 (Incorporated by reference to Exhibit
10.21(b) to HFS Incorporated's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.13(d) Third Amendment to the Amended and Restated 1993 Stock Option
Plan dated January 22, 1996 (Incorporated by reference to Exhibit
10.21(c) to HFS Incorporated's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.13(e) Fourth Amendment to the Amended and Restated 1993 Stock Option
Plan dated May 20, 1996 (Incorporated by reference to Exhibit 4.5
to HFS Incorporated's Registration Statement on Form S-8,
Registration No. 333-06733)
10.13(f) Fifth Amendment to the Amended and Restated 1993 Stock Option
Plan dated July 24, 1996 (Incorporated by reference to Exhibit
10.21(e) to HFS Incorporated's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.13(g) Sixth Amendment to the Amended and Restated 1993 Stock Option
Plan dated September 24, 1996 (Incorporated by reference to
Exhibit 10.21(e) to HFS Incorporated's Annual Report on Form 10-K
for the year ended December 31, 1995)
10.13(h) Seventh Amendment to the Amended and Restated 1993 Stock Option
Plan dated as of April 30, 1997 (Incorporated by reference to
Exhibit 10.17(g) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999)
10.13(i) Eighth Amendment to the Amended and Restated 1993 Stock Option
Plan dated as of May 27, 1997 (Incorporated by reference to
Exhibit 10.17(h) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997)
G-3
10.14 HFS Incorporated's 1992 Incentive Stock Option Plan and Form of
Stock Option Agreement (Incorporated by reference to Exhibit 10.6
to HFS Incorporated's Registration Statement on Form S-1,
Registration No. 33-51422)
10.15 1992 Employee Stock Plan (Incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8,
Registration No. 333-45183, dated January 29, 1998)
10.16 Deferred Compensation Plan (Incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998)
10.17 Cendant Corporation Move.com Group 1999 Stock Option Plan
(Incorporated by reference to Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
dated March 29, 2001)
10.18 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)
10.19 Form of Underwriting Agreement for Debt Securities (Incorporated
by reference to Exhibit 1.1 to the Company's Registration
Statement on Form S-3, Registration No. 333-45227, dated January
29, 1998)
10.20 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)
(Incorporated by reference to Exhibit 4(b) to the Company's
Current Report on Form 8-K dated February 13, 1997)
10.21 Agreement and Plan of Merger between CUC International Inc. and
HFS Incorporated, dated as of May 27, 1997 (Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K dated May 29, 1997)
10.22(a) Five Year Competitive Advance and Revolving Credit 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 (Incorporated by reference to Exhibit (b)(1) to the
Company's Schedule 14-D1 dated January 27, 1998)
10.22(b) Amendment, dated as of October 30, 1998, to the Five Year
Competitive Advance and Revolving Credit Agreement, dated as of
October 2, 1998, among the Company, the financial institutions
parties thereto and The Chase Manhattan Bank, as Administrative
Agent (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated November 5, 1998)
10.22(c) Amendment, dated as of February 4, 1999, to the Five Year
Competitive Advance and Revolving Credit Agreement and the
364-Day Competitive Advance and Revolving Credit Agreement among
the Company, the lenders therein and The Chase Manhattan Bank, as
Administrative Agent (Incorporated by reference to Exhibit 99.2
to the Company's Current Report on Form 8-K dated February 16,
1999)
10.22(d) Amendment to the Five Year Competitive Advance and Revolving
Credit Agreement dated as of February 22, 2001, among the
Company, the financial institutions parties thereto and The Chase
Manhattan Bank, as Administrative Agent (Incorporated by
reference to Exhibit 10.22(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, dated March 29,
2001)
G-4
10.23(a) Three Year Competitive Advance and Revolving Credit Agreement
dated as of August 29, 2000 among the Company, the lenders
parties thereto, and The Chase Manhattan Bank, as Administrative
Agent (Incorporated by reference to Exhibit 10.23(a) to the
Company's Annual Report on Form 10-K for the year ended December
31, 2000, dated March 29, 2001)
10.23(b) Amendment to the Three Year Competitive Advance and Revolving
Credit Agreement, dated as of February 22, 2001, among the
Company, the lenders parties thereto and The Chase Manhattan
Bank, as Administrative Agent (Incorporated by reference to
Exhibit 10.23(b) to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, dated March 29, 2001)
10.24 $650,000,000 Term Loan Agreement dated as of February 22, 2001,
among the Company, the lenders therein and The Chase Manhattan
Bank, as Administrative Agent. (Incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, dated March 29, 2001)
10.25(a) 364-Day Competitive Advance and Revolving Credit Agreement dated
March 4, 1997, as amended and restated through February 22, 2001,
among PHH Corporation, the lenders thereto, and The Chase
Manhattan Bank, as Administrative Agent (Incorporated by
reference to Exhibit 10.25(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, dated March 29,
2001)
10.25(b) Five-year Credit Agreement ("PHH Five-year Credit Agreement")
dated February 28, 2000, among PHH Corporation, the Lenders, and
The Chase Manhattan Bank, as Administrative Agent (Incorporated
by reference to Exhibit 10.24(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999)
10.25(c) Amendment to the Five Year Competitive Advance and Revolving
Credit Agreement, dated as of February 22, 2001, among PHH
Corporation, the financial institutions parties thereto and The
Chase Manhattan Bank, as Administrative Agent (Incorporated by
reference to Exhibit 10.25(c) to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, dated March 29,
2001)
10.26 Agreement and Plan of Merger by and among Cendant Corporation,
PHH Corporation, Avis Acquisition Corp. and Avis Group Holdings,
Inc., dated as of November 11, 2000 (Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated
November 17, 2000)
10.27 Distribution Agreement between the Company and CS First Boston
Corporation; Goldman, Sachs & Co.; Merrill Lynch & Co.; Merrill
Lynch, Pierce, Fenner & Smith, Incorporated; and J.P. Morgan
Securities, Inc. dated November 9, 1995 (Incorporated by
reference to Exhibit 1 to Registration Statement, Registration
No. 33-63627)
10.28 Distribution Agreement between the Company and Credit Suisse;
First Boston Corporation; Goldman Sachs & Co. and Merrill Lynch &
Co., dated June 5, 1997 (Incorporated by reference to Exhibit 1
to Registration Statement, Registration No. 333-27715)
10.29 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.
(Incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated March 3, 1998)
10.30 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 Exhibit 10.2 to HFS Incorporated's Registration
Statement on Form S-1, Registration No. 33-51422)
10.31 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 Exhibit 10.3 to HFS Incorporated's Registration
Statement on Form S-1, Registration No. 33-51422)
G-5
10.32 License Agreement dated as of November 1, 1991 between Franchise
Systems Holdings, Inc. and Ramada Franchise Systems, Inc.
(Incorporated by reference to Exhibit 10.4 to HFS Incorporated's
Registration Statement on Form S-1, Registration No. 33-51422)
10.33 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 Exhibit 10.5 to HFS
Incorporated's Registration Statement on Form S-1, Registration
No. 33-51422)
10.34 The Company's 1999 Non-Employee Directors Deferred Compensation
Plan (Incorporated by reference to Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999)
10.35 Agreement and Plan of Merger, dated as of June 15, 2001 among the
Company, Galaxy Acquisition Corp. and Galileo International, Inc.
(Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated June 15, 2001)
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23 Consent of Deloitte & Touche LLP
G-6