DELAWARE | 06-0918165 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
6 SYLVAN WAY
PARSIPPANY, NJ |
07054 |
|
(Address of principal executive offices) | (Zip Code) |
NAME OF EACH EXCHANGE | ||
TITLE OF EACH CLASS | ON WHICH REGISTERED | |
Common Stock, Par Value $.01 | New York Stock Exchange | |
Preferred Stock Purchase Rights | New York Stock Exchange |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o |
2
| as of the date of the acquisition of Avis Group Holdings we allocated $256 million less purchase price to its fleet leasing business and we allocated additional purchase price of $141 million and $52 million ($51 million, net of amortization in 2001) to its fuel card business and our Avis car rental business, respectively; | |
| the fair value of the net assets acquired (excluding goodwill) of the fleet leasing business and our Avis car rental business increased $39 million and $24 million, respectively, and as a result, the total amount of goodwill recorded in the March 2001 acquisition decreased $63 million; | |
| income from continuing operations decreased $8 million and $5 million in 2004 and 2003, respectively, due to additional depreciation and amortization on assets we recorded in connection with the reallocation of purchase price; and | |
| income from discontinued operations increased $1 million and $17 million in 2005 and 2004, respectively, related to certain operations of PHH and decreased $51 million in 2003 related to certain operations of PHH and the effect of not aggregating the fleet leasing and fuel card businesses for purposes of testing goodwill and the reallocation of purchase price. |
| the recognition of impairment charges related to goodwill of the fleet leasing business of $102 million in 2003 and $100 million in 2002; | |
| a decrease in the loss on disposal of PHH (which included the fleet leasing business) in first quarter 2005 due to a reduction in PHHs net assets resulting from the impairment charges and reallocation of purchase price, discussed above; and | |
| an increase in the gain on the sale of the Wright Express fuel card business in the first quarter of 2005. |
Item 6. | Selected Financial Data |
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
3
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Item 8. | Financial Statements and Supplementary Data |
Item 9A. | Controls and Procedures |
12 | Computation of Ratio of Earnings to Fixed Charges. |
31.1 | Certification of Chief Executive Officer Pursuant to Rules 13(a)-14(a) and 15(d)-14(a) Promulgated Under the Securities Exchange Act of 1934, as amended. |
31.2 | Certification of Chief Financial Officer Pursuant to Rules 13(a)-14(a) and 15(d)-14(a) Promulgated Under the Securities Exchange Act of 1934, as amended. |
32 | Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
4
At or For the Year Ended December 31, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
(restated) | (restated) | (restated) | (restated) | (restated) | |||||||||||||||||
(In millions, except per share data) | |||||||||||||||||||||
Results of Operations
|
|||||||||||||||||||||
Net revenues
|
$ | 5,400 | $ | 4,820 | $ | 4,682 | $ | 3,015 | $ | 2,317 | |||||||||||
Income (loss) from continuing operations
|
$ | (11 | ) | $ | 71 | $ | (149 | ) | $ | (241 | ) | $ | (594 | ) | |||||||
Income from discontinued operations, net of tax
|
1,637 | 2,020 | 1,558 | 1,012 | 1,012 | ||||||||||||||||
Cumulative effect of accounting changes, net of tax
|
(8 | ) | - | (329 | ) | - | (38 | ) | |||||||||||||
Net income
|
$ | 1,618 | $ | 2,091 | $ | 1,080 | $ | 771 | $ | 380 | |||||||||||
Per Share Data
|
|||||||||||||||||||||
Income (loss) from continuing operations:
|
|||||||||||||||||||||
Basic
|
$ | (0.01 | ) | $ | 0.07 | $ | (0.15 | ) | $ | (0.24 | ) | $ | (0.68 | ) | |||||||
Diluted
|
(0.01 | ) | 0.07 | (0.15 | ) | (0.24 | ) | (0.68 | ) | ||||||||||||
Income from discontinued operations:
|
|||||||||||||||||||||
Basic
|
$ | 1.58 | $ | 1.96 | $ | 1.53 | $ | 1.00 | $ | 1.16 | |||||||||||
Diluted
|
1.58 | 1.90 | 1.53 | 1.00 | 1.16 | ||||||||||||||||
Cumulative effect of accounting changes:
|
|||||||||||||||||||||
Basic
|
$ | (0.01 | ) | $ | - | $ | (0.32 | ) | $ | - | $ | (0.04 | ) | ||||||||
Diluted
|
(0.01 | ) | - | (0.32 | ) | - | (0.04 | ) | |||||||||||||
Net income:
|
|||||||||||||||||||||
Basic
|
$ | 1.56 | $ | 2.03 | $ | 1.06 | $ | 0.76 | $ | 0.44 | |||||||||||
Diluted
|
1.56 | 1.97 | 1.06 | 0.76 | 0.44 | ||||||||||||||||
Cash dividends declared
|
$ | 0.40 | $ | 0.32 | $ | - | $ | - | $ | - | |||||||||||
Financial Position
|
|||||||||||||||||||||
Total assets
|
$ | 34,493 | $ | 42,698 | $ | 39,551 | $ | 36,337 | $ | 33,898 | |||||||||||
Assets of discontinued operations
|
20,512 | 29,452 | 27,232 | 24,469 | 21,770 | ||||||||||||||||
Assets under vehicle programs
|
8,500 | 7,072 | 6,485 | 6,379 | 4,132 | ||||||||||||||||
Long-term debt, including current portion
|
3,508 | 4,234 | 5,900 | 6,396 | 6,955 | ||||||||||||||||
Debt under vehicle
programs (*)
|
7,909 | 6,727 | 6,295 | 6,138 | 3,771 | ||||||||||||||||
Stockholders equity
|
11,342 | 12,464 | 9,946 | 9,167 | 6,995 |
(*) | Includes related-party debt due to Avis Budget Rental Car Funding (AESOP) LLC. See Note 15 to our Consolidated Financial Statements. |
5
6
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| Domestic Car Rental provides car rentals and ancillary products and services in the United States. | |
| International Car Rental provides car rentals and ancillary products and services primarily in Canada, Argentina, Australia, New Zealand, Puerto Rico and the U.S. Virgin Islands. | |
| Truck Rental provides truck rentals and related services to consumers and light commercial users in the United States. |
| Realogy Corporation encompasses our former Realogy segment, which is now presented as a discontinued operation. | |
| Wyndham Worldwide Corporation encompasses our former Hospitality Services and Timeshare Resorts segments, which are now presented as discontinued operations. | |
| Travelport, Inc. encompasses our former Travel Distribution Services segment, which is now presented as a discontinued operation. | |
| Avis Budget Group, Inc. encompasses our vehicle rental operations. |
7
2005 | 2004 | Change | ||||||||||
Net revenues
|
$ | 5,400 | $ | 4,820 | $ | 580 | ||||||
Total expenses
|
5,462 | 4,813 | 649 | |||||||||
Income (loss) before income taxes
|
(62 | ) | 7 | (69 | ) | |||||||
Benefit from income taxes
|
(51 | ) | (64 | ) | 13 | |||||||
Income (loss) from continuing operations
|
(11 | ) | 71 | (82 | ) | |||||||
Income from discontinued operations, net of tax
|
1,088 | 1,822 | (734 | ) | ||||||||
Gain on disposal of discontinued operations, net of tax
|
549 | 198 | 351 | |||||||||
Cumulative effect of accounting change, net of tax
|
(8 | ) | - | (8 | ) | |||||||
Net income
|
$ | 1,618 | $ | 2,091 | $ | (473 | ) | |||||
8
9
Revenues | EBITDA | ||||||||||||||||||||||||
2005 | 2004 | % Change | 2005 | 2004 | % Change | ||||||||||||||||||||
Domestic Car Rental
|
$ | 4,109 | $ | 3,658 | 12 | % | $ | 225 | $ | 265 | (15 | )% | |||||||||||||
International Car Rental
|
661 | 534 | 24 | 111 | 97 | 14 | |||||||||||||||||||
Truck Rental
|
546 | 517 | 6 | 103 | 105 | (2 | ) | ||||||||||||||||||
Total Reportable Segments
|
5,316 | 4,709 | 13 | 439 | 467 | (6 | ) | ||||||||||||||||||
Corporate and
Other(a)
|
84 | 111 | (24 | ) | (213 | ) | (76 | ) | |||||||||||||||||
Total Company
|
$ | 5,400 | $ | 4,820 | 12 | 226 | 391 | ||||||||||||||||||
Less: Non-vehicle related depreciation and amortization | 116 | 115 | |||||||||||||||||||||||
Interest expense related to corporate debt, net(b) | 172 | 269 | |||||||||||||||||||||||
Income (loss) before income taxes | $ | (62 | ) | $ | 7 | ||||||||||||||||||||
(a) | Includes unallocated corporate overhead, the elimination of transactions between segments and the results of operations of certain non-strategic businesses. |
(b) | The 2005 amount includes a credit resulting from the reversal of $73 million of accrued interest associated with the resolution of amounts due under a litigation settlement reached in 1999. |
10
11
2004 | 2003 | Change | ||||||||||
Net revenues
|
$ | 4,820 | $ | 4,682 | $ | 138 | ||||||
Total expenses
|
4,813 | 4,945 | (132 | ) | ||||||||
Income (loss) before income taxes
|
7 | (263 | ) | 270 | ||||||||
Benefit from income taxes
|
(64 | ) | (114 | ) | 50 | |||||||
Income (loss) from continuing operations
|
71 | (149 | ) | 220 | ||||||||
Income from discontinued operations, net of tax
|
1,822 | 1,558 | 264 | |||||||||
Gain on disposal of discontinued operations, net of tax
|
198 | - | 198 | |||||||||
Cumulative effect of accounting change, net of tax
|
- | (329 | ) | 329 | ||||||||
Net income
|
$ | 2,091 | $ | 1,080 | $ | 1,011 | ||||||
12
Revenues | EBITDA | ||||||||||||||||||||||||
% | % | ||||||||||||||||||||||||
2004 | 2003 | Change | 2004 | 2003 | Change | ||||||||||||||||||||
Domestic Car Rental
|
$ | 3,658 | $ | 3,640 | - | % | $ | 265 | $ | 165 | 61 | % | |||||||||||||
International Car Rental
|
534 | 447 | 19 | 97 | 55 | 76 | |||||||||||||||||||
Truck Rental
|
517 | 512 | 1 | 105 | 108 | (3 | ) | ||||||||||||||||||
Total Reportable Segments
|
4,709 | 4,599 | 2 | 467 | 328 | 42 | |||||||||||||||||||
Corporate and
Other (a)
|
111 | 83 | 34 | (76 | ) | (111 | ) | ||||||||||||||||||
Total Company
|
$ | 4,820 | $ | 4,682 | 3 | 391 | 217 | ||||||||||||||||||
Less: Non-vehicle related depreciation and amortization | 115 | 105 | |||||||||||||||||||||||
Interest expense related to corporate debt, net (b) | 269 | 375 | |||||||||||||||||||||||
Income (loss) before income taxes | $ | 7 | $ | (263 | ) | ||||||||||||||||||||
(a) | Includes unallocated corporate overhead, the elimination of transactions between segments and the results of operations of certain non-strategic businesses. |
13
14
2005 | 2004 | Change | ||||||||||
Total assets exclusive of assets under vehicle programs
|
$ | 25,993 | $ | 35,626 | $ | (9,633 | ) | |||||
Total liabilities exclusive of liabilities under vehicle programs
|
13,889 | 21,966 | (8,077 | ) | ||||||||
Assets under vehicle programs
|
8,500 | 7,072 | 1,428 | |||||||||
Liabilities under vehicle programs
|
9,262 | 8,268 | 994 | |||||||||
Stockholders equity
|
11,342 | 12,464 | (1,122 | ) |
15
Year Ended December 31, | |||||||||||||
2005 | 2004 | Change | |||||||||||
Cash provided by (used in):
|
|||||||||||||
Operating activities
|
$ | 1,000 | $ | 787 | $ | 213 | |||||||
Investing activities
|
27 | (810 | ) | 837 | |||||||||
Financing activities
|
(1,001 | ) | (1,030 | ) | 29 | ||||||||
Effects of exchange rate changes
|
- | 4 | (4 | ) | |||||||||
Cash provided by discontinued operations
|
357 | 639 | (282 | ) | |||||||||
Net change in cash and cash equivalents
|
$ | 383 | $ | (410 | ) | $ | 793 | ||||||
16
As of December 31, | |||||||||||||||||
Maturity Date | 2005 | 2004 | Change | ||||||||||||||
Term notes
|
|||||||||||||||||
67/8%
notes
|
August 2006 | $ | 850 | $ | 850 | $ | - | ||||||||||
4.89% notes
|
August 2006 | 100 | 100 | - | |||||||||||||
61/4% notes
|
January 2008 | 798 | 797 | 1 | |||||||||||||
61/4% notes
|
March 2010 | 349 | 349 | - | |||||||||||||
73/8% notes
|
January 2013 | 1,192 | 1,191 | 1 | |||||||||||||
71/8% notes
|
March 2015 | 250 | 250 | - | |||||||||||||
Other
|
|||||||||||||||||
Revolver
borrowings (a)
|
November 2009 | 7 | 650 | (643 | ) | ||||||||||||
Net hedging gains
(losses) (b)
|
(47 | ) | 17 | (64 | ) | ||||||||||||
Other
|
9 | 30 | (21 | ) | |||||||||||||
$ | 3,508 | $ | 4,234 | $ | (726 | ) | |||||||||||
(a) | Outstanding borrowings do not include $350 million of borrowings for which our Travelport subsidiary is the primary obligor. This amount is included within liabilities of discontinued operations on our Consolidated Balance Sheet at December 31, 2005. |
(b) | As of December 31, 2005, the balance represents $153 million of net mark-to-market adjustments on current interest rate hedges, partially offset by $106 million of net gains resulting from the termination of interest rate hedges. As of December 31, 2004, the balance represents $138 million of net gains resulting from the termination of interest rate hedges, partially offset by $121 million of mark-to-market adjustments on current interest rate hedges. |
As of December 31, | |||||||||||||
2005 | 2004 | Change | |||||||||||
Avis Budget Rental Car
Funding (a)
|
$ | 6,957 | $ | 5,935 | $ | 1,022 | |||||||
Budget Truck financing:
|
|||||||||||||
HFS Truck Funding
program (b)
|
149 | 220 | (71 | ) | |||||||||
Capital
leases (c)
|
370 | 225 | 145 | ||||||||||
Other (d)
|
433 | 347 | 86 | ||||||||||
$ | 7,909 | $ | 6,727 | $ | 1,182 | ||||||||
(a) | The change in the balance at December 31, 2005 principally reflects the issuance of fixed and floating rate asset-backed notes at various interest rates to support the acquisition of vehicles, partially offset by net repayments of outstanding term notes. |
(b) | The change in the balance at December 31, 2005 reflects payment of floating rate notes in connection with the retirement of portions of our truck rental fleet, which currently is acquired primarily under capital lease arrangements. |
(c) | The change in the balance at December 31, 2005 reflects $145 million of additional capital lease arrangements to finance the acquisition of a portion of our truck rental fleet. |
(d) | The change in the balance at December 31, 2005 primarily reflects incremental borrowings under our bank loan and commercial paper conduit facilities to support the acquisition of vehicles in our international operations. |
17
Debt Under | ||||||||
Corporate | Vehicle | |||||||
Debt | Programs | |||||||
Due in 2006
|
$ | 975 | $ | 2,456 | ||||
Due in 2007
|
5 | 1,816 | ||||||
Due in 2008
|
797 | 1,639 | ||||||
Due in 2009
|
- | 480 | ||||||
Due in 2010
|
331 | 800 | ||||||
Thereafter
|
1,400 | 718 | ||||||
$ | 3,508 | $ | 7,909 | |||||
Total | Outstanding | Letters of | Available | |||||||||||||
Capacity | Borrowings | Credit Issued | Capacity | |||||||||||||
Revolving credit facility and
commercial paper program (a) |
$ | 3,500 | $ | 7 | $ | 1,256 | $ | 1,887 | ||||||||
Letter of credit
facility (b)
|
303 | - | 303 | - |
(a) | In addition to the letters of credit issued as of December 31, 2005, the revolving credit facility contains the committed capacity to issue an additional $494 million in letters of credit. The letters of credit outstanding under this facility at December 31, 2005 were issued primarily to support our vehicle rental business. |
(b) | Final maturity date is July 2010. |
Total | Outstanding | Available | |||||||||||
Capacity (a) | Borrowings | Capacity | |||||||||||
Debt due to Avis Budget Rental
Funding (b)
|
$ | 7,580 | $ | 6,957 | $ | 623 | |||||||
Budget Truck Financing:
|
|||||||||||||
HFS Truck Funding
program (c)
|
149 | 149 | - | ||||||||||
Capital
leases (d)
|
370 | 370 | - | ||||||||||
Other (e)
|
821 | 433 | 388 | ||||||||||
$ | 8,920 | $ | 7,909 | $ | 1,011 | ||||||||
(a) | Capacity is subject to maintaining sufficient assets to collateralize debt. |
(b) | The outstanding debt is collateralized by approximately $7.5 billion of underlying vehicles (the majority of which are subject to manufacturer repurchase agreements) and related assets. |
(c) | The outstanding debt is collateralized by approximately $148 million of underlying vehicles and related assets. |
(d) | In connection with these capital leases, there are corresponding unamortized assets of $364 million classified within vehicles, net on our Consolidated Balance Sheet as of December 31, 2005. |
(e) | The outstanding debt is collateralized by $635 million of vehicles and related assets. |
18
First | Second | Third | Fourth | |||||||||||||
Domestic Car Rental
|
22 | % | 25 | % | 28 | % | 25 | % | ||||||||
International Car Rental
|
22 | 23 | 29 | 26 | ||||||||||||
Truck Rental
|
19 | 27 | 31 | 23 |
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||||||||||
Long-term debt, including current portion
|
$ | 975 | $ | 5 | $ | 797 | $ | - | $ | 331 | $ | 1,400 | $ | 3,508 | ||||||||||||||
Asset-backed debt under programs
(a)
|
2,456 | 1,816 | 1,639 | 480 | 800 | 718 | 7,909 | |||||||||||||||||||||
Operating leases
|
327 | 287 | 220 | 145 | 101 | 618 | 1,698 | |||||||||||||||||||||
Commitments to purchase vehicles
(b)
|
8,035 | 4,409 | 1,938 | - | - | - | 14,382 | |||||||||||||||||||||
Other purchase commitments
(c)
|
162 | 143 | 77 | 45 | 42 | 35 | 504 | |||||||||||||||||||||
$ | 11,955 | $ | 6,660 | $ | 4,671 | $ | 670 | $ | 1,274 | $ | 2,771 | $ | 28,001 | |||||||||||||||
(a) | Represents debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding), which was issued to support the purchase of vehicles. |
(b) | Primarily represents commitments to purchase vehicles from either General Motors Corporation or Ford Motor Company. These commitments are subject to the vehicle manufacturers satisfying their obligations under the repurchase agreements. The purchase of such vehicles is financed through the issuance of debt under vehicle programs in addition to cash received upon the sale of vehicles primarily under repurchase agreements (see Note 15 to our Consolidated Financial Statements). |
(c) | Primarily represents commitments under service contracts for information technology and telecommunications. |
19
20
| FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations |
| SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions and Statement of Position No. 04-2, Accounting for Real Estate Time-Sharing Transactions, and | |
| SFAS No. 123R, Share-Based Payment |
| Our primary interest rate exposure at December 31, 2005 was to interest rate fluctuations in the United States, specifically LIBOR and commercial paper interest rates due to their impact on variable rate borrowings and other interest rate sensitive liabilities. We anticipate that LIBOR and commercial paper rates will remain a primary market risk exposure for the foreseeable future. | |
| We have foreign currency rate exposure to exchange rate fluctuations worldwide and particularly with respect to the British pound, Canadian dollar, Australian dollar and the New Zealand dollar. We anticipate that such foreign currency exchange rate risk will remain a market risk exposure for the foreseeable future. |
21
(a) | Disclosure Controls and Procedures. In connection with the original filing of our 2005 Annual Report on Form-K, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective. |
As described in Note 24 to the accompanying Consolidated Financial Statements, we have restated the Consolidated Financial Statements included in this report for certain errors in the allocation of purchase price among three businesses acquired in March 2001, the aggregation of two of the businesses for purposes of testing goodwill impairment, and certain items related to the operations of our former PHH Corporation subsidiary. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has reevaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report to determine whether the restatement changes our prior conclusion, and has determined that it does not change our conclusion that as of the end of the period covered by this report, our disclosure controls and procedures were effective. In arriving at this conclusion, management considered the facts and circumstances that resulted in the financial statement errors and restatement. Based on such considerations, management does not believe the restatement was the result of a material weakness in our internal control over financial reporting because we believe that such controls and procedures operated in a manner that provided management with a reasonable basis for the original conclusions with respect to the allocation of purchase price among three businesses acquired in March 2001 and the aggregation of two of the businesses for purposes of testing goodwill impairment. Additionally, management has concluded that the adjustments related to the operations of PHH Corporation were not the result of control deficiencies that existed within our internal control over financial reporting as of December 31, 2005, as these adjustments were the result of errors that occurred at PHH Corporation, which was spun off as of January 31, 2005. |
22
(b) | Managements Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on this assessment, our management believes that, as of December 31, 2005, our internal control over financial reporting is effective. Our independent auditors have issued an attestation report on our managements assessment of the Companys internal control over financial reporting, which is included below. |
(c) | Changes in Internal Control Over Financial Reporting. During the second quarter of 2005, we began implementing integration activities related to our acquisitions of ebookers plc and Gullivers Travel Associates, which were consummated on February 28, 2005 and April 1, 2005, respectively. Total revenues and total assets related to these two acquisitions were $303 million for the year ended December 31, 2005 and approximately $1.8 billion as of December 31, 2005, respectively, and are reflected within discontinued in our Consolidated Financial Statements. Each of these companies, headquartered outside of the United States, was accustomed to operating under less stringent financial reporting and operating control frameworks when, compared to the Companys existing frameworks (including reporting deadlines, application of U.S. GAAP, general computer controls, extent of process documentation, etc.). As part of the process of integrating these companies into the Companys process and system of internal controls, we identified areas where improvements in process, systems and documentation were necessary at these businesses. As of December 31, 2005, the majority of the improvements that were initiated to strengthen the control environments at these businesses had been completed. |
Given the large number of businesses through which we operate and their wide variety of information systems and processes, we continue to modify our internal controls and procedures throughout the organization on a fairly continuous basis in order to improve our ability to run our businesses more effectively and/or efficiently. During the introduction and training phases related to these new systems and processes, there may be a temporary weakening in our system of internal controls. However, we do not believe that any such temporary weakening has had, or is likely to have, a material effect on the Companys internal control over financial reporting. | |
Except as described above, there have not been any changes in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Companys fiscal fourth quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. |
23
24
/s/ Deloitte & Touche LLP | |
New York, New York | |
February 28, 2006 |
25
AVIS BUDGET GROUP, INC. | ||||
By: | /s/ JOHN T. MCCLAIN | |||
John T. McClain Senior Vice President and Chief Accounting Officer March 1, 2007 |
26
Page | ||
Report of Independent Registered Public Accounting Firm
|
F-2 | |
Consolidated Statements of Income for the years ended
December 31, 2005 (restated),
2004 (restated) and 2003 (restated) |
F-3 | |
Consolidated Balance Sheets as of December 31, 2005
(restated) and 2004 (restated)
|
F-4 | |
Consolidated Statements of Cash Flows for the years ended
December 31, 2005 (restated),
2004 (restated) and 2003 (restated) |
F-5 | |
Consolidated Statements of Stockholders Equity for the
years ended December 31,
2005 (restated), 2004 (restated) and 2003 (restated) |
F-7 | |
Notes to Consolidated Financial Statements
|
F-9 |
F-1
F-2
Year Ended December 31, | ||||||||||||||
2005 | 2004 | 2003 | ||||||||||||
(Restated see Note 24) | ||||||||||||||
Revenues
|
||||||||||||||
Vehicle rental
|
$ | 4,302 | $ | 3,860 | $ | 3,788 | ||||||||
Other
|
1,098 | 960 | 894 | |||||||||||
Net revenues
|
5,400 | 4,820 | 4,682 | |||||||||||
Expenses
|
||||||||||||||
Operating
|
2,729 | 2,413 | 2,342 | |||||||||||
Vehicle depreciation and lease charges, net
|
1,238 | 988 | 1,046 | |||||||||||
Selling, general and administrative
|
857 | 784 | 812 | |||||||||||
Vehicle interest, net
|
309 | 244 | 265 | |||||||||||
Non-vehicle related depreciation and amortization
|
116 | 115 | 105 | |||||||||||
Interest expense related to corporate debt, net:
|
||||||||||||||
Interest expense
|
172 | 251 | 317 | |||||||||||
Early extinguishment of debt
|
- | 18 | 58 | |||||||||||
Separation costs
|
15 | - | - | |||||||||||
Restructuring charges
|
26 | - | - | |||||||||||
Total expenses
|
5,462 | 4,813 | 4,945 | |||||||||||
Income (loss) before income taxes
|
(62 | ) | 7 | (263 | ) | |||||||||
Benefit from income taxes
|
(51 | ) | (64 | ) | (114 | ) | ||||||||
Income (loss) from continuing operations
|
(11 | ) | 71 | (149 | ) | |||||||||
Income from discontinued operations, net of tax
|
1,088 | 1,822 | 1,558 | |||||||||||
Gain (loss) on disposals of discontinued operations, net of
tax
|
||||||||||||||
PHH valuation and transaction-related charges
|
(285 | ) | - | - | ||||||||||
Gain on disposals
|
834 | 198 | - | |||||||||||
Income before cumulative effect of accounting changes
|
1,626 | 2,091 | 1,409 | |||||||||||
Cumulative effect of accounting changes, net of tax
|
(8 | ) | - | (329 | ) | |||||||||
Net income
|
$ | 1,618 | $ | 2,091 | $ | 1,080 | ||||||||
Earnings (loss) per share
|
||||||||||||||
Basic
|
||||||||||||||
Income (loss) from continuing operations
|
$ | (0.01 | ) | $ | 0.07 | $ | (0.15 | ) | ||||||
Net income
|
1.56 | 2.03 | 1.06 | |||||||||||
Diluted
|
||||||||||||||
Income (loss) from continuing operations
|
$ | (0.01 | ) | $ | 0.07 | $ | (0.15 | ) | ||||||
Net income
|
1.56 | 1.97 | 1.06 |
F-3
December 31, | |||||||||
2005 | 2004 | ||||||||
(Restated see Note 24) | |||||||||
Assets | |||||||||
Current assets:
|
|||||||||
Cash and cash equivalents
|
$ | 546 | $ | 163 | |||||
Receivables (net of allowance for doubtful accounts of $20 and
$19)
|
348 | 314 | |||||||
Deferred income taxes
|
375 | 166 | |||||||
Other current assets
|
234 | 304 | |||||||
Assets of discontinued operations
|
20,512 | 29,452 | |||||||
Total current assets
|
22,015 | 30,399 | |||||||
Property and equipment, net
|
516 | 509 | |||||||
Deferred income taxes
|
260 | 1,731 | |||||||
Goodwill
|
2,188 | 2,183 | |||||||
Other intangibles, net
|
731 | 648 | |||||||
Other non-current assets
|
283 | 156 | |||||||
Total assets exclusive of assets under vehicle programs
|
25,993 | 35,626 | |||||||
Assets under vehicle programs:
|
|||||||||
Program cash
|
15 | - | |||||||
Vehicles, net
|
7,509 | 6,375 | |||||||
Receivables from vehicle manufacturers and other
|
602 | 348 | |||||||
Investment in Avis Budget Rental Car Funding
(AESOP) LLCrelated party
|
374 | 349 | |||||||
8,500 | 7,072 | ||||||||
Total assets
|
$ | 34,493 | $ | 42,698 | |||||
Liabilities and stockholders equity | |||||||||
Current liabilities:
|
|||||||||
Accounts payable and other current liabilities
|
$ | 2,287 | $ | 2,007 | |||||
Current portion of long-term debt
|
975 | 679 | |||||||
Liabilities of discontinued operations
|
7,263 | 15,027 | |||||||
Total current liabilities
|
10,525 | 17,713 | |||||||
Long-term debt
|
2,533 | 3,555 | |||||||
Other non-current liabilities
|
831 | 698 | |||||||
Total liabilities exclusive of liabilities under vehicle programs
|
13,889 | 21,966 | |||||||
Liabilities under vehicle programs:
|
|||||||||
Debt
|
952 | 792 | |||||||
Debt due to Avis Budget Rental Car Funding
(AESOP) LLCrelated party
|
6,957 | 5,935 | |||||||
Deferred income taxes
|
1,139 | 1,383 | |||||||
Other
|
214 | 158 | |||||||
9,262 | 8,268 | ||||||||
Commitments and contingencies (Note 16)
|
|||||||||
Stockholders equity:
|
|||||||||
Preferred stock, $.01 par valueauthorized 10 million
shares; none issued and outstanding
|
- | - | |||||||
Common stock, $.01 par valueauthorized 2 billion
shares; issued 1,350,852,215 and 1,333,462,545 shares
|
14 | 13 | |||||||
Additional paid-in capital
|
12,009 | 11,790 | |||||||
Retained earnings
|
5,997 | 5,948 | |||||||
Accumulated other comprehensive income
|
40 | 274 | |||||||
Treasury stock, at cost339,246,211 and 282,135,978 shares
|
(6,718 | ) | (5,561 | ) | |||||
Total stockholders equity
|
11,342 | 12,464 | |||||||
Total liabilities and stockholders equity
|
$ | 34,493 | $ | 42,698 | |||||
F-4
Year Ended December 31, | ||||||||||||||
2005 | 2004 | 2003 | ||||||||||||
(Restated see Note 24) | ||||||||||||||
Operating Activities
|
||||||||||||||
Net income
|
$ | 1,618 | $ | 2,091 | $ | 1,080 | ||||||||
Adjustments to arrive at income from continuing operations
|
(1,629 | ) | (2,020 | ) | (1,229 | ) | ||||||||
Income (loss) from continuing operations
|
(11 | ) | 71 | (149 | ) | |||||||||
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating
activities exclusive of vehicle programs:
|
||||||||||||||
Non-vehicle related depreciation and amortization
|
116 | 115 | 105 | |||||||||||
Deferred income taxes
|
(170 | ) | (224 | ) | (315 | ) | ||||||||
Net change in assets and liabilities, excluding the impact of
acquisitions and dispositions:
|
||||||||||||||
Receivables
|
(14 | ) | (2 | ) | 3 | |||||||||
Income taxes
|
(69 | ) | 78 | 268 | ||||||||||
Accounts payable and other current liabilities
|
(4 | ) | (106 | ) | (74 | ) | ||||||||
Proceeds from (payments for) termination of fair value hedges
|
- | (9 | ) | 200 | ||||||||||
Other, net
|
(39 | ) | (77 | ) | 210 | |||||||||
Net cash provided by (used in) operating activities exclusive
of vehicle programs
|
(191 | ) | (154 | ) | 248 | |||||||||
Vehicle programs:
|
||||||||||||||
Vehicle depreciation
|
1,191 | 941 | 942 | |||||||||||
1,191 | 941 | 942 | ||||||||||||
Net cash provided by operating activities
|
1,000 | 787 | 1,190 | |||||||||||
Investing activities
|
||||||||||||||
Property and equipment additions
|
(146 | ) | (121 | ) | (147 | ) | ||||||||
Net assets acquired (net of cash acquired) and
acquisition-related payments
|
(211 | ) | (86 | ) | (46 | ) | ||||||||
Proceeds received on asset sales
|
46 | 32 | 90 | |||||||||||
Proceeds from sales of available-for-sale securities
|
18 | 40 | - | |||||||||||
Proceeds from dispositions of businesses, net of
transaction-related payments
|
2,636 | 778 | - | |||||||||||
Other, net
|
66 | 16 | 10 | |||||||||||
Net cash provided by (used in) investing activities exclusive
of vehicle programs
|
2,409 | 659 | (93 | ) | ||||||||||
Vehicle programs:
|
||||||||||||||
Decrease (increase) in program cash
|
(15 | ) | 31 | (21 | ) | |||||||||
Investment in vehicles
|
(11,214 | ) | (10,373 | ) | (9,584 | ) | ||||||||
Payments received on investment in vehicles
|
8,869 | 8,882 | 8,887 | |||||||||||
Other, net
|
(22 | ) | (9 | ) | - | |||||||||
(2,382 | ) | (1,469 | ) | (718 | ) | |||||||||
Net cash provided by (used in) investing activities
|
27 | (810 | ) | (811 | ) | |||||||||
F-5
Year Ended December 31, | |||||||||||||
2005 | 2004 | 2003 | |||||||||||
(Restated see Note 24) | |||||||||||||
Financing activities
|
|||||||||||||
Proceeds from borrowings
|
- | 27 | 2,586 | ||||||||||
Principal payments on borrowings
|
(38 | ) | (1,906 | ) | (2,397 | ) | |||||||
Net short-term borrowing (repayments) under revolving credit
agreement
|
(650 | ) | 650 | (600 | ) | ||||||||
Issuances of common stock
|
289 | 1,430 | 446 | ||||||||||
Repurchases of common stock
|
(1,349 | ) | (1,323 | ) | (1,090 | ) | |||||||
Payment of dividends
|
(423 | ) | (333 | ) | - | ||||||||
Other, net
|
7 | (28 | ) | (78 | ) | ||||||||
Net cash used in financing activities exclusive of vehicle
programs
|
(2,164 | ) | (1,483 | ) | (1,133 | ) | |||||||
Vehicle programs:
|
|||||||||||||
Proceeds from borrowings
|
10,246 | 9,568 | 4,431 | ||||||||||
Principal payments on borrowings
|
(9,149 | ) | (9,185 | ) | (4,529 | ) | |||||||
Net change in short-term borrowings
|
81 | 81 | - | ||||||||||
Other, net
|
(15 | ) | (11 | ) | (16 | ) | |||||||
1,163 | 453 | (114 | ) | ||||||||||
Net cash used in financing activities
|
(1,001 | ) | (1,030 | ) | (1,247 | ) | |||||||
Effect of changes in exchange rates on cash and cash equivalents
|
- | 4 | - | ||||||||||
Cash provided by (used in) discontinued operations
(Revised See Note 1)
|
|||||||||||||
Operating activities
|
2,513 | 4,604 | 5,961 | ||||||||||
Investing activities
|
(2,746 | ) | (3,699 | ) | (2,513 | ) | |||||||
Financing activities
|
641 | (280 | ) | (2,001 | ) | ||||||||
Effect of exchange rate changes
|
(51 | ) | 14 | (6 | ) | ||||||||
Cash provided by discontinued operations
|
357 | 639 | 1,441 | ||||||||||
Net increase (decrease) in cash and cash equivalents
|
383 | (410 | ) | 573 | |||||||||
Cash and cash equivalents, beginning of period
|
163 | 573 | - | ||||||||||
Cash and cash equivalents, end of period
|
$ | 546 | $ | 163 | $ | 573 | |||||||
Supplemental Disclosure of Cash Flow Information
|
|||||||||||||
Interest payments
|
$ | 576 | $ | 584 | $ | 499 | |||||||
Income tax payments (refunds), net
|
$ | 188 | $ | 82 | $ | (67 | ) |
F-6
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Treasury Stock | Stockholders | |||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | |||||||||||||||||||||||||
Balance at January 1, 2003 (as previously reported)
|
1,239 | $ | 12 | $ | 10,090 | $ | 3,258 | $ | (14 | ) | (207 | ) | $ | (4,031 | ) | $ | 9,315 | |||||||||||||||
Effect of restatement
|
- | - | - | (148 | ) | - | - | - | (148 | ) | ||||||||||||||||||||||
Balance at January 1, 2003 (restatedsee
Note 24)
|
1,239 | $ | 12 | $ | 10,090 | $ | 3,110 | $ | (14 | ) | (207 | ) | $ | (4,031 | ) | $ | 9,167 | |||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income (restated)
|
- | - | - | 1,080 | - | - | - | |||||||||||||||||||||||||
Currency translation adjustment
|
- | - | - | - | 143 | - | - | |||||||||||||||||||||||||
Unrealized gains on cash flow hedges, net of tax of $27
|
- | - | - | - | 38 | - | - | |||||||||||||||||||||||||
Unrealized gains on available-for-sale, securities, net of tax
of $25
|
- | - | - | - | 45 | - | - | |||||||||||||||||||||||||
Reclassification for realized holding gains on
available-for-sale securities, net of tax of $(1)
|
- | - | - | - | (3 | ) | - | - | ||||||||||||||||||||||||
Total comprehensive income (restated)
|
1,303 | |||||||||||||||||||||||||||||||
Issuance of common stock
|
- | - | (4 | ) | - | - | 1 | 21 | 17 | |||||||||||||||||||||||
Net activity related to restricted stock units
|
- | - | 15 | - | - | - | - | 15 | ||||||||||||||||||||||||
Exercise of stock options
|
21 | - | 75 | - | - | 19 | 359 | 434 | ||||||||||||||||||||||||
Tax benefit from exercise of stock options
|
- | - | 106 | - | - | - | - | 106 | ||||||||||||||||||||||||
Repurchases of common stock
|
- | - | - | - | - | (65 | ) | (1,090 | ) | (1,090 | ) | |||||||||||||||||||||
Other
|
- | 1 | 2 | - | - | - | (9 | ) | (6 | ) | ||||||||||||||||||||||
Balance at December 31, 2003 (restated)
|
1,260 | $ | 13 | $ | 10,284 | $ | 4,190 | $ | 209 | (252 | ) | $ | (4,750 | ) | $ | 9,946 | ||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income (restated)
|
- | - | - | 2,091 | - | - | - | |||||||||||||||||||||||||
Currency translation adjustment
|
- | - | - | 84 | - | - | ||||||||||||||||||||||||||
Unrealized gains on cash flow hedges, net of tax of $16
|
- | - | - | - | 31 | - | - | |||||||||||||||||||||||||
Reclassification for gains on cash flow hedges, net of tax of
$(4)
|
- | - | - | - | (8 | ) | - | - | ||||||||||||||||||||||||
Unrealized losses on available-for-sale, securities, net of tax
of $(2)
|
- | - | - | - | (3 | ) | - | - | ||||||||||||||||||||||||
Reclassification for realized holding gains on
available-for-sale securities, net of tax of $(18)
|
- | - | - | - | (27 | ) | - | - | ||||||||||||||||||||||||
Minimum pension liability adjustment, net of tax of $(6)
|
- | - | - | - | (12 | ) | - | - | ||||||||||||||||||||||||
Total comprehensive income (restated)
|
2,156 | |||||||||||||||||||||||||||||||
Conversion of zero coupon senior convertible contingent notes
|
22 | - | 430 | - | - | - | - | 430 | ||||||||||||||||||||||||
Settlement of forward purchase contractsUpper DECS
securities
|
38 | - | 863 | - | - | - | - | 863 | ||||||||||||||||||||||||
Net activity related to restricted stock units
|
- | - | 15 | - | - | 2 | 29 | 44 | ||||||||||||||||||||||||
Exercise of stock options
|
13 | - | 71 | - | - | 25 | 482 | 553 | ||||||||||||||||||||||||
Tax benefit from exercise of stock options
|
- | - | 116 | - | - | - | - | 116 | ||||||||||||||||||||||||
Repurchases of common stock
|
- | - | - | - | - | (58 | ) | (1,323 | ) | (1,323 | ) | |||||||||||||||||||||
Payment of dividends
|
- | - | - | (333 | ) | - | - | - | (333 | ) | ||||||||||||||||||||||
Other
|
- | - | 11 | - | - | 1 | 1 | 12 | ||||||||||||||||||||||||
Balance at December 31, 2004 (restated)
|
1,333 | $ | 13 | $ | 11,790 | $ | 5,948 | $ | 274 | (282 | ) | $ | (5,561 | ) | $ | 12,464 |
F-7
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Treasury Stock | Stockholders | |||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | |||||||||||||||||||||||||
Balance at January 1, 2005 (restated)
|
1,333 | $ | 13 | $ | 11,790 | $ | 5,948 | $ | 274 | (282 | ) | $ | (5,561 | ) | $ | 12,464 | ||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net income (restated)
|
- | - | - | 1,618 | - | - | - | |||||||||||||||||||||||||
Currency translation adjustment, net of tax of $(20)
|
- | - | - | - | (219 | ) | - | - | ||||||||||||||||||||||||
Unrealized gains on cash flow hedges, net of tax of $26
|
- | - | - | - | 39 | - | - | |||||||||||||||||||||||||
Reclassification for gains on cash flow hedges, net of tax of
$(8)
|
- | - | - | - | (11 | ) | - | - | ||||||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of tax of
$1
|
- | - | - | - | (2 | ) | - | - | ||||||||||||||||||||||||
Reclassification for realized holding gains on
available-for-sale securities, net of tax of $(10)
|
- | - | - | - | (13 | ) | - | - | ||||||||||||||||||||||||
Minimum pension liability adjustment, net of tax of $(12)
|
- | - | - | - | (17 | ) | - | - | ||||||||||||||||||||||||
Total comprehensive income (restated)
|
1,395 | |||||||||||||||||||||||||||||||
Net activity related to restricted stock units
|
- | - | 14 | - | - | 3 | 63 | 77 | ||||||||||||||||||||||||
Exercise of stock options
|
17 | - | 135 | - | - | 8 | 133 | 268 | ||||||||||||||||||||||||
Tax benefit from exercise of stock options
|
- | - | 79 | - | - | - | - | 79 | ||||||||||||||||||||||||
Repurchases of common stock
|
- | - | - | - | - | (68 | ) | (1,349 | ) | (1,349 | ) | |||||||||||||||||||||
Payment of dividends
|
- | - | - | (423 | ) | - | - | - | (423 | ) | ||||||||||||||||||||||
Dividend of PHH Corporation (restated)
|
- | - | - | (1,427 | ) | (11 | ) | - | - | (1,438 | ) | |||||||||||||||||||||
Adjustment to offset PHH valuation charge included in net income
(restated)
|
- | - | - | 281 | - | - | - | 281 | ||||||||||||||||||||||||
Other
|
1 | 1 | (9 | ) | - | - | - | (4 | ) | (12 | ) | |||||||||||||||||||||
Balance at December 31, 2005 (restated)
|
1,351 | $ | 14 | $ | 12,009 | $ | 5,997 | $ | 40 | (339 | ) | $ | (6,718 | ) | $ | 11,342 | ||||||||||||||||
F-8
1. | Basis of Presentation |
As of December 31, 2005, Cendant Corporation (Cendant) was a global provider of real estate and travel services. Following the distributions of the shares of Realogy Corporation (Realogy) and Wyndham Worldwide Corporation (Wyndham) to Cendants stockholders on July 31, 2006 and the sale of Travelport, Inc. (Travelport) on August 23, 2006, which are further described in Note 3 Discontinued Operations, Cendant changed its name to Avis Budget Group, Inc. The Companys continuing operations consist primarily of Avis Budget Car Rental, which provides car and truck rentals and ancillary services to businesses and consumers in the United States and internationally. The accompanying Consolidated Financial Statements include the accounts and transactions of Avis Budget Group, Inc. and its subsidiaries (Avis Budget) as well as entities in which Avis Budget directly or indirectly has a controlling financial interest (collectively, the Company). | |
The Company operates in the following business segments: |
| Domestic Car Rental provides car rentals and ancillary products and services in the United States. | |
| International Car Rental provides car rentals and ancillary products and services primarily in Canada, Argentina, Australia, New Zealand, Puerto Rico and the U.S. Virgin Islands. | |
| Truck Rental provides truck rentals and related services to consumers and light commercial users in the United States. |
The Company adopted the above segment reporting structure as a result of a reevaluation performed subsequent to the completion of the spin-offs of Realogy and Wyndham and the sale of Travelport, each of which is discussed below. | |
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. Additionally, in 2005, the Company has separately disclosed the operating, investing and financing portions of cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount. | |
Selling, general and administrative expenses on the accompanying Consolidated Statements of Income include unallocated corporate expenses related to the Companys discontinued operations. Accordingly, the expenses recorded by the Company in the Consolidated Statements of Income may not be indicative of the actual expenses the Company will incur as a separate company. | |
Vehicle Programs. The Company presents separately the financial data of its vehicle programs. These programs are distinct from the Companys other activities since the assets are generally funded through the issuance of debt that is collateralized by such assets. Assets under vehicle programs are funded through borrowings under asset-backed funding or other similar arrangements. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of the Companys vehicle programs. The Company believes it is appropriate to segregate the financial data of its vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets. | |
Discontinued Operations. In June 2004, the Company completed an initial public offering of Jackson Hewitt Tax Service Inc. (Jackson Hewitt), an operator and franchisor of tax preparation systems and services. On January 31, 2005, the Company completed the spin-off of its former mortgage, fleet leasing |
F-9
and appraisal businesses in a tax-free distribution to the Companys stockholders of one share of PHH Corporation (PHH) common stock per every twenty shares of Cendant common stock held on January 19, 2005. In February 2005, the Company completed an initial public offering of Wright Express Corporation (Wright Express), its former fuel card subsidiary, and in October 2005, the Company sold its former Marketing Services division, which was comprised of its individual membership and loyalty/insurance marketing businesses. Also, on July 31, 2006, the Company completed the spin-offs of Realogy and Wyndham, and on August 23, 2006, the Company completed the sale of Travelport. Upon completion of the spin-off of PHH, the Companys former mortgage business was not classified as a discontinued operation due to Realogys participation in a mortgage origination venture that was established with PHH in connection with the spin-off. However, due to the spin-off of Realogy on July 31, 2006, the Company no longer participates in the venture. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the account balances and activities of Jackson Hewitt, PHH, Wright Express, the former Marketing Services division, Realogy, Wyndham and Travelport have been segregated and reported as discontinued operations for all periods presented. Summarized financial data for the aforementioned businesses are provided in Note 3Discontinued Operations. | |
Separation Plan | |
From October 2005 to July 2006, the Companys Board of Directors approved a plan to separate Cendant into four independent companies: |
| Realogy Corporationencompasses the Companys former Realogy segment, which is now presented as a discontinued operation. | |
| Wyndham Worldwide Corporationencompasses the Companys former Hospitality Services and Timeshare Resorts segments, which are now presented as discontinued operations. | |
| Travelport, Inc.encompasses the Companys former Travel Distribution Services segment, which is now presented as a discontinued operation. | |
| Avis Budget Group, Inc.encompasses the Companys vehicle rental operations. |
On July 31, 2006, the Company completed the spin-offs of Realogy and Wyndham in tax-free distributions of one share each of Realogy and Wyndham common stock for every four and five shares, respectively, of then outstanding Cendant common stock held on July 21, 2006. On August 1, 2006, Realogy and Wyndham stock began regular-way trading on the New York Stock Exchange under the symbols H and WYN, respectively. On August 23, 2006, the Company completed the sale of Travelport for proceeds of approximately $4.1 billion, net of closing adjustments. |
2. | Summary of Significant Accounting Policies |
CONSOLIDATION POLICY | |
The Company adopted Financial Accounting Standards Board (FASB) FASB Interpretation No. 46 (Revised 2003), Consolidation of Variable Interest Entities (FIN 46), in its entirety as of December 31, 2003. | |
In connection with the implementation of FIN 46, the Company consolidated TRL Group, Inc. (TRL Group) (formerly known as Trilegiant Corporation) and Bishops Gate Residential Mortgage Trust (Bishops Gate) effective July 1, 2003 through the application of the prospective transition method. The consolidation of TRL Group and Bishops Gate resulted in a non-cash charge of $352 million ($329 million after tax) recorded on July 1, 2003 to reflect the cumulative effect of the accounting change. Since TRL Group and Bishops Gate were components of the Companys former individual membership business and PHH, respectively, the results of operations of TRL Group and Bishops Gate from July 1, 2003 and forward are reflected within discontinued operations. See Note 23TRL Group, Inc. for more information regarding TRL Group. |
F-10
Also in connection with the implementation of FIN 46, the Company deconsolidated Avis Budget Rental Car Funding (AESOP) LLC (Avis Budget Rental Car Funding) (formerly Cendant Rental Car Funding AESOP, LLC), which did not result in the recognition of a charge to reflect the cumulative effect of accounting change. See Note 15Debt Under Vehicle Programs and Borrowing Arrangements for more complete information regarding Avis Budget Rental Car Funding. | |
New Policy. In connection with FIN 46, when evaluating an entity for consolidation, the Company first determines whether an entity is within the scope of FIN 46 and if it is deemed to be a VIE. If the entity is considered to be a VIE, the Company determines whether it would be considered the entitys primary beneficiary. The Company consolidates those VIEs for which it has determined that it is the primary beneficiary. Generally, the Company will consolidate an entity not deemed either a VIE or qualifying special purpose entity (QSPE) upon a determination that its ownership, direct or indirect, exceeds fifty percent of the outstanding voting shares of an entity and/or that it has the ability to control the financial or operating policies through its voting rights, board representation or other similar rights. For entities where the Company does not have a controlling interest (financial or operating), the investments in such entities are classified as available-for-sale securities or accounted for using the equity or cost method, as appropriate. The Company applies the equity method of accounting when it has the ability to exercise significant influence over operating and financial policies of an investee in accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. |
Previous Policy. Prior to the adoption of FIN 46, the Company did not consolidate SPE and SPE-type entities unless the Company retained both control of the assets transferred and the risks and rewards of those assets. Additionally, non-SPE-type entities were only consolidated if the Companys ownership exceeded fifty percent of the outstanding voting shares of an entity and/or if the Company had the ability to control the financial or operating policies of an entity through its voting rights, board representation or other similar rights. | |
REVENUE RECOGNITION |
The Company operates and franchises the Avis and Budget rental systems, providing vehicle rentals to business and leisure travelers. Revenue from vehicle rentals is recognized over the period the vehicle is rented. Franchise revenue principally consists of royalties received from the Companys franchisees in conjunction with vehicle rental transactions. Royalties are accrued as the underlying franchisee revenue is earned (generally over the rental period of a vehicle). Revenue from the sale of gasoline is recognized over the period the vehicle is rented and is based on the volume of gasoline consumed during the rental period or a contracted fee paid by the customer at the time the vehicle rental agreement is executed. The Company is reimbursed by its customers for certain operating expenses it incurs, including gasoline and vehicle licensing fees, as well as airport concession fees, which the Company pays in exchange for the right to operate at airports and other locations. Revenues and expenses associated with gasoline, vehicle licensing and airport concessions are recorded on a gross basis within revenue and operating expenses, respectively, on the accompanying Consolidated Statements of Income. |
VEHICLE DEPRECIATION AND LEASE CHARGES, NET |
Vehicles are stated at cost, net of accumulated depreciation. The initial cost of the vehicles is net of incentives and allowances from vehicle manufacturers. The Company acquires the majority of its rental vehicles pursuant to repurchase programs established by automobile manufacturers. Under these programs, the manufacturers agree to repurchase vehicles at a specified price and date, subject to certain eligibility criteria (such as car condition and mileage requirements). The Company depreciates vehicles such that the net book value of the vehicles on the date of return to the manufacturers is intended to equal the contractual guaranteed residual values, thereby minimizing any gain or loss on the sale of the vehicles. The Company records depreciation expense for any expected deficiency in the contractual guaranteed residual values due to excessive wear or damages. At December 31, 2005, the Company estimates that the difference between the contracted guaranteed residual value and the carrying value of these vehicles was $76 million, which has already been reflected in the Companys Consolidated Statement of Income. |
F-11
Rental vehicles are depreciated on a straight-line basis giving consideration to the contractual guaranteed residual values and the number of months between the original purchase date of the vehicle and the expected sale date of the vehicle back to the manufacturers. For 2005, 2004 and 2003, rental vehicles were depreciated at rates ranging from 7% to 28% per annum. As market conditions change, the Company adjusts its depreciation. Upon disposal of the vehicles, depreciation expense is also adjusted for any difference between the net proceeds from the sale and the remaining book value. Vehicle-related interest amounts are net of interest income of $4 million, $4 million and $5 million for 2005, 2004 and 2003 respectively. |
ADVERTISING EXPENSES |
Advertising costs are expensed in the period incurred. Advertising expenses, recorded within selling, general and administrative expense on the Companys Consolidated Statements of Income, were $100 million, $97 million and $98 million in 2005, 2004 and 2003, respectively. |
INCOME TAXES |
The Companys provision for income taxes is determined using the asset and liability method, under which deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. The Companys deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Companys provision for income taxes while increases to the valuation allowance result in additional provision. However, if the valuation allowance is adjusted in connection with an acquisition, such adjustment is recorded through goodwill rather than the provision for income taxes. The realization of the Companys deferred tax assets, net of the valuation allowance, is primarily dependent on estimated future taxable income. A change in the Companys estimate of future taxable income may require an addition or reduction to the valuation allowance. |
CASH AND CASH EQUIVALENTS |
The Company considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. |
DERIVATIVE INSTRUMENTS |
The Company uses derivative instruments as part of its overall strategy to manage its exposure to market risks associated with fluctuations in foreign currency exchange rates and interest rates. As a matter of policy, the Company does not use derivatives for trading or speculative purposes. | |
All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated as hedging instruments and of derivatives designated as fair value hedging instruments are recognized currently in earnings and included either as a component of net revenues or interest expense related to corporate debt, based upon the nature of the hedged item, in the Consolidated Statements of Income. Changes in fair value of the hedged item in a fair value hedge are recorded as an adjustment to the carrying amount of the hedged item and recognized currently in earnings as a component of net revenues or interest expense related to corporate debt, based upon the nature of the hedged item, in the Consolidated Statements of Income. The effective portion of changes in fair value of derivatives designated as cash flow hedging instruments is recorded as a component of other comprehensive income. The ineffective portion is reported currently in earnings as a component of net revenues or interest expense related to corporate debt, based upon the nature of the hedged item. Amounts included in other comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings. |
F-12
INVESTMENTS |
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. The Companys non-marketable preferred stock investments are accounted for at cost. Common stock investments in affiliates over which the Company has the ability to exercise significant influence but not a controlling interest are carried on the equity method of accounting. Available-for-sale securities are carried at current fair value with unrealized gains or losses reported net of taxes as a separate component of stockholders equity. Trading securities are recorded at fair value with realized and unrealized gains and losses reported currently in earnings. | |
All realized gains and losses and preferred dividend income are recorded within other revenues in the Consolidated Statements of Income. Gains and losses on securities sold are based on the specific identification method. | |
Affinion Group Holdings, Inc. The Companys investment in Affinion Group Holdings, Inc. (Affinion) was received in connection with the October 2005 sale of its former Marketing Services division, along with cash proceeds approximating $1.7 billion. This investment represents preferred stock with a carrying value of $83 million (face value of $125 million) and warrants with a carrying value of $3 million that are exercisable into 7.5% of the common equity of Affinion upon the earlier of four years or the achievement of specified investment hurdles. | |
Homestore, Inc. The Companys investment in Homestore, Inc. (Homestore) was received in exchange for the February 2001 sale of its former move.com and ancillary businesses. During 2005 and 2004, the Company sold 7.3 million and 9.8 million, respectively, shares of Homestore and recognized gains of $18 million and $40 million, respectively, within net revenues on its Consolidated Statements of Income. As of December 31, 2005, the Company had sold all of its shares of Homestore stock. As of December 31, 2004, the Companys investment in Homestore had a fair value of $22 million. |
PROPERTY AND EQUIPMENT |
Property and equipment (including leasehold improvements) are recorded at cost, net of accumulated depreciation and amortization. Depreciation, recorded as a component of non-vehicle related depreciation and amortization in the Consolidated Statements of Income, is computed utilizing the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements, also recorded as a component of non-vehicle related depreciation and amortization, is computed utilizing the straight-line method over the estimated benefit period of the related assets, which may not exceed 20 years, or the lease term, if shorter. Useful lives are generally 30 years for buildings, three to seven years for capitalized software, three to seven years for furniture, fixtures and equipment and four to fifteen years for buses and support vehicles. | |
On March 30, 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), which clarifies that conditional asset retirement obligations are within the scope of SFAS No. 143, Accounting for Asset Retirement Obligations. FIN 47 requires the Company to recognize a liability for the fair value of conditional asset retirement obligations if the fair value of the liability can be reasonably estimated. The Company adopted the provisions of FIN 47 in fourth quarter 2005, as required. Accordingly, the Company recorded a $14 million ($8 million after tax, or $0.01 per diluted share) non-cash charge to reflect the cumulative effect of accounting change during 2005 relating to the Companys obligation to remove assets at certain leased properties. |
IMPAIRMENT OF LONG-LIVED ASSETS |
In connection with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), the Company is required to assess goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company assesses goodwill for such impairment by comparing the carrying value of its reporting units to their fair values. Each of the Companys reportable segments represents a reporting unit. The Company determines |
F-13
the fair value of its reporting units utilizing discounted cash flows and incorporates assumptions that it believes marketplace participants would utilize. When available and as appropriate, the Company uses comparative market multiples and other factors to corroborate the discounted cash flow results. Other indefinite-lived intangible assets are tested for impairment and written down to fair value, as required by SFAS No. 142. | |
The Company evaluates the recoverability of its other long-lived assets, including amortizing intangible assets, if circumstances indicate an impairment may have occurred, pursuant to SFAS No. 144. This analysis is performed by comparing the respective carrying values of the assets 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 segment. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Companys Consolidated Statements of Income. | |
The Company performs its annual impairment testing in the fourth quarter of each year subsequent to completing its annual forecasting process. In performing this test, the Company determines fair value using the present value of expected future cash flows. Within the Companys continuing operations, there was no impairment of intangible assets in 2005, 2004 or 2003. Impairment charges recorded for other long-lived assets were not material during 2005, 2004 or 2003. However, as a result of the analysis performed in 2005, the Company determined that the carrying values of goodwill and certain other indefinite-lived intangible assets assigned to Travelports consumer travel businesses within discontinued operations exceeded their estimated fair values. Consequently, the Company also tested its other long-lived assets within Travelports consumer travel business for impairment. In connection with the impairment assessments performed, the Company recorded a pretax charge of $425 million within discontinued operations, of which $254 million reduced the value of goodwill and $171 million reduced the value of other intangible assets (including $120 million related to trademarks). This impairment resulted from a decline in future anticipated cash flows primarily generated by Travelports consumer travel businesses. Also, as a result of the analysis performed in 2003, the Company determined that the carrying value of goodwill assigned to its former fleet leasing business exceeded its estimated fair value. In connection with the impairment assessment performed, the Company recorded a pretax charge of $102 million within discontinued operations as a reduction to the carrying value of goodwill of the former fleet leasing business. |
PROGRAM CASH |
Program cash primarily represents amounts specifically designated to purchase assets under vehicle programs and/or to repay the related debt. |
SELF-INSURANCE RESERVES |
The Consolidated Balance Sheets include approximately $422 million and $411 million of liabilities with respect to self-insured public liability and property damage as of December 31, 2005 and 2004, respectively. Such liabilities relate to additional liability insurance, personal effects protection insurance, public liability, property damage and personal accident insurance claims for which the Company is self insured. The current portion of such amounts is included within accounts payable and other current liabilities and the non-current portion is included in other non-current liabilities. The Company estimates the required liability of such claims on an undiscounted basis utilizing an actuarial method that is based upon various assumptions which include, but are not limited to, the Companys historical loss experience and projected loss development factors. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and change in the ultimate cost per incident (severity). | |
In addition, at December 31, 2005 and 2004, the Consolidated Balance Sheets include liabilities of approximately $140 million and $142 million, respectively, relating to health and welfare, workers compensation and other benefits the Company provides to its employees. The Company estimates the liability required for such benefits based on actual claims outstanding and the estimated cost of claims |
F-14
incurred as of the balance sheet date. These amounts are included within accounts payable and other current liabilities on the Companys Consolidated Balance Sheets. |
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
Timeshare Transactions. In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions, in connection with the previous issuance of the American Institute of Certified Public Accountants Statement of Position No. 04-2, Accounting for Real Estate Time-Sharing Transactions (SOP 04-2). The Company will adopt the provisions of SFAS No. 152 and SOP 04-2 effective January 1, 2006, as required, and anticipates recording an after tax charge in the range of $50 million to $80 million on such date as a cumulative effect of an accounting change. There is no expected impact to cash flows from the adoption of SFAS No. 152 and SOP 04-2. | |
Stock-Based Compensation. In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R), which eliminates the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by APB Opinion No. 25 and by SFAS No. 123, Accounting for Stock-Based Compensation. The Company will adopt SFAS No. 123R on January 1, 2006, as required. Although the Company has not yet completed its assessment of adopting SFAS No. 123R, it does not believe that such adoption will significantly affect its earnings, financial position or cash flows since the Company does not use the alternative intrinsic value approach. |
3. | Discontinued Operations |
Travelport. On August 23, 2006, the Company completed the sale of Travelport for proceeds of approximately $4.1 billion, net of closing adjustments. The Company recorded a non-cash impairment charge of approximately $1.3 billion in second quarter 2006 to reflect the difference between Travelports carrying value and its estimated fair value, less costs to dispose. There was no tax benefit recorded in connection with this charge. During the third quarter 2006, the Company also recorded a pretax loss of $137 million ($510 million, after tax) on the sale of Travelport in connection with certain transaction-specific costs and tax charges the Company could not recognize until the sale was consummated. | |
Realogy and Wyndham. On July 31, 2006, the Company completed the spin-offs of Realogy and Wyndham in tax-free distributions of one share each of Realogy and Wyndham common stock for every four and five shares, respectively, of Cendant Corporation common stock held on July 21, 2006. | |
Marketing Services Division. On October 17, 2005, the Company completed the sale of its Marketing Services division for approximately $1.8 billion. The purchase price consisted of approximately $1.7 billion of cash, net of closing adjustments, plus $125 million face value of newly issued preferred stock of Affinion and warrants to purchase up to 7.5% of the common equity of Affinion (see Note 2Summary of Significant Accounting Policies for more detailed information on the preferred stock and warrants). | |
Wright Express. On February 22, 2005, the Company completed the initial public offering of Wright Express for $964 million of cash. Additionally, the Company entered into a tax receivable agreement with Wright Express pursuant to which Wright Express is obligated to make payments to the Company over a 15 year term. However, pursuant to the Separation Agreement between the Company, Realogy, Wyndham and Travelport, the Company is obligated to distribute all such payments received from Wright Express to Realogy and Wyndham following the separation. During 2005, the Company received $15 million in connection with this tax receivable agreement, which is recorded within the gain on disposal line item on the accompanying Consolidated Statements of Income. | |
PHH. On January 31, 2005, the Company completed the spin-off of PHH, which includes its former mortgage, fleet leasing and appraisal businesses. In connection with the spin-off, the Company recorded a non-cash impairment charge of $281 million and transaction costs of $4 million during first quarter 2005. There were no tax benefits recorded in connection with these charges, as such charges are not tax deductible. |
F-15
Jackson Hewitt. On June 25, 2004, the Company completed the initial public offering of Jackson Hewitt. In connection with the initial public offering, the Company received $772 million in cash. | |
Summarized statement of income data for discontinued operations is as follows: |
Year Ended December 31, 2005 |
Marketing | ||||||||||||||||
Wright | Services | |||||||||||||||
Express (a) (b) | PHH (a) (c) | Division (a) | Realogy | |||||||||||||
Net revenues
|
$ | 29 | $ | 179 | $ | 1,066 | $ | 7,139 | ||||||||
Income (loss) before income taxes
|
$ | (7 | ) | $ | 1 | $ | 90 | $ | 1,065 | |||||||
Provision (benefit) for income taxes
|
(3 | ) | 25 | 37 | 414 | |||||||||||
Income (loss) from discontinued operations, net of tax
|
$ | (4 | ) | $ | (24 | ) | $ | 53 | $ | 651 | ||||||
Gain (loss) on disposal of discontinued operations
|
$ | 585 | $ | (285 | ) | $ | 1,146 | $ | - | |||||||
Provision for income taxes
|
332 | - | 565 | - | ||||||||||||
Gain (loss) on disposal of discontinued operations, net of
tax
|
$ | 253 | $ | (285 | ) | $ | 581 | $ | - | |||||||
Wyndham | Travelport (d) | Total | ||||||||||
Net revenues
|
$ | 3,252 | $ | 2,400 | $ | 14,065 | ||||||
Income (loss) before income taxes
|
$ | 643 | $ | (118 | ) | $ | 1,674 | |||||
Provision (benefit) for income taxes
|
187 | (74 | ) | 586 | ||||||||
Income (loss) from discontinued operations, net of tax
|
$ | 456 | $ | (44 | ) | $ | 1,088 | |||||
Gain (loss) on disposal of discontinued operations
|
$ | - | $ | - | $ | 1,446 | ||||||
Provision for income taxes
|
- | - | 897 | |||||||||
Gain (loss) on disposal of discontinued operations, net of
tax
|
$ | - | $ | - | $ | 549 | ||||||
(a) | Results are through the date of disposition. |
(b) | Gain on disposal includes payments received from Wright Express in connection with the tax receivable agreement discussed above. |
(c) | The provision for income taxes reflects a $24 million charge associated with separating the appraisal business from the Company in connection with the PHH spin-off. |
(d) | Results include a pretax impairment charge of $425 million. (See Note 2Summary of Significant Accounting Policies for further information.) |
Year Ended December 31, 2004 |
Marketing | ||||||||||||||||
Wright | Services | |||||||||||||||
Express | PHH | Division (a) | Realogy | |||||||||||||
Net revenues
|
$ | 188 | $ | 2,403 | $ | 1,484 | $ | 6,549 | ||||||||
Income before income taxes
|
$ | 82 | $ | 190 | $ | 317 | $ | 1,032 | ||||||||
Provision for income taxes
|
32 | 83 | 5 | 379 | ||||||||||||
Income from discontinued operations, net of tax
|
$ | 50 | $ | 107 | $ | 312 | $ | 653 | ||||||||
F-16
Jackson | ||||||||||||||||
Wyndham | Travelport | Hewitt (b) | Total | |||||||||||||
Net revenues
|
$ | 2,872 | $ | 1,748 | $ | 194 | $ | 15,438 | ||||||||
Income before income taxes
|
$ | 606 | $ | 330 | $ | 106 | $ | 2,663 | ||||||||
Provision for income taxes
|
217 | 83 | 42 | 841 | ||||||||||||
Income from discontinued operations, net of tax
|
$ | 389 | $ | 247 | $ | 64 | $ | 1,822 | ||||||||
Gain on disposal of discontinued operations
|
$ | - | $ | - | $ | 251 | $ | 251 | ||||||||
Provision for income taxes
|
- | - | 53 | 53 | ||||||||||||
Gain on disposal of discontinued operations, net of tax
|
$ | - | $ | - | $ | 198 | $ | 198 | ||||||||
(a) | The provision for income taxes reflects the reversal of a valuation allowance of $121 million by TRL Group associated with federal and state deferred tax assets, partially offset by a $13 million cash payment the Company made to TRL Group in connection with the January 2004 transaction for the contract termination (see Note 23 TRL Group, Inc.) |
(b) | Results are through the date of disposition. |
Year Ended December 31, 2003 |
Marketing | ||||||||||||||||
Wright | Services | |||||||||||||||
Express | PHH | Division | Realogy | |||||||||||||
Net revenues
|
$ | 156 | $ | 2,505 | $ | 1,217 | $ | 5,565 | ||||||||
Income before income taxes
|
$ | 57 | $ | 343 | $ | 270 | $ | 849 | ||||||||
Provision for income taxes
|
21 | 175 | 102 | 288 | ||||||||||||
Income from discontinued operations, net of tax
|
$ | 36 | $ | 168 | $ | 168 | $ | 561 | ||||||||
Jackson | ||||||||||||||||
Wyndham | Travelport | Hewitt | Total | |||||||||||||
Net revenues
|
$ | 2,515 | $ | 1,633 | $ | 177 | $ | 13,768 | ||||||||
Income before income taxes
|
$ | 514 | $ | 346 | $ | 58 | $ | 2,437 | ||||||||
Provision for income taxes
|
198 | 72 | 23 | 879 | ||||||||||||
Income from discontinued operations, net of tax
|
$ | 316 | $ | 274 | $ | 35 | $ | 1,558 | ||||||||
F-17
Summarized balance sheet data for discontinued operations is as follows: |
As of December 31, 2005 |
Realogy | Wyndham | Travelport (a) | Total | ||||||||||||||
Assets of discontinued operations:
|
|||||||||||||||||
Current assets
|
$ | 330 | $ | 917 | $ | 676 | $ | 1,923 | |||||||||
Property and equipment, net
|
321 | 422 | 533 | 1,276 | |||||||||||||
Goodwill
|
3,163 | 2,638 | 4,088 | 9,889 | |||||||||||||
Other assets
|
1,647 | 4,133 | 1,644 | 7,424 | |||||||||||||
Total assets of discontinued operations
|
$ | 5,461 | $ | 8,110 | $ | 6,941 | $ | 20,512 | |||||||||
Liabilities of discontinued operations:
|
|||||||||||||||||
Current liabilities
|
$ | 656 | $ | 940 | $ | 860 | $ | 2,456 | |||||||||
Other liabilities
|
809 | 3,266 | 732 | 4,807 | |||||||||||||
Total liabilities of discontinued operations
|
$ | 1,465 | $ | 4,206 | $ | 1,592 | $ | 7,263 | |||||||||
(a) | Current liabilities include $350 million under the Companys $3.5 billion revolving credit facility, as Travelport is the primary obligor for such borrowings. |
As of December 31, 2004 |
Marketing | |||||||||||||||||
Wright | Services | ||||||||||||||||
Express | PHH | Division | Realogy | ||||||||||||||
Assets of discontinued operations:
|
|||||||||||||||||
Current assets
|
$ | 72 | $ | 922 | $ | 388 | $ | 322 | |||||||||
Property and equipment, net
|
37 | 98 | 84 | 258 | |||||||||||||
Goodwill
|
135 | 195 | 256 | 2,912 | |||||||||||||
Assets under management programs
|
419 | 8,123 | - | 733 | |||||||||||||
Other assets
|
22 | 273 | 352 | 722 | |||||||||||||
Total assets of discontinued operations
|
$ | 685 | $ | 9,611 | $ | 1,080 | $ | 4,947 | |||||||||
Liabilities of discontinued operations:
|
|||||||||||||||||
Current liabilities
|
$ | 213 | $ | 381 | $ | 738 | $ | 657 | |||||||||
Liabilities under management programs
|
215 | 7,562 | - | 409 | |||||||||||||
Other liabilities
|
6 | 110 | 20 | 52 | |||||||||||||
Total liabilities of discontinued operations
|
$ | 434 | $ | 8,053 | $ | 758 | $ | 1,118 | |||||||||
F-18
Wyndham | Travelport | Total | |||||||||||
Assets of discontinued operations:
|
|||||||||||||
Current assets
|
$ | 817 | $ | 474 | $ | 2,995 | |||||||
Property and equipment, net
|
413 | 444 | 1,334 | ||||||||||
Goodwill
|
2,625 | 3,354 | 9,477 | ||||||||||
Assets under management programs
|
2,726 | - | 12,001 | ||||||||||
Other assets
|
991 | 1,285 | 3,645 | ||||||||||
Total assets of discontinued operations
|
$ | 7,572 | $ | 5,557 | $ | 29,452 | |||||||
Liabilities of discontinued operations:
|
|||||||||||||
Current liabilities
|
$ | 915 | $ | 545 | $ | 3,449 | |||||||
Liabilities under management programs
|
2,141 | - | 10,327 | ||||||||||
Other liabilities
|
639 | 424 | 1,251 | ||||||||||
Total liabilities of discontinued operations
|
$ | 3,695 | $ | 969 | $ | 15,027 | |||||||
4. | Earnings Per Share |
The following table sets forth the computation of basic and diluted earnings per share (EPS): |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Income (loss) from continuing operations
|
$ | (11 | ) | $ | 71 | $ | (149 | ) | ||||
Convertible debt interest, net of tax
|
- | - | 7 | |||||||||
Income (loss) from continuing operations for diluted EPS
|
$ | (11 | ) | $ | 71 | $ | (142 | ) | ||||
Net income
|
$ | 1,618 | $ | 2,091 | $ | 1,080 | ||||||
Convertible debt interest, net of tax
|
- | - | 7 | |||||||||
Net income for diluted EPS
|
$ | 1,618 | $ | 2,091 | $ | 1,087 | ||||||
Basic weighted average shares
outstanding (a)
|
1,040 | 1,031 | 1,017 | |||||||||
Stock options, warrants and restricted stock
units (b)
|
- | 31 | - | |||||||||
Convertible
debt (c)
|
- | 2 | - | |||||||||
Diluted weighted average shares
outstanding (a)
|
1,040 | 1,064 | 1,017 | |||||||||
F-19
Year Ended December 31, | ||||||||||||||
2005 | 2004 | 2003 | ||||||||||||
Earnings per share:
|
||||||||||||||
Basic
|
||||||||||||||
Income (loss) from continuing operations
|
$ | (0.01 | ) | $ | 0.07 | $ | (0.15 | ) | ||||||
Income from discontinued operations
|
1.05 | 1.77 | 1.53 | |||||||||||
Gain (loss) on disposal of discontinued operations:
|
||||||||||||||
PHH valuation and transaction-related charges
|
(0.27 | ) | - | - | ||||||||||
Gain on disposals
|
0.80 | 0.19 | - | |||||||||||
Cumulative effect of accounting changes
|
(0.01 | ) | - | (0.32 | ) | |||||||||
Net income
|
$ | 1.56 | $ | 2.03 | $ | 1.06 | ||||||||
Diluted
|
||||||||||||||
Income (loss) from continuing operations
|
$ | (0.01 | ) | $ | 0.07 | $ | (0.15 | ) | ||||||
Income from discontinued operations
|
1.05 | 1.71 | 1.53 | |||||||||||
Gain (loss) on disposal of discontinued operations:
|
||||||||||||||
PHH valuation and transaction-related charges
|
(0.27 | ) | - | - | ||||||||||
Gain on disposals
|
0.80 | 0.19 | - | |||||||||||
Cumulative effect of accounting changes
|
(0.01 | ) | - | (0.32 | ) | |||||||||
Net income
|
$ | 1.56 | $ | 1.97 | $ | 1.06 | ||||||||
(a) | Because the Company incurred a loss from continuing operations in 2005 and 2003, outstanding stock options, restricted stock units and stock warrants are anti-dilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods. |
(b) | For 2004, excludes restricted stock units for which performance based vesting criteria have not been achieved. |
(c) | The 2004 balance reflects the dilutive impact of the Companys zero coupon senior convertible contingent notes prior to conversion on February 13, 2004 into shares of Cendant common stock, the impact of which is reflected within basic weighted average shares outstanding from the conversion date forward (20 million shares in 2004). |
The following table summarizes the Companys outstanding common stock equivalents that were anti-dilutive and therefore excluded from the computation of diluted EPS: |
Year Ended December 31, | ||||||
2005 | 2004 | 2003 | ||||
Options (a)
|
129 | 23 | 188 | |||
Warrants (b)
|
2 | - | 2 | |||
Upper
DECS (c)
|
- | 24 | 40 |
(a) | Represents all outstanding options for 2005 and 2003. The weighted average exercise price for anti-dilutive options at December 31, 2004 was $29.76. |
(b) | Represents all outstanding warrants for 2005 and 2003, for which the weighted average exercise price is $21.31. |
(c) | Represents the shares that were issuable under the forward purchase contract component of the Companys Upper DECS securities prior to the settlement of such securities on August 17, 2004, at which time the Company issued 38 million shares of Cendant common stock. The impact of this share issuance is included in basic EPS from the settlement date forward (14 million shares in 2004, due to a partial year impact). However, diluted EPS does not reflect any shares that were issuable prior to August 17, 2004, as the Upper DECS were anti-dilutive during such periods (since the appreciation price of $28.42 was greater than the average price of Cendant common stock). |
5. | Acquisitions |
Assets acquired and liabilities assumed in business combinations were recorded on the Companys Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values |
F-20
at such dates. The results of operations of businesses acquired by the Company have been included in the Companys Consolidated Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values, will be recorded by the Company as further adjustments to the purchase price allocations. |
During 2005, the Company acquired 23 vehicle rental licensees for $206 million in cash, resulting in trademark intangible assets of $88 million and goodwill of $6 million, none of which is expected to be deductible for tax purposes. During 2004, the Company acquired 29 vehicle rental licensees for $60 million in cash, resulting in goodwill of $33 million, all of which is expected to be deductible for tax purposes, and trademark intangible assets of $13 million. During 2003, the Company purchased seven vehicle rental licensees for $7 million in cash, resulting in goodwill of $8 million, all of which is expected to be deductible for tax purposes. These acquisitions, which relate primarily to the Companys International Car Rental segment, were not significant individually or in the aggregate to the Companys results of operations, financial position or cash flows. | |
During 2005, 2004 and 2003, the Company recorded acquisition and integration related costs (credits) of $1 million, $(5) million and $27 million, respectively. The 2004 amount is comprised of $7 million of costs primarily associated with the integration of Budgets information technology systems with the Companys platform, offset by the reversal of a previously established $12 million accrual, which resulted from the termination of a lease on more favorable terms than originally anticipated. The 2003 amount primarily related to the integration of Budgets information technology systems into the Companys platform and revisions to the Companys original estimate of costs to exit a facility in connection with the outsourcing of its data operations. |
6. | Intangible Assets |
Intangible assets consisted of: |
As of December 31, 2005 | As of December 31, 2004 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Amortized Intangible Assets
|
||||||||||||||||||||||||
Franchise
agreements (a)
|
$ | 76 | $ | 14 | $ | 62 | $ | 79 | $ | 14 | $ | 65 | ||||||||||||
Customer
lists (b)
|
20 | 6 | 14 | 20 | 4 | 16 | ||||||||||||||||||
Other (c)
|
2 | 1 | 1 | 2 | 1 | 1 | ||||||||||||||||||
$ | 98 | $ | 21 | $ | 77 | $ | 101 | $ | 19 | $ | 82 | |||||||||||||
Unamortized Intangible Assets
|
||||||||||||||||||||||||
Goodwill
|
$ | 2,188 | $ | 2,183 | ||||||||||||||||||||
Trademarks (d)
|
$ | 654 | $ | 566 | ||||||||||||||||||||
(a) | Primarily amortized over a period ranging from 2 to 40 years. |
(b) | Primarily amortized over 20 years. |
(c) | Primarily amortized over a period ranging from 6 to 20 years. |
(d) | Comprised of various tradenames (including the Avis and Budget tradenames) that the Company has acquired and which distinguish the Companys consumer services. These tradenames are expected to generate future cash flows for an indefinite period of time. |
F-21
The changes in the carrying amount of goodwill during 2005 are as follows: |
Goodwill | Adjustments | Foreign | ||||||||||||||||||
Balance at | Acquired | to Goodwill | Exchange | Balance at | ||||||||||||||||
January 1, | during | Acquired | and | December 31, | ||||||||||||||||
2005 | 2005 | during 2004 | Other | 2005 | ||||||||||||||||
Domestic Car Rental
|
$ | 1,351 | $ | 6 | (a) | $ | 1 | (b) | $ | (4) | $ | 1,354 | ||||||||
International Car Rental
|
589 | - | - | 2 | 591 | |||||||||||||||
Truck Rental
|
243 | - | - | - | 243 | |||||||||||||||
Total Company
|
$ | 2,183 | $ | 6 | $ | 1 | $ | (2) | $ | 2,188 | ||||||||||
(a) | Reflects the acquisition of licensees during 2005. |
(b) | Reflects refinements made during 2005 to the purchase price allocation associated with the acquisition of domestic licensees during 2004. |
Amortization expense relating to all intangible assets was as follows: |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Franchise agreements
|
$ | 2 | $ | 3 | $ | 3 | ||||||
Customer lists
|
2 | 1 | 1 | |||||||||
Total
|
$ | 4 | $ | 4 | $ | 4 | ||||||
Based on the Companys amortizable intangible assets as of December 31, 2005, the Company expects related amortization expense to approximate $3 million for each of the five succeeding fiscal years. |
7. | Vehicle Rental Activities |
The components of vehicles, net within assets under vehicle programs are as follows: |
As of December 31, | ||||||||
2005 | 2004 | |||||||
Rental vehicles
|
$ | 8,247 | $ | 6,997 | ||||
Vehicles held for sale
|
165 | 49 | ||||||
8,412 | 7,046 | |||||||
Less: accumulated depreciation
|
(903 | ) | (671 | ) | ||||
$ | 7,509 | $ | 6,375 | |||||
The components of vehicle depreciation and lease charges, net are summarized below: |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Depreciation expense
|
$ | 1,191 | $ | 941 | $ | 942 | ||||||
Lease charges
|
69 | 58 | 54 | |||||||||
(Gain) loss on sales of vehicles, net
(a)
|
(22 | ) | (11 | ) | 50 | |||||||
$ | 1,238 | $ | 988 | $ | 1,046 | |||||||
(a) | The 2003 amount reflects unfavorable conditions in the used car market, which the Company uses to sell any vehicles that do not meet the eligibility criteria to be repurchased under manufacturer agreements. |
F-22
8. | Franchising Activities |
Franchising revenues, which are recorded within other revenues on the accompanying Consolidated Statements of Income, amounted to $39 million, $43 million and $41 million during 2005, 2004 and 2003, respectively. | |
The number of Company-owned and franchised outlets in operation (excluding independent commissioned dealer locations for the Budget truck rental business and Avis and Budget locations operated under an arrangement with Avis Europe Holdings, Limited, an independent third party) is as follows: |
As of December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Company-owned
|
||||||||||||
Avis brand
|
1,186 | 1,074 | 982 | |||||||||
Budget brand
|
902 | 822 | 859 | |||||||||
Franchised
|
||||||||||||
Avis brand
|
849 | 851 | 820 | |||||||||
Budget brand
|
1,221 | 1,345 | 1,496 |
In connection with ongoing fees the Company receives from its franchisees pursuant to the franchise agreements, the Company is required to provide certain services, such as training, marketing and the operation of reservation systems. |
9. | Restructuring Charges |
During 2005, the Company recorded $26 million of restructuring charges as a result of activities undertaken following the PHH spin-off and the IPO of Wright Express. The restructuring activities were targeted principally at reducing costs, enhancing organizational efficiency and consolidating and rationalizing existing processes and facilities. The more significant areas of cost reduction include the closure of a call center and field locations of the Companys truck rental business and reductions in staff within the Companys corporate functions. | |
The initial recognition of the restructuring charge and the corresponding utilization from inception are summarized by category as follows: |
Personnel | Facility | Asset | ||||||||||||||
Related (a) | Related (b) | Impairments (c) | Total | |||||||||||||
Initial charge
|
$ | 20 | $ | 5 | $ | 1 | $ | 26 | ||||||||
Cash payments
|
(15 | ) | (2 | ) | - | (17 | ) | |||||||||
Other reductions
(d)
|
(5 | ) | - | (1 | ) | (6 | ) | |||||||||
Balance at December 31, 2005
|
$ | - | $ | 3 | $ | - | $ | 3 | ||||||||
(a) | The initial charge primarily represents severance benefits resulting from the reductions in staff. The Company formally communicated the termination of employment to approximately 300 employees, representing a wide range of employee groups. As of December 31, 2005, the Company had terminated all of these employees. |
(b) | The initial charge principally represents costs incurred in connection with facility closures and lease obligations resulting from the consolidation of truck rental operations. |
(c) | The initial charge principally represents the write-off of leasehold improvements in connection with lease terminations. |
(d) | Other reductions to charges recorded for personnel-related costs represent the accelerated vesting of restricted stock units previously granted to individuals who were terminated in connection with this restructuring action. Other reductions to liabilities established for asset impairments principally represent the write-off of leasehold improvements in connection with lease terminations. |
F-23
Total restructuring charges are recorded as follows: |
Cash | Liability | |||||||||||
Payments/ | as of | |||||||||||
Costs | Other | December 31, | ||||||||||
Incurred | Reductions | 2005 | ||||||||||
Truck Rental
|
$ | 5 | $ | (2 | ) | $ | 3 | |||||
Domestic Car Rental
|
2 | (2 | ) | - | ||||||||
Corporate and Other
|
19 | (19 | ) | - | ||||||||
$ | 26 | $ | (23 | ) | $ | 3 | ||||||
10. | Income Taxes |
The benefit from income taxes consists of the following: |
Year Ended December 31, | |||||||||||||
2005 | 2004 | 2003 | |||||||||||
Current
|
|||||||||||||
Federal
|
$ | 79 | $ | 141 | $ | 172 | |||||||
State
|
15 | (8 | ) | 16 | |||||||||
Foreign
|
25 | 27 | 13 | ||||||||||
119 | 160 | 201 | |||||||||||
Deferred
|
|||||||||||||
Federal
|
(149 | ) | (246 | ) | (287 | ) | |||||||
State
|
(34 | ) | 23 | (28 | ) | ||||||||
Foreign
|
13 | (1 | ) | - | |||||||||
(170 | ) | (224 | ) | (315 | ) | ||||||||
Benefit from income taxes
|
$ | (51 | ) | $ | (64 | ) | $ | (114 | ) | ||||
Pretax income for domestic and foreign operations consists of the following: |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Domestic
|
$ | (135 | ) | $ | (64 | ) | $ | (308 | ) | |||
Foreign
|
73 | 71 | 45 | |||||||||
Pre-tax income
|
$ | (62 | ) | $ | 7 | $ | (263 | ) | ||||
F-24
Current and non-current deferred income tax assets and liabilities are comprised of the following: |
As of December 31, | ||||||||||
2005 | 2004 | |||||||||
Current deferred income tax assets:
|
||||||||||
Litigation settlement and related liabilities
|
$ | 41 | $ | 30 | ||||||
Net operating loss carryforwards
|
138 | - | ||||||||
State net operating loss carryforwards
|
11 | - | ||||||||
Accrued liabilities and deferred income
|
179 | 96 | ||||||||
Provision for doubtful accounts
|
9 | 10 | ||||||||
Acquisition and integration-related liabilities
|
42 | 64 | ||||||||
Other
|
6 | 21 | ||||||||
Current deferred income tax assets
|
426 | 221 | ||||||||
Current deferred income tax liabilities:
|
||||||||||
Prepaid expenses
|
51 | 48 | ||||||||
Other
|
- | 7 | ||||||||
Current deferred income tax liabilities
|
51 | 55 | ||||||||
Current net deferred income tax asset
|
$ | 375 | $ | 166 | ||||||
Non-current deferred income tax assets:
|
||||||||||
Net operating loss carryforwards
|
$ | 2 | $ | 1,459 | ||||||
Foreign net operating loss carryforwards
|
28 | - | ||||||||
State net operating loss carryforwards
|
60 | 185 | ||||||||
Alternate minimum tax credit carryforward
|
132 | 53 | ||||||||
Acquisition and integration-related liabilities
|
- | 3 | ||||||||
Accrued liabilities and deferred income
|
206 | 193 | ||||||||
Other
|
38 | 62 | ||||||||
Valuation
allowance (*)
|
(59 | ) | (54 | ) | ||||||
Non-current deferred income tax assets
|
407 | 1,901 | ||||||||
Non-current deferred income tax liabilities:
|
||||||||||
Depreciation and amortization
|
147 | 170 | ||||||||
Non-current deferred income tax liabilities
|
147 | 170 | ||||||||
Non-current net deferred income tax asset
|
$ | 260 | $ | 1,731 | ||||||
(*) | The valuation allowance of $59 million at December 31, 2005 relates to state net operating loss carryforwards and certain state deferred tax assets of $45 million and $14 million, respectively. The valuation allowance will be reduced when and if the Company determines that the related deferred income tax assets are more likely than not to be realized. If determined to be realizable, approximately $4 million of the valuation allowance for state net operating loss carryforwards would reduce goodwill. |
Net deferred income tax liabilities related to vehicle programs are comprised of the following: |
As of December 31, | ||||||||
2005 | 2004 | |||||||
Depreciation and amortization
|
$ | 1,130 | $ | 1,379 | ||||
Other
|
9 | 4 | ||||||
Net deferred income tax liability under vehicle programs
|
$ | 1,139 | $ | 1,383 | ||||
As of December 31, 2005, the Company had federal net operating loss carryforwards of approximately $400 million, which primarily expire in 2024. No provision has been made for U.S. federal deferred income taxes on approximately $184 million of accumulated and undistributed earnings of foreign subsidiaries at December 31, 2005, since it is the present intention of management to reinvest the undistributed earnings indefinitely in those foreign operations. The determination of the amount of unrecognized U.S. federal deferred income tax liability for unremitted earnings is not practicable. |
F-25
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The American Jobs Creation Act of 2004, which became effective October 22, 2004, provides a one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. The Company has applied the provisions of this act to qualifying earnings repatriations through December 31, 2005. In December 2005, the Company repatriated $350 million of unremitted earnings, resulting in income tax expense of approximately $28 million, which is reflected within discontinued operations. | |
The Companys effective income tax rate for continuing operations differs from the U.S. federal statutory rate as follows: |
As of December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Federal statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes, net of federal tax benefits
|
36.9 | 89.0 | 3.0 | |||||||||
Changes in valuation allowances
|
(18.4 | ) | 45.3 | 39.2 | ||||||||
Taxes on foreign operations at rates different than U.S. federal
statutory rates
|
(2.8 | ) | (26.5 | ) | 0.9 | |||||||
Taxes on repatriated foreign income, net of tax credits
|
1.9 | (28.4 | ) | - | ||||||||
Resolution of prior years examination issues
|
29.8 | (1,153.1 | ) | 2.0 | ||||||||
Redemption of preferred interest
|
- | - | (35.2 | ) | ||||||||
Nondeductible expenses
|
(20.3 | ) | 156.2 | (3.8 | ) | |||||||
Other
|
20.2 | (31.8 | ) | 2.2 | ||||||||
82.3 | % | (914.3 | )% | 43.3 | % | |||||||
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining the Companys worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5, Accounting for Contingencies. | |
The Internal Revenue Service (IRS) is currently examining the Companys taxable years 1998 through 2002. Over the course of this audit, the Company has responded to numerous requests for information, primarily focused on the 1999 statutory merger of the Companys former fleet business; the calculation of the stock basis in the 1999 sale of a subsidiary; and the deductibility of expenses associated with the shareholder class action litigation. To date, the Company has not received any IRS proposed adjustments related to such period. Although the Company believes it has appropriate support for the positions taken on its tax returns, the Company has recorded a liability for its best estimate of the probable loss on certain of these positions. The Company believes that its accruals for tax liabilities are adequate for all open years, based on its assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Although the Company believes its recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore the Companys assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. While the Company believes that the estimates and assumptions supporting its assessments are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, a material effect on our income tax provision, net income, or cash flows in the period or periods for which that determination is made could result. |
F-26
Other current assets consisted of: |
As of December 31, | ||||||||
2005 | 2004 | |||||||
Prepaid expenses
|
$ | 172 | $ | 146 | ||||
Other
|
62 | 158 | ||||||
$ | 234 | $ | 304 | |||||
12. | Property and Equipment, net |
Property and equipment, net consisted of: |
As of December 31, | ||||||||
2005 | 2004 | |||||||
Land
|
$ | 50 | $ | 51 | ||||
Building and leasehold improvements
|
286 | 263 | ||||||
Capitalized software
|
272 | 247 | ||||||
Furniture, fixtures and equipment
|
105 | 141 | ||||||
Buses and support vehicles
|
74 | 77 | ||||||
Projects in process
|
109 | 86 | ||||||
896 | 865 | |||||||
Less: Accumulated depreciation and amortization
|
(380 | ) | (356 | ) | ||||
$ | 516 | $ | 509 | |||||
Depreciation and amortization expense relating to property and equipment during 2005, 2004 and 2003 was $112 million, $111 million and $101 million, respectively (including $36 million, $27 million and $26 million, respectively, of amortization expense relating to capitalized computer software). |
13. | Accounts Payable and Other Current Liabilities |
Accounts payable and other current liabilities consisted of: |
As of December 31, | ||||||||
2005 | 2004 | |||||||
Income taxes payable
|
$ | 776 | $ | 622 | ||||
Accrued legal settlements
|
313 | 178 | ||||||
Accrued payroll and related
|
279 | 305 | ||||||
Accounts payable
|
152 | 214 | ||||||
Accrued disposition costs
|
145 | - | ||||||
Public liability and property damage insurance
liabilities (a)
|
125 | 115 | ||||||
Accrued interest
|
119 | 180 | ||||||
Other
|
378 | 393 | ||||||
$ | 2,287 | $ | 2,007 | |||||
(a) | The non-current liability related to public liability and property damage insurance was $297 million and $296 million at December 31, 2005 and 2004, respectively. |
F-27
14. | Long-term Debt and Borrowing Arrangements |
Long-term debt consisted of: |
As of December 31, | |||||||||||||
Maturity Date | 2005 | 2004 | |||||||||||
Term notes:
|
|||||||||||||
67/8%
notes
|
August 2006 | $ | 850 | $ | 850 | ||||||||
4.89% notes
|
August 2006 | 100 | 100 | ||||||||||
61/4%
notes
|
January 2008 | 798 | 797 | ||||||||||
61/4%
notes
|
March 2010 | 349 | 349 | ||||||||||
73/8%
notes
|
January 2013 | 1,192 | 1,191 | ||||||||||
71/8%
notes
|
March 2015 | 250 | 250 | ||||||||||
Other:
|
|||||||||||||
Revolver
borrowings (a)
|
November 2009 | 7 | 650 | ||||||||||
Net hedging gains
(losses) (b)
|
(47 | ) | 17 | ||||||||||
Other
|
9 | 30 | |||||||||||
Total long-term debt
|
3,508 | 4,234 | |||||||||||
Less: Current
portion (c)
|
975 | 679 | |||||||||||
Long-term debt
|
$ | 2,533 | $ | 3,555 | |||||||||
(a) | Outstanding borrowings at December 31, 2005 do not include $350 million of borrowings for which the Companys Travelport subsidiary is the primary obligor. This amount is included within liabilities of discontinued operations on the accompanying Consolidated Balance Sheet at December 31, 2005. |
(b) | As of December 31, 2005, the balance represents $153 million of net mark-to-market adjustments on current interest rate hedges, partially offset by $106 million of net gains resulting from the termination of interest rate hedges. As of December 31, 2004, the balance represents $138 million of net gains resulting from the termination of interest rate hedges, partially offset by $121 million of mark-to-market adjustments on current interest rate hedges. |
(c) | The balance as of December 31, 2005 includes $850 million and $100 million of borrowings under the Companys 67/8% and 4.89% notes, respectively, due in August 2006. The balance as of December 31, 2004 includes $650 million of borrowings under the Companys $3.5 billion revolving credit facility. |
TERM NOTES |
67/8% Notes |
The Companys 67/8% notes, with a face value of $850 million, were issued in August 2001 for net proceeds of $843 million. The interest rate on these notes is subject to an upward adjustment of 150 basis points in the event that the credit ratings assigned to the Company by nationally recognized credit rating agencies are downgraded below investment grade. The Company does not have the right to redeem these notes prior to maturity. These notes are senior unsecured obligations and rank equally in right of payment with all the Companys existing and future unsecured senior indebtedness. |
4.89% Notes |
On May 10, 2004, the Companys outstanding 63/4% senior notes that formed a part of the Upper DECS, a hybrid instrument previously issued by the Company that consisted of both equity linked and debt securities, were successfully remarketed and the interest rate was reset to 4.89%. Each Upper DECS consisted of both a senior note and a forward purchase contract to purchase shares of the Companys common stock. In connection with such remarketing, the Company purchased and retired $763 million of the senior notes for $778 million in cash and recorded a loss of $18 million on the early extinguishment. The forward purchase contract was settled on August 17, 2004 (see Note 17 Stockholders Equity for more information on the forward purchase contract). These notes are senior unsecured obligations and rank equally in right of payment with all the Companys existing and future unsecured senior indebtedness. |
F-28
61/4% Notes |
The Companys 61/4% notes (with face values of $800 million and $350 million) were issued in January and March 2003 for aggregate net proceeds of $1,137 million. The notes are redeemable at the Companys option at any time, in whole or in part, at the appropriate redemption prices plus accrued interest through the redemption date. These notes are senior unsecured obligations and rank equally in right of payment with all the Companys existing and future unsecured senior indebtedness. |
73/8% Notes |
The Companys 73/8% notes, with a face value of $1.2 billion, were issued in January 2003 for net proceeds of $1,181 million. The notes are redeemable at the Companys option at any time, in whole or in part, at the appropriate redemption prices plus accrued interest through the redemption date. These notes are senior unsecured obligations and rank equally in right of payment with all the Companys existing and future unsecured senior indebtedness. |
71/8% Notes |
The Companys 71/8% notes, with a face value of $250 million, were issued in March 2003 for net proceeds of $248 million. The notes are redeemable at the Companys option at any time, in whole or in part, at the appropriate redemption prices plus accrued interest through the redemption date. These notes are senior unsecured obligations and rank equally in right of payment with all the Companys existing and future unsecured senior indebtedness. |
COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS |
At December 31, 2005, the committed credit facilities and commercial paper program available to the Company at the corporate level were as follows: |
Total | Outstanding | Letters of | Available | |||||||||||||
Capacity | Borrowings | Credit Issued | Capacity | |||||||||||||
Revolving credit facility and commercial paper
program (a)
|
$ | 3,500 | $ | 7 | $ | 1,256 | $ | 1,887 | ||||||||
Letter of credit
facility (b)
|
303 | - | 303 | - |
(a) | In addition to the letters of credit issued as of December 31, 2005, the revolving credit facility contains the committed capacity to issue an additional $494 million in letters of credit. The letters of credit outstanding under this facility at December 31, 2005 were issued primarily to support the Companys vehicle rental business. |
(b) | Final maturity date is July 2010. |
As of December 31, 2005, the Company also had $400 million of availability for public debt or equity issuances under a shelf registration statement. |
DEBT COVENANTS |
Certain of the Companys debt instruments and credit facilities contain 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, 2005, the Company was in compliance with all restrictive and financial covenants. The Companys debt instruments permit the debt issued thereunder to be accelerated upon certain events, including the failure to pay principal when due under any of the Companys other debt instruments or credit facilities subject to materiality thresholds. The Companys credit facilities permit the loans made thereunder to be accelerated upon certain events, including the failure to pay principal when due under any of the Companys debt instruments subject to materiality thresholds. |
F-29
15. | Debt Under Vehicle Programs and Borrowing Arrangements |
Debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding) consisted of: |
As of December 31, | |||||||||
2005 | 2004 | ||||||||
Debt due to Avis Budget Rental Car Funding
|
$ | 6,957 | $ | 5,935 | |||||
Budget Truck Financing:
|
|||||||||
HFS Truck Funding program
|
149 | 220 | |||||||
Capital leases
|
370 | 225 | |||||||
Other
|
433 | 347 | |||||||
$ | 7,909 | $ | 6,727 | ||||||
Avis Budget Rental Car Funding. Avis Budget Rental Car Funding was established by the Company as a bankruptcy remote special purpose limited liability company that issues private placement notes and uses the proceeds from such issuances to make loans to a wholly-owned subsidiary of the Company, AESOP Leasing LP (AESOP Leasing), on a continuing basis. AESOP Leasing is required to use these proceeds to acquire or finance the acquisition of vehicles used in the Companys rental car operations. Prior to December 31, 2003, both Avis Budget Rental Car Funding and AESOP Leasing were consolidated by the Company and, as such, the intercompany transactions between these two entities were eliminated causing only the third-party debt issued by Avis Budget Rental Car Funding and the vehicles purchased by AESOP Leasing to be presented within the Companys Consolidated Financial Statements. However, in connection with the adoption of FIN 46, the Company determined that it was not the primary beneficiary of Avis Budget Rental Car Funding. Accordingly, the Company deconsolidated Avis Budget Rental Car Funding on December 31, 2003. As a result, AESOP Leasings obligation to Avis Budget Rental Car Funding is reflected as related party debt on the Companys Consolidated Balance Sheet as of December 31, 2005 and 2004. The Company also recorded an asset within assets under vehicle programs on its Consolidated Balance Sheet at December 31, 2005 and 2004, which represents the equity issued by Avis Budget Rental Car Funding to the Company. The vehicles purchased by AESOP Leasing remain on the Companys Consolidated Balance Sheet as AESOP Leasing continues to be consolidated by the Company. Such vehicles and related assets, which approximate $7.5 billion, collateralize the debt issued by Avis Budget Rental Car Funding and are not available to pay the obligations of the Company. | |
The business activities of Avis Budget Rental Car Funding are limited primarily to issuing indebtedness and using the proceeds thereof to make loans to AESOP Leasing for the purpose of acquiring or financing the acquisition of vehicles to be leased to the Companys rental car subsidiary and pledging its assets to secure the indebtedness. As the deconsolidation of Avis Budget Rental Car Funding occurred on December 31, 2003, the income statement and cash flow activity of the Company are not impacted for 2003. Beginning on January 1, 2004, the results of operations and cash flows of Avis Budget Rental Car Funding are no longer reflected within the Companys Consolidated Financial Statements. Borrowings under the Avis Budget Rental Car Funding program primarily represent floating rate term notes with a weighted average interest rate of 4% for 2005 and 3% for both 2004 and 2003. | |
Truck Financing. Budget Truck financing consists of debt outstanding under the HFS Truck Funding Program and capital leases. The HFS Truck Funding Program is a debt facility established by the Company to finance the acquisition of the Budget truck rental fleet. The borrowings under this program are collateralized by $148 million of corresponding assets and are floating rate term notes with a weighted average interest rate of 4%, 2% and 1% for 2005, 2004 and 2003, respectively. The Company has also obtained a portion of its truck rental fleet under capital lease arrangements for which there are corresponding unamortized assets of $364 million and $218 million classified within vehicles, net on the Companys Consolidated Balance Sheets as of December 31, 2005 and 2004, respectively. Interest paid as part of capital lease obligations was $14 million and $5 million during 2005 and 2004, respectively. |
F-30
Other. Borrowings under the Companys other vehicle rental programs represent amounts issued under financing facilities that provide for the issuance of notes to support the acquisition of vehicles used in the Companys international vehicle rental operations. The debt issued is collateralized by $635 million of vehicles and related assets and primarily represents floating rate bank loans and commercial paper for which the weighted average interest rate was 4%, 3% and 4% for 2005, 2004 and 2003, respectively. | |
The following table provides the contractual maturities of the Companys debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding) at December 31, 2005: |
Vehicle- | Capital | |||||||||||
Backed Debt | Leases | Total | ||||||||||
2006
|
$ | 2,397 | $ | 59 | $ | 2,456 | ||||||
2007
|
1,703 | 113 | 1,816 | |||||||||
2008
|
1,500 | 139 | 1,639 | |||||||||
2009
|
421 | 59 | 480 | |||||||||
2010
|
800 | - | 800 | |||||||||
Thereafter
|
718 | - | 718 | |||||||||
$ | 7,539 | $ | 370 | $ | 7,909 | |||||||
COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS |
As of December 31, 2005, available funding under the Companys vehicle programs (including related party debt due to Avis Budget Rental Car Funding) consisted of: |
Total | Outstanding | Available | |||||||||||
Capacity (a) | Borrowings | Capacity | |||||||||||
Debt due to Avis Budget Rental Car Funding
|
$ | 7,580 | $ | 6,957 | $ | 623 | |||||||
Budget Truck financing:
|
|||||||||||||
HFS Truck Funding program
|
149 | 149 | - | ||||||||||
Capital leases
|
370 | 370 | - | ||||||||||
Other
|
821 | 433 | 388 | ||||||||||
$ | 8,920 | $ | 7,909 | $ | 1,011 | ||||||||
(a) | Capacity is subject to maintaining sufficient assets to collateralize debt. |
DEBT COVENANTS |
Debt agreements under the Companys vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and indebtedness of material subsidiaries, mergers, limitations on liens, liquidations, and sale and leaseback transactions, and also require the maintenance of certain financial ratios. As of December 31, 2005, the Company is in compliance with all such covenants. |
F-31
16. | Commitments and Contingencies |
Lease Commitments |
The Company is committed to making rental payments under noncancelable operating leases covering various facilities and equipment. Future minimum lease payments required under noncancelable operating leases as of December 31, 2005 are as follows: |
Year | Amount | |||
2006
|
$ | 327 | ||
2007
|
287 | |||
2008
|
220 | |||
2009
|
145 | |||
2010
|
101 | |||
Thereafter
|
618 | |||
$ | 1,698 | |||
Other than those within the Companys vehicle rental program, for which the future minimum lease payments have been reflected in Note 15 Debt Under Vehicle Programs and Borrowing Arrangements, commitments under capital leases are not significant. During 2005, 2004 and 2003, the Company incurred total rental expense of $491 million, $454 million and $430 million, respectively, inclusive of contingent rental expense of $138 million, $97 million and $93 million in 2005, 2004 and 2003, respectively, principally based on car rental volume. Included within the Companys total rental expense for 2005, 2004 and 2003 are concession fees paid by the Company in connection with agreements with various airports authorities that allow the Company to conduct its car rental operations on-site. In general, concession fees for airport locations are based on a percentage of total commissionable revenue (as determined by each airport authority), subject to minimum annual guaranteed amounts. |
Commitments to Purchase Vehicles |
The Company maintains agreements with vehicle manufacturers, which require the Company to purchase approximately $14.4 billion of vehicles from these manufacturers over the next three years (approximately $8.0 billion, $4.4 billion and $1.9 billion during 2006, 2007 and 2008, respectively). These commitments are subject to the vehicle manufacturers satisfying their obligations under the repurchase agreements. The Companys primary suppliers for the Avis and Budget brands are General Motors Corporation and Ford Motor Company, respectively. The purchase of such vehicles is financed through the issuance of debt under vehicle programs in addition to cash received upon the sale of vehicles primarily under repurchase programs. |
Other Purchase Commitments |
In the normal course of business, the Company makes various commitments to purchase goods or services from specific suppliers, including those related to capital expenditures. None of the purchase commitments made by the Company as of December 31, 2005 (aggregating approximately $504 million) was individually significant with the exception of the Companys commitments under service contracts for information technology and telecommunications (aggregating $358 million, of which $91 million relates to 2006). These purchase obligations extend through 2011. |
Contingencies |
The Company is involved in litigation asserting claims associated with accounting irregularities discovered in 1998 at former CUC business units outside of the principal common stockholder class action litigation. While the Company has an accrued liability of approximately $80 million recorded on its Consolidated Balance Sheet as of December 31, 2005 for these claims based upon its best estimates, it does not believe that it is feasible to predict or determine the final outcome or resolution of any unresolved proceedings. The Company does not believe that the impact of any unresolved proceedings should result in a material liability to the Company in relation to its consolidated financial position or liquidity. |
F-32
In addition to the matters discussed above, the Company is also involved in claims, legal proceedings and governmental inquiries related to its vehicle rental operations, including contract disputes, business practices, intellectual property, environmental issues and other commercial, employment and tax matters, including breach of contract claims by licensees. The Company believes that it has adequately accrued for such matters as appropriate or, for matters not requiring accrual, believes that they will not have a material adverse effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur, which could have a material adverse effect on the Companys results of operations or cash flows in a particular reporting period. |
Standard Guarantees/Indemnifications |
In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for breaches of representations and warranties. In addition, many of these parties are also indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. Such guarantees or indemnifications are granted under various agreements, including those governing (i) purchases, sales or outsourcing of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities and use of derivatives and (v) issuances of debt or equity securities. The guarantees or indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements and derivative contracts, and (v) underwriters in debt or equity security issuances. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these guarantees, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees as the triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates any potential payments to be made. |
Other Guarantees |
The Company has provided certain guarantees to subsidiaries of PHH, which, as previously discussed, was spun-off during first quarter 2005. These guarantees relate primarily to various real estate and product operating leases. The maximum potential amount of future payments that the Company may be required to make under the guarantees relating to the various real estate and product operating leases is estimated to be approximately $40 million. At December 31, 2005, the liability recorded by the Company in connection with these guarantees was approximately $1 million. To the extent that the Company would be required to perform under any of these guarantees, PHH has agreed to indemnify the Company. | |
In connection with the Companys disposition of its Marketing Services division (MSD), the Company agreed to provide certain indemnifications related to, among other things, litigation matters related to various suits brought against MSD by individual consumers and state regulatory authorities seeking monetary and/or injunctive relief regarding the marketing of certain membership programs and inquiries from state regulatory authorities related to such programs. Such indemnification entitles the purchaser to reimbursement for a portion of the actual losses suffered by it in regards to such matters. In addition, pursuant to a number of post-closing commercial arrangements entered into between certain of the Companys subsidiaries and MSD, the Company also agreed to provide a minimum number of call transfers to certain MSD subsidiaries, as well as retaining pre-existing guarantee obligations for certain real estate operating lease obligations on behalf of certain MSD subsidiaries. The Company established a liability for the estimated fair value of these guarantees in the amount of approximately $100 million on the sale date, which reduced the gain on the transaction recorded within discontinued operations. The |
F-33
maximum potential amount of future payments to be made under these guarantees is approximately $400 million excluding one litigation matter for which there is no limitation to the maximum potential amount of future payments. |
17. | Stockholders Equity |
Dividend Payments |
During the quarterly periods ended March 31, June 30, September 30 and December 31, 2005, the Company paid cash dividends of $0.09, $0.09, $0.11 and $0.11 per common share, respectively ($423 million in the aggregate). During the quarterly periods ended March 31, June 30, September 30 and December 31, 2004, the Company paid cash dividends of $0.07, $0.07, $0.09 and $0.09 per common share, respectively ($333 million in the aggregate). |
Share Repurchases |
During 2005, the Company used $1.1 billion of available cash and $289 million of proceeds primarily received in connection with option exercises to repurchase approximately $1.3 billion (approximately 68 million shares) of common stock under its common stock repurchase program. During 2004, the Company used $756 million of available cash and $567 million of proceeds primarily received in connection with option exercises to repurchase approximately $1.3 billion (approximately 58 million shares) of common stock under its common stock repurchase program. During 2003, the Company used $644 million of available cash and $446 million of proceeds primarily received in connection with option exercises to repurchase approximately $1.1 billion (approximately 65 million shares) of common stock under its common stock repurchase program. |
Share Issuances |
During first quarter 2004, the Company announced its intention to redeem its $430 million then-outstanding zero coupon senior convertible contingent notes for cash. As a result, holders had the right to convert their notes into shares of Cendant common stock. Virtually all holders elected to convert their notes. Accordingly, the Company issued approximately 22 million shares in exchange for approximately $430 million in notes (carrying value) during February 2004. The Company used the cash that otherwise would have been used to redeem these notes to repurchase shares in the open market. | |
On August 17, 2004, the forward purchase contracts that formed a portion of the Companys Upper DECS securities settled pursuant to the terms of such contracts. Accordingly, the Company issued approximately 38 million shares in exchange for $863 million in cash and recorded an increase of $863 million to stockholders equity. |
37/8% Convertible Senior Debentures Call Spread Options |
During 2004, the Company redeemed its former 37/8% convertible senior debentures for cash. However, holders could have elected to convert each $1,000 par value debenture into 41.58 shares of Cendant common stock (33.4 million shares in the aggregate). In order to offset a portion of the dilution that would have occurred if the holders elected to convert their debentures, the Company purchased call spread options on April 30, 2004 covering 16.3 million of the 33.4 million shares issuable upon conversion. The call spread options, which expired unexercised in fourth quarter 2004, and which cost $23 million, were accounted for as a capital transaction and included as a component of stockholders equity. |
F-34
Accumulated Other Comprehensive Income |
The after-tax components of accumulated other comprehensive income are as follows: |
Unrealized | Unrealized Gains | Minimum | Accumulated | |||||||||||||||||
Currency | Gains (Losses) | (Losses) on | Pension | Other | ||||||||||||||||
Translation | on Cash Flow | Available-for-Sale | Liability | Comprehensive | ||||||||||||||||
Adjustments (*) | Hedges | Securities | Adjustment | Income (Loss) | ||||||||||||||||
Balance, January 1, 2003
|
$ | 81 | $ | (41 | ) | $ | 4 | $ | (58 | ) | $ | (14 | ) | |||||||
Current period change
|
143 | 38 | 42 | - | 223 | |||||||||||||||
Balance, December 31, 2003
|
224 | (3 | ) | 46 | (58 | ) | 209 | |||||||||||||
Current period change
|
84 | 23 | (30 | ) | (12 | ) | 65 | |||||||||||||
Balance, December 31, 2004
|
308 | 20 | 16 | (70 | ) | 274 | ||||||||||||||
Effect of PHH spin-off
|
(12 | ) | (5 | ) | (1 | ) | 7 | (11 | ) | |||||||||||
Current period change
|
(219 | ) | 28 | (15 | ) | (17 | ) | (223 | ) | |||||||||||
Balance, December 31, 2005
|
$ | 77 | $ | 43 | $ | - | $ | (80 | ) | $ | 40 | |||||||||
(*) | Assets and liabilities of foreign subsidiaries having non-U.S.-dollar functional currencies are translated at exchange rates at the Consolidated Balance Sheet dates. Revenues and expenses are translated at average exchange rates during the periods presented. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, are included in accumulated other comprehensive income. Gains or losses resulting from foreign currency transactions are included in the Consolidated Statements of Income. |
All components of accumulated other comprehensive income are net of tax except currency translation adjustments, which exclude income taxes related to indefinite investments in foreign subsidiaries. |
18. | Stock-Based Compensation |
The Company may grant stock options, stock appreciation rights, restricted shares and restricted stock units (RSUs) to its employees, including directors and officers of the Company and its affiliates. Beginning in 2003, the Company changed the method by which it provides stock-based compensation to its employees by significantly reducing the number of stock options granted and instead, issuing RSUs as a form of compensation. The Company is authorized to grant up to 318 million shares of its common stock under its active stock plans and at December 31, 2005, approximately 123 million shares were available for future grants under the terms of these plans. |
Stock Options |
Stock options generally have a ten-year term, and those granted prior to 2004 vest ratably over periods ranging from two to five years. In 2004, the Company adopted performance and time vesting criteria for stock option grants. The predetermined performance criteria determine the number of options that will ultimately vest and are based on the growth of the Companys earnings and cash flows over the vesting period of the respective award. The number of options that will ultimately vest may range from 0% to 200% of the base award. Vesting occurs over a four-year period, but cannot exceed 25% of the base award in each of the three years following the grant date. The Companys policy is to grant options with exercise prices at then-current fair market value. |
F-35
The annual activity of the Companys common stock option plans consisted of: |
2005 | 2004 | 2003 | |||||||||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | ||||||||||||||||||||
of | Exercise | of | Exercise | of | Exercise | ||||||||||||||||||||
Options | Price | Options | Price | Options | Price | ||||||||||||||||||||
Balance at beginning of year
|
151 | $ | 17.83 | 188 | $ | 17.21 | 237 | $ | 16.23 | ||||||||||||||||
Granted at fair market
value (a)
|
1 | 20.38 | 1 | 23.12 | 1 | 13.40 | |||||||||||||||||||
Granted in connection with acquisitions
|
- | - | 2 | 15.60 | 1 | 15.02 | |||||||||||||||||||
Granted in connection with PHH
spin-off (b)
|
6 | (* | ) | - | - | - | - | ||||||||||||||||||
Exercised
|
(24 | ) | 11.35 | (38 | ) | 14.61 | (40 | ) | 10.77 | ||||||||||||||||
Forfeited
|
(5 | ) | 20.23 | (2 | ) | 19.33 | (11 | ) | 19.45 | ||||||||||||||||
Balance at end of year
|
129 | $ | 18.09 | 151 | $ | 17.83 | 188 | $ | 17.21 | ||||||||||||||||
(*) | Not meaningful. |
(a) | In 2005 and 2004, reflects the maximum number of options assuming achievement of all performance and time vesting criteria. | |
(b) | As a result of the spin-off of PHH, the closing price of the Companys common stock was adjusted downward by $1.10 on January 31, 2005. Additionally, the Company granted incremental options to achieve a balance of 1.04249 options outstanding subsequent to the spin-off for each option outstanding prior to the spin-off. The exercise price of each option was also adjusted downward by a proportionate value. |
The Company records pre-tax compensation expense related to the issuance of stock options to its employees over the vesting period of the award and based on the estimated number of options the Company believes it will ultimately provide. During 2005, 2004 and 2003, the Company recorded $2 million, $2 million and $1 million, respectively, of pre-tax compensation expense within general and administrative expenses related to the stock options issued subsequent to January 1, 2003. The Company also recorded pre-tax stock-based compensation expense of $8 million and $2 million during 2005 and 2004, respectively, within discontinued operations. | |
The table below summarizes information regarding the Companys outstanding and exercisable stock options as of December 31, 2005: |
Outstanding Options | Exercisable Options | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||
Number | Remaining | Average | Number | Average | ||||||||||||||||
Range of | of | Contractual | Exercise | of | Exercise | |||||||||||||||
Exercise Prices | Options | Life | Price | Options | Price | |||||||||||||||
$0.01 to $10.00
|
26 | 3.5 | $ | 9.15 | 26 | $ | 9.15 | |||||||||||||
$10.01 to $20.00
|
64 | 3.8 | 17.10 | 63 | 17.15 | |||||||||||||||
$20.01 to $30.00
|
25 | 3.1 | 22.95 | 24 | 23.08 | |||||||||||||||
$30.01 to $40.00
|
14 | 1.9 | 30.93 | 13 | 30.93 | |||||||||||||||
129 | 3.4 | $ | 18.09 | 126 | $ | 18.10 | ||||||||||||||
As a result of the contemplated separation plan, approximately 128 million of the options outstanding at December 31, 2005 are expected to be accelerated and converted into options of the new companies based upon the pro rata market values of each new company. An additional one million options are expected to be cancelled in connection with the plan. The actual options to be accelerated, converted and cancelled will be contingent upon the options outstanding balance at the date of each respective spin-off. | |
The weighted-average grant-date fair value of the Companys common stock options granted in the normal course of business during 2005, 2004 and 2003 was $5.89, $6.90 and $5.19, respectively. The weighted-average grant-date fair value of Cendant common stock options granted in connection with |
F-36
acquisitions made during 2004 and 2003 was $9.49 and $3.89, respectively. No options were granted in connection with acquisitions made in 2005. The fair values of these stock options are estimated on the dates of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for Cendant common stock options granted in 2005, 2004 and 2003: |
2005 | 2004 | 2003 | ||||||||||
Dividend yield
|
1.7 | % | 1.5 | % | - | |||||||
Expected volatility
|
30.0 | % | 30.0 | % | 49.0 | % | ||||||
Risk-free interest rate
|
3.8 | % | 4.0 | % | 2.4 | % | ||||||
Expected holding period (years)
|
5.5 | 5.5 | 3.6 |
Restricted Stock Units |
RSUs granted by the Company entitle the employee to receive one share of Cendant common stock upon vesting. RSUs granted in 2003 vest ratably over a four-year term. In 2004, the Company adopted performance and time vesting criteria for RSU grants. The predetermined performance criteria determine the number of RSUs that will ultimately vest and are based on the growth of the Companys earnings and cash flows over the vesting period of the respective award. The number of RSUs that will ultimately vest may range from 0% to 200% of the base award. Vesting occurs over a four-year period, but cannot exceed 25% of the base award in each of the three years following the grant date. | |
The annual activity related to the Companys RSU plan consisted of: |
2005 | 2004 | 2003 | |||||||||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | ||||||||||||||||||||
of | Grant | of | Grant | of | Grant | ||||||||||||||||||||
RSUs | Price | RSUs | Price | RSUs | Price | ||||||||||||||||||||
Balance at beginning of year
|
16 | $ | 20.85 | 6 | $ | 13.98 | - | $ | - | ||||||||||||||||
Granted at fair market value
(a)
|
14 | 20.19 | 13 | 23.16 | 6 | 13.98 | |||||||||||||||||||
Granted in connection with PHH spin-off
(b)
|
1 | (*) | - | - | - | - | |||||||||||||||||||
Vested
|
(3 | ) | 19.48 | (2 | ) | 13.97 | - | - | |||||||||||||||||
Canceled
|
(5 | ) | 20.90 | (1 | ) | 17.02 | - | - | |||||||||||||||||
Balance at end of year
|
23 | 20.65 | 16 | 20.85 | 6 | 13.98 | |||||||||||||||||||
(*) | Not meaningful. |
(a) | In 2004 and 2005, reflects the maximum number of RSUs assuming achievement of all performance and time vesting criteria. |
(b) | As a result of the spin-off of PHH, the closing price of Cendant common stock was adjusted downward by $1.10 on January 31, 2005. In order to provide an equitable adjustment to holders of its RSUs, the Company granted incremental RSUs to achieve a balance of 1.0477 RSUs outstanding subsequent to the spin-off for each RSU outstanding prior to the spin-off. |
During 2005, 2004 and 2003, the Company recorded pre-tax compensation expense in connection with these RSUs of (i) $23 million, $11 million and $4 million, respectively, included within general and administrative expenses, and (ii) $46 million, $33 million and $11 million, respectively, within discontinued operations. The expense recorded in 2005 includes $5 million related to accelerated vesting of restricted stock units of individuals terminated in connection with the Companys 2005 restructuring initiatives. The related deferred compensation balance is recorded on the Companys Consolidated Balance Sheets within additional paid-in capital and approximated $440 million and $301 million as of December 31, 2005 and 2004, respectively. The Company will amortize the deferred compensation balance as of December 31, 2005 to expense over the remaining vesting periods of the respective RSUs and based on the estimated performance goals of the award the Company believes it will ultimately achieve. Currently, such amortization expense is predicated on the base award. |
F-37
Pro Forma Compensation Expense |
The effect on net income and earnings per share for 2004 and 2003 if the Company had applied the fair value based method to all employee stock awards granted (including those granted prior to January 1, 2003 for which the Company has not recorded compensation expense) is as follows: |
Year Ended | |||||||||
December 31, | |||||||||
2004 | 2003 | ||||||||
Reported net income
|
$ | 2,091 | $ | 1,080 | |||||
Add back: Stock-based employee compensation expense included in
reported net income, net of tax
|
29 | 10 | |||||||
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax
|
(31 | ) | (50 | ) | |||||
Pro forma net income
|
$ | 2,089 | $ | 1,040 | |||||
Earnings per share:
|
|||||||||
Reported
|
|||||||||
Basic
|
$ | 2.03 | $ | 1.06 | |||||
Diluted
|
1.97 | 1.06 | |||||||
Pro forma
|
|||||||||
Basic
|
$ | 2.03 | $ | 1.02 | |||||
Diluted
|
1.96 | 0.99 |
As of January 1, 2005, the Company recorded compensation expense for all outstanding employee stock awards; accordingly, pro forma information is not presented subsequent to December 31, 2004. |
Employee Stock Purchase Plan |
The Company is also authorized to sell up to 8.5 million shares of its common stock to eligible employees under its current non-compensatory employee stock purchase plan (ESPP), which expires in March 2006. Under the terms of the ESPP, employees may authorize the Company to withhold up to 10% of their compensation from each paycheck for the purchase of the Companys common stock. For amounts withheld during 2005, 2004 and 2003, the purchase price of the stock was calculated as 95% of the fair market value of the Companys common stock as of the first day of each month. During 2005, the Company issued approximately 0.5 million shares under the ESPP, bringing the cumulative issuances to approximately 4.6 million shares. As of December 31, 2005, approximately 3.9 million shares were available for issuance under the ESPP. |
19. | Employee Benefit Plans |
Defined Contribution Savings Plans |
The Company sponsors several defined contribution savings 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 by the plans. The Companys cost for contributions to these plans was $20 million, $25 million and $22 million during 2005, 2004 and 2003, respectively. |
Defined Benefit Pension Plans |
The Company sponsors domestic non-contributory defined benefit pension plans covering certain eligible employees and contributory defined benefit pension plans in certain foreign subsidiaries with participation in the plans at the employees option. Under both the domestic and foreign plans, benefits are based on an employees years of credited service and a percentage of final average compensation. The projected benefit obligations of the plans were approximately $176 million and $160 million at December 31, 2005 and 2004, respectively. The fair value of the plan assets was $144 million and |
F-38
$139 million at December 31, 2005 and 2004, respectively. Accordingly, the plans were underfunded by $32 million and $21 million at December 31, 2005 and 2004, respectively. However, the pension liability recorded by the Company (as a component of accrued liabilities on the Companys Consolidated Balance Sheets) was $29 million (net of pension assets of $16 million) and $25 million, respectively, of which $41 million and $10 million represents additional minimum pension liability included in accumulated other comprehensive income at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, an additional minimum pension liability of $90 million and $102 million, respectively, related to discontinued operations was also recorded as a charge to other comprehensive income. The Companys policy is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as the Company determines to be appropriate. The net pension expense incurred by the Company was $4 million during 2005 and was insignificant during 2004 and 2003. The Company expects to contribute approximately $5 million to these plans in 2006. |
20. | Financial Instruments |
RISK MANAGEMENT |
Following is a description of the Companys risk management policies. |
Foreign Currency Risk |
The Company uses foreign currency forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and forecasted royalties, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated acquisitions. The Company primarily hedges its foreign currency exposure to the British pound, Canadian dollar, Australian dollar and New Zealand dollar. The majority of forward contracts utilized by the Company do not qualify for hedge accounting treatment under SFAS No. 133. The fluctuations in the value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. Forward contracts that are used to hedge certain forecasted third party receipts and disbursements up to 12 months are designated and do qualify as cash flow hedges. The amount of gains or losses reclassified from other comprehensive income to earnings resulting from ineffectiveness or from excluding a component of the forward contracts gain or loss from the effectiveness calculation for cash flow hedges during 2005, 2004 and 2003 was not material, nor is the amount of gains or losses the Company expects to reclassify from other comprehensive income to earnings over the next 12 months. |
Interest Rate Risk |
The debt used to finance much of the Companys operations is also exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create an appropriate mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and instruments with purchased option features. The derivatives used to manage the risk associated with the Companys fixed rate debt were designated as either fair value hedges or freestanding derivatives. The fair value hedges were perfectly effective resulting in no net impact on the Companys consolidated results of operations during 2005, 2004 and 2003, except to create the accrual of interest expense at variable rates. In 2005, the freestanding derivatives resulted in $12 million of expenses to the Companys consolidated results of operations. During 2004 and 2003, these derivatives had a nominal impact on the Companys results of operations. During 2004 and 2003, the Company terminated certain of its fair value hedges, which resulted in cash gains (losses) of ($9) million and $200 million, respectively. Such gains (losses) are deferred and being recognized over the lives of the formerly hedged items as a component of interest expense. During 2005, 2004 and 2003, the Company recorded $32 million, $33 million and $50 million, respectively, of such amortization. | |
The derivatives used to manage the risk associated with the Companys floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges, which had maturities ranging from July 2006 to July 2012. In connection with its cash flow hedges, the Company recorded net gains |
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of $39 million, $31 million and $36 million during 2005, 2004 and 2003, respectively, to other comprehensive income. Such amounts include gains related to the Companys continuing operations of $27 million, $27 million and $43 million for 2005, 2004 and 2003, respectively. The after-tax amount of gains or losses reclassified from accumulated other comprehensive income (loss) to earnings resulting from ineffectiveness or from excluding a component of the derivatives gain or loss from the effectiveness calculation for cash flow hedges for 2005 and 2003 was not material to the Companys results of operations. In 2004, the Company terminated certain derivatives associated with its vehicle-backed debt and reclassified $12 million of gains ($8 million, net of tax) from accumulated other comprehensive income to income. The amount of losses the Company expects to reclassify from accumulated other comprehensive income to earnings during the next twelve months is not material. In 2005, the Company recorded a gain of $1 million related to freestanding derivatives. During 2004 and 2003, such freestanding derivatives had a nominal impact on the Companys results of operations. |
Credit Risk and Exposure |
The Company is exposed to counterparty credit risks in the event of nonperformance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral in certain instances in which financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the amount for which it is at risk with each counterparty to such contracts, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties. | |
There were no significant concentrations of credit risk with any individual counterparties or groups of counterparties at December 31, 2005 or 2004 other than risks related to the Companys repurchase agreements with automobile manufacturers (see Note 2 Summary of Significant Accounting Policies). Such risks relate principally to the vehicles subject to repurchase agreements with General Motors Corporation and Ford Motor Company and with respect to program cars that were sold and returned to the car manufacturers but for which the Company has not yet received payment. Concentrations of credit risk associated with trade receivables are considered minimal due to the Companys diverse customer base. Bad debts have been minimal historically. The Company does not normally require collateral or other security to support credit sales. |
FAIR VALUE |
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. The carrying amounts of cash and cash equivalents, available-for-sale securities, accounts receivable, program cash, and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. |
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The carrying amounts and estimated fair values of all other financial instruments at December 31, are as follows: |
2005 | 2004 | ||||||||||||||||
Estimated | Estimated | ||||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||||
Amount | Value | Amount | Value | ||||||||||||||
Assets
|
|||||||||||||||||
Investments in Affinion
|
$ | 86 | $ | 86 | $ | - | $ | - | |||||||||
Investment in Homestore
|
- | - | 22 | 22 | |||||||||||||
Debt
|
|||||||||||||||||
Current portion of long-term debt
|
975 | 984 | 679 | 679 | |||||||||||||
Long-term debt
|
2,533 | 2,718 | 3,555 | 3,904 | |||||||||||||
Interest rate
swaps (*)
|
(153 | ) | (153 | ) | (121 | ) | (121 | ) | |||||||||
Debt under vehicle programs
|
|||||||||||||||||
Vehicle-backed debt due to Avis Budget Rental Car Funding
|
6,957 | 6,931 | 5,935 | 5,943 | |||||||||||||
Vehicle-backed debt (excluding derivative liabilities)
|
931 | 931 | 775 | 776 | |||||||||||||
Interest rate swaps and other derivatives
|
(21 | ) | (21 | ) | (17 | ) | (17 | ) | |||||||||
Derivatives (*)
|
(14 | ) | (14 | ) | (21 | ) | (21 | ) |
(*) | Derivative instruments in gain (loss) positions. |
21. | Segment Information |
The reportable segments presented below represent the Companys operating segments for which separate financial information is available and is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and EBITDA, which is defined as income from continuing operations before non-vehicle related depreciation and amortization, non-vehicle related interest and income taxes. The Companys presentation of EBITDA may not be comparable to similarly-titled measures used by other companies. |