SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 1-10308
------------
Cendant Corporation
(Exact name of Registrant as specified in its charter)
Delaware 06-0918165
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive (Zip Code)
office)
(973) 428-9700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if applicable)
------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the Registrant's classes of
common stock was 851,235,799 shares of Common Stock outstanding as of May 14,
1998.
EXPLANATORY NOTE
As discussed in Note 1 and Note 10 to the condensed consolidated financial
statements of Cendant Corporation (the "Company") included herein, the Company
has discovered accounting irregularities in certain former business units of CUC
International Inc. which are now part of the Company's Alliance Marketing
Division (formerly the Membership segment). Upon management's discovery of
accounting irregularities, the Audit Committee of the Company's Board of
Directors engaged special legal counsel and independent auditors to assist it in
an investigation. The results of this investigation may impact the unaudited
first quarter 1998 results set forth herein, although management does not
believe any impact to be material. Also, the Company will restate previously
reported quarterly and annual results of operations, including the 1997
financial information set forth herein. Management believes that 1998 first
quarter results of operations were compiled in accordance with appropriate
accounting practices, and reflect the elimination of known historical accounting
irregularities currently under investigation by the Audit Committee of the
Company's Board of Directors; however, the balance sheets at March 31, 1998 and
December 31, 1997 have not been adjusted to reflect, among other things, an
approximate $100 million overstatement in cash since the corresponding
adjustment to the statement of financial position is unknown at this time. The
1997 financial information set forth herein is presented as previously reported
and includes certain reclassifications necessary to conform to the current year
presentation; however, such 1997 financial information has not been adjusted for
any historical accounting irregularities currently under investigation. The
Audit Committee's investigation and the related restatement are expected to be
completed during the summer of 1998.
Cendant Corporation and Subsidiaries
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997
Consolidated Statements of Income - Three
Months Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997
Item 2 - Management=s Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements, include, but are not limited to: the
outcome of the investigation of the Audit Committee of the Company's Board of
Directors into the accounting irregularities discussed in the Explanatory Note;
the outcome of pending or future litigation relating to such accounting
irregularities; uncertainty as to the Company's future profitability; the
Company's ability to develop and implement operational and financial systems to
manage rapidly growing operations; competition in the Company's existing and
potential future lines of business; the Company's ability to integrate and
operate successfully acquired businesses and the risks associated with such
businesses; the Company's ability to obtain financing on acceptable terms to
finance the Company's growth strategy and for the Company to operate within the
limitations imposed by financing arrangements; uncertainty as to the future
profitability of acquired businesses, and other factors. Other factors and
assumptions not identified above were also involved in the derivation of these
forward-looking statements, and the failure of such other assumptions to be
realized as well as other factors may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Cendant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
1998 1997
----------- ------------
Assets
Current assets
Cash and cash equivalents .................................................................. $ 259.4 $ 149.5
Receivables, net ........................................................................... 1,691.6 1,648.8
Other current assets ....................................................................... 765.3 777.0
--------- ---------
Total current assets .......................................................................... 2,716.3 2,575.3
--------- ---------
Deferred membership acquisition costs ...................................................... 437.5 424.5
Franchise agreements, net .................................................................. 900.2 890.3
Goodwill, net .............................................................................. 3,412.4 2,467.0
Other intangibles, net ..................................................................... 1,034.3 897.8
Other assets ............................................................................... 1,359.0 1,152.6
--------- ---------
Total assets exclusive of assets under programs ............................................... 9,859.7 8,407.5
--------- ---------
Assets under management and mortgage programs
Net investment in leases and leased vehicles ............................................... 3,812.6 3,659.1
Relocation receivables ..................................................................... 649.7 775.3
Mortgage loans held for sale ............................................................... 1,795.8 1,636.3
Mortgage servicing rights .................................................................. 408.9 373.0
--------- ---------
6,667.0 6,443.7
--------- ---------
Total assets .................................................................................. $ 16,526.7 $ 14,851.2
========= =========
See accompanying notes to consolidated financial statements
Cendant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
1998 1997
--------- -----------
Liabilities and shareholders' equity
Accounts payable and other current liabilities ............................................. $ 1,691.4 $ 1,742.8
--------- ---------
Deferred income ............................................................................ 1,046.5 1,197.2
Long-term debt ............................................................................. 1,106.4 1,348.3
Other noncurrent liabilities ............................................................... 245.4 187.1
--------- ---------
Total liabilities exclusive of liabilities under programs .................................. 4,089.7 4,475.4
--------- ---------
Liabilities under management and mortgage programs
Debt .................................................................................... 5,796.9 5,602.6
--------- ---------
Deferred income taxes ................................................................... 298.5 295.7
--------- ---------
Mandatorily redeemable preferred securities issued by subsidiaries ......................... 1,447.0 --
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value - authorized
10 million shares; none issued and outstanding .......................................... -- --
Common stock, $.01 par value - authorized
2 billion shares; issued 852,284,508
and 838,333,800 shares, respectively .................................................... 8.6 8.4
Additional paid-in capital ................................................................. 3,259.2 3,059.9
Retained earnings .......................................................................... 1,759.5 1,530.0
Accumulated other comprehensive loss ....................................................... (55.0) (43.0)
Restricted stock, deferred compensation .................................................... (3.3) (3.4)
Treasury stock, at cost 6,750,546 shares ................................................... (74.4) (74.4)
--------- -----------
Total shareholders' equity ................................................................. 4,894.6 4,477.5
--------- ---------
Total liabilities and shareholders' equity ................................................. $ 16,526.7 $ 14,851.2
========= =========
See accompanying notes to consolidated financial statements
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Three Months Ended
March 31,
1998 1997
------------- ------------
Revenues
Membership and service fees, net ......................................... $ 1,252.9 $ 1,027.1
Fleet leasing (net of depreciation and interest costs of
$315.6 and $286.1, respectively) ....................................... 15.3 15.3
Other .................................................................... 168.4 115.6
----------- -----------
Net revenues ................................................................ 1,436.6 1,158.0
----------- -----------
Expenses
Operating ................................................................ 425.3 360.7
Marketing and reservation ................................................ 342.4 276.9
General and administrative ............................................... 198.6 169.1
Depreciation and amortization ............................................ 78.4 60.9
Interest, net ............................................................ 23.4 12.3
. ----------- -----------
Total expenses .............................................................. 1,068.1 879.9
----------- -----------
Income before income taxes and minority interest ............................ 368.5 278.1
Provision for income taxes .................................................. 134.1 112.2
----------- -----------
Income before minority interest ............................................. 234.4 165.9
Minority interest, net ...................................................... (4.9) --
----------- -----------
Net income .................................................................... $ 229.5 $ 165.9
=========== ===========
Per share information:
Net income per share
Basic ...................................................................... $ 0.27 $ 0.21
=========== ===========
Diluted .............................................................. ..... $ 0.26 0.19
=========== ===========
Weighted average shares
Basic ...................................................................... 838,733 799,404
Diluted .................................................................... 908,543 877,107
See accompanying notes to consolidated financial statements
Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
March 31,
1998 1997
-------- -------
Operating Activities
Net income ..................................................................... $ 229.5 $ 165.9
Merger-related payments ........................................................ (131.6) --
Depreciation and amortization .................................................. 78.4 52.6
Management and mortgage programs:
Depreciation and amortization under management and mortgage programs ........ 278.5 281.4
Mortgage loans held for sale ................................................ (159.4) 32.9
-------- -------
119.1 314.3
-------- -------
Other, net ..................................................................... (97.4) (116.8)
-------- -------
Net cash provided by operating activities ...................................... 198.0 416.0
-------- -------
Investing Activities
Property and equipment additions ............................................... (66.5) (32.3)
Loans and investments .......................................................... (139.2) (24.8)
Proceeds from sales of marketable securities ................................... -- 42.6
Purchases of marketable securities ............................................. -- (314.3)
Net assets acquired, exclusive of cash acquired
and acquisition-related payments ............................................ (1,126.8) (84.7)
Other, net ..................................................................... 41.3 7.0
-------- -------
(1,291.2) (406.5)
-------- -------
Management and mortgage programs:
Investment in leases and leased vehicles .................................... (626.2) (690.2)
Payments received on investment in leases and leased vehicles ............... 222.0 268.8
Proceeds from sales and transfers of lease and leased vehicles to
third parties ............................................................ 27.3 84.8
Equity advances on homes under management ................................... (1,436.8) (900.6)
Repayment of advances on homes under management ............................. 1,564.5 962.1
Additions to originated mortgage servicing rights ........................... (109.5) (41.7)
Proceeds from sales of mortgage servicing rights ............................ 39.9 --
-------- -------
(318.8) (316.8)
-------- -------
Net cash used in investing activities .......................................... (1,610.0) (723.3)
-------- -------
See accompanying notes to consolidated financial statements.
Three Months Ended
March 31,
1998 1997
-------- ------
Financing Activities
Proceeds from borrowings .................................................... $ -- $ 236.4
Principal payments on borrowings ......................................... .. (239.5) (31.1)
Issuance of convertible debt ................................................. -- 542.7
Issuance of common stock ..................................................... 143.9 36.2
Purchases of common stock .................................................... -- (171.3)
Proceeds from mandatorily redeemable preferred securities
issued by subsidiaries, net ............................................... 1,447.0 --
Other, net ................................................................... -- (1.2)
-------- -------
1,351.4 611.7
-------- -------
Management and mortgage programs:
Proceeds from debt issuance or borrowings ................................. 983.8 324.5
Principal payments on borrowings .......................................... (449.1) (880.1)
Net change in short-term borrowings ....................................... (340.4) 422.6
-------- -------
194.3 (133.0)
-------- -------
Net cash provided by financing activities .................................... 1,545.7 478.7
-------- -------
Effect of changes in exchange rates on cash and cash equivalents ............. (23.8) 36.7
-------- -------
Net increase in cash and cash equivalents .................................... 109.9 208.1
Cash and cash equivalents, beginning of period ............................... 149.5 633.9
-------- -------
Cash and cash equivalents, end of period ..................................... $ 259.4 $ 842.0
======== =======
See accompanying notes to consolidated financial statements
Cendant Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Cendant Corporation, together with its subsidiaries and its joint ventures
(the "Company"), is a leading global provider of consumer and business
services. The Company was created through the merger (the "Cendant Merger")
of HFS Incorporated ("HFS") and CUC International Inc. ("CUC") in December
1997. The Company provides all the services formerly provided by each of
HFS and CUC, including technology-driven membership-based consumer
services, travel services and real estate services.
The consolidated balance sheet of the Company as of March 31, 1998 and
consolidated statements of income and cash flows for the three months ended
March 31, 1998 and 1997 are unaudited. The accompanying consolidated
financial statements include the accounts and transactions of the Company
and all wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Subject to the
exceptions described below, the accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
As publicly announced on April 15, 1998, the Company has discovered
accounting irregularities in certain business units of CUC, which now
comprise part of the Company's Alliance Marketing Division (formerly known
as the Membership segment) and the Audit Committee of the Company's Board
of Directors has initiated an investigation into such matters (See note
10). The results of this investigation into these accounting irregularities
may impact the unaudited first quarter 1998 results set forth herein,
although management does not expect it to be material. Also, the Company
will restate previously reported quarterly and annual results, including
the 1997 financial information set forth herein. The Audit Committee's
investigation and the related restatement is expected to be completed
during the summer of 1998. Management believes that 1998 first quarter
results of operations were compiled in accordance with appropriate
accounting practices, and reflect the elimination of known historical
accounting irregularities currently under investigation by the Audit
Committee of the Company's Board of Directors; however, the balance sheet
at March 31, 1998 and December 31, 1997 have not been adjusted to reflect,
among other things, an approximate $100 million overstatement in cash since
the corresponding adjustment to the statement of financial position is
unknown at this time. The 1997 financial information set forth herein is
presented as previously reported and includes certain reclassifications
necessary to conform to the current year presentation, however, such 1997
financial information has not been adjusted for any historical accounting
irregularities currently under investigation. Subject to the foregoing, in
the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
2. Earnings Per Share
Basic earnings per share ("EPS") is computed based solely on the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects all potential dilution of common stock and is calculated as
follows:
Three Months Ended
March 31,
(In millions, except per share amounts) 1998 1997
----------- ----------
Net income $ 229.5 $ 165.9
Convertible debt interest 3.1 3.6
---------- -----------
Net income, as adjusted $ 232.6 $ 169.5
========== ===========
Weighted average shares - basic 838.7 799.4
Potential dilution of common stock:
Stock options 49.7 39.8
Convertible debt 20.1 37.9
---------- -----------
Weighted average shares - diluted 908.5 877.1
========== ===========
Basic EPS $ .27 $ .21
========== ===========
Diluted EPS $ .26 $ .19
========== ===========
3. Comprehensive Income
The Company adopted Statement of Accounting Standards No. 130 "Reporting
Comprehensive Income" effective January 1, 1998. The statement establishes
standards for reporting and display of an alternative income measurement
and its components in the financial statements.
Components of comprehensive income is summarized as follows:
Three Months Ended
March 31,
(In millions) 1998 1997
----------- -----------
Net income $ 229.5 $ 165.9
Other comprehensive income, net of tax:
Currency translation adjustment (13.5) (13.2)
Unrealized gain (losses) on marketable securities:
Unrealized holding gains arising during the period 1.5 -
Reclassification adjustment for gains included
in earnings - (4.3)
----------- ------------
Other comprehensive loss (12.0) (17.5)
----------- ------------
Comprehensive income $ 217.5 $ 148.4
========== ===========
The components of accumulated other comprehensive income are as follows:
March 31, December 31,
(In millions) 1998 1997
----------- ------------
Unrealized loss on marketable securities, net of tax $ - $ (1.5)
Cumulative currency translation adjustment (55.0) (41.5)
----------- ------------
$ (55.0) $ (43.0)
=========== ============
4. Business Combinations
The acquisitions discussed below were accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. Excess purchase price over
fair value of the underlying net assets acquired is allocated to goodwill.
Goodwill is amortized on a straight-line basis over the estimated benefit
periods, ranging from 7 to 40 years. The operating results of such acquired
companies are included in the Company's consolidated statements of income
since the respective dates of acquisition. The pro forma effect of such
acquisitions is not material to prior periods.
The following table reflects the fair values of assets acquired and
liabilities assumed in connection with the Company's acquisitions
consummated and other acquisition-related payments made during the three
months ended March 31, 1998.
(In millions)
Total consideration:
Cash paid (net of $17.9 million of cash acquired) $ 1,126.8
-----------
Assets acquired 202.5
Liabilities assumed 47.2
-----------
Fair value of identifiable net assets acquired 155.3
-----------
Goodwill $ 971.5
===========
Harpur Group. On January 20, 1998, the Company completed the acquisition of
The Harpur Group Ltd. ("Harpur"), a leading fuel card and vehicle
management company in the United Kingdom ("UK"), from privately held H-G
Holdings, Inc. for approximately $186.0 million in cash plus future
contingent payments of up to $20.0 million over the next two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480.0 million
in cash or $68 per share of Jackson Hewitt common stock. Jackson Hewitt
operates the second largest tax preparation service franchise system in the
United States with locations in 41 states. Jackson Hewitt franchises a
system of approximately 2,050 offices that specialize in computerized
preparation of federal and state individual income tax returns.
Other 1998 Acquisitions and Acquisition-related Payments. The Company
acquired certain entities for an aggregate purchase price of approximately
$378.7 million in cash during the first quarter of 1998. Additionally, the
Company made a $100 million cash payment to the seller of Resort
Condominiums International, Inc. in satisfaction of a contingent purchase
liability.
5. Merger - Related Costs and Other Unusual Charges
The Company incurred merger-related costs and other unusual charges of
$844.9 million ($589.8 million, after tax) associated with and coincident
to the Cendant Merger and the fourth quarter 1997 merger with Hebdo Mag
International Inc. (collectively, the "Cendant Merger Charge"). In
addition, the Company recorded a one-time merger and related charge of
$303.0 million ($227.0 million, after tax) during the second quarter of
1997 (the "PHH Merger Charge"), coincident to the Company's April 1997
merger with PHH Corporation ("PHH).
Cendant Merger Charge. Cumulative payments of $309.5 and non-cash
write-offs of $208.3 million were recorded against the Cendant Merger
Charge through the first quarter of 1998. The remaining merger-related
costs and other unusual charges, associated with the Cendant Merger, will
be substantially completed during 1998. Operating results from activities
that will not be continued are not material to the results of operations of
the Company.
PHH Merger Charge. The Company anticipates that approximately $236.0
million will be paid in cash in connection with the PHH Merger Charge of
which cumulative payments were $171.2 million through March 31, 1998.
The remaining cost associated with the PHH Merger Charge will be
substantially completed in the second quarter of 1998. Operating results
from PHH activities that will not be continued are not material to
the results of operations of the Company.
6. Investment in Avis Rent A Car, Inc.
The Company's equity interest in Avis Rent A Car, Inc. ("Avis ") was
diluted from 27.5% to 20.4% as a result of a public offering by Avis of its
common stock in March 1998 in which the Company sold a portion of its
investment in Avis. The Company recognized a pre-tax gain of approximately
$17.0 million as a result of the sale, which is included in other revenue
in the consolidated statement of income for the three months ended March
31, 1998.
7. Credit Agreements
On March 25, 1998, the Company entered into a $500 million credit agreement
with a bank, which matures on June 15, 1998, and on April 17, 1998, the
Company entered into a $500 million credit agreement with a bank which
matures on July 31, 1998. Such credit agreements will terminate upon the
Company's execution of a $2 billion term loan facility for which it has
already received a commitment letter from a bank. See "Subsequent Events
Financing Transactions."
8. Mandatorily Redeemable Preferred Securities Issued by Subsidiaries
On March 2, 1998, the Company issued 29.9 million FELINE PRIDES(sm) and 2.3
million trust preferred securities and received approximately $1.4 billion
in gross proceeds therefrom. The FELINE PRIDES(sm) consist of 27.6 million
Income PRIDES and 2.3 million Growth PRIDES, each with a face amount of $50
per PRIDE. The Income PRIDES consist of trust preferred securities and
stock purchase contracts under which the holders will purchase common stock
from the Company in February 2001. The Growth PRIDES consist of stock
purchase contracts under which the holders will purchase common stock from
the Company in February 2001 and zero coupon U.S. Treasury securities. The
trust preferred securities will bear interest, in the form of preferred
stock dividends, at the annual rate of 6.45 percent. Such preferred stock
dividends are presented as minority interest, net of tax in the
consolidated statements of income. The forward purchase contract forming a
part of the Income PRIDES will pay 1.05 percent annually in the form of a
contract adjustment payment. The forward purchase contract forming a part
of the Growth PRIDES will pay 1.3 percent annually in the form of a
contract adjustment payment. The forward purchase contracts call for the
holder to purchase the minimum of 1.0395 shares and a maximum of 1.3514
shares of Company common stock per PRIDES security, depending upon the
average of the closing price per share of Company common stock for a 20
consecutive day period ending in mid-February of 2001.
9. Pending Acquisition of American Bankers Insurance Group, Inc.
On March 23, 1998, the Company entered into a definitive agreement to
acquire American Bankers Insurance Group, Inc. ("American Bankers") for $67
per share in cash and stock, for aggregate consideration of approximately
$3.1 billion. The Company intends to purchase 23.5 million shares of
American Bankers at $67 per share through its pending cash tender offer, to
be followed by a merger in which the Company will deliver Cendant shares
with a value of $67 for each remaining share of American Bankers common
stock outstanding. The Company has received anti-trust clearance to acquire
American Bankers. The tender offer is subject to the receipt of tenders
representing at least 51 percent of the common shares of American Bankers
as well as customary closing conditions. The transaction is expected to be
completed following the restatement of the Company's
financial statements, receipt of and approval by American Bankers'
shareholders and receipt of required regulatory approvals, which require
restated financial statements. American Bankers provides
affordable, specialty insurance products and services through financial
institutions, retailers and other entities offering consumer financing.
In connection with the Company's proposal to acquire American Bankers, on
January 23, 1998, the Company received a bank commitment to provide a $1.5
billion, 364-day revolving credit facility which will bear interest, at the
option of the Company, at rates based on prime rates, as defined, or LIBOR
plus an applicable variable margin.
10. Subsequent Events
Acquisition of National Parking Corporation
On April 27, 1998, the Company completed the acquisition of National
Parking Corporation ("NPC") for $1.3 billion in cash. NPC is the largest
private (non-municipal) single car park operator in the United Kingdom
("UK") with approximately 500 locations. NPC has also developed a
broad-based roadside assistance group under the name of Green Flag. Green
Flag offers a wide-range of emergency support and rescue services to
approximately 3.5 million members.
Pending Acquisition of RAC Motoring Services
On May 1, 1998, the Company signed a letter of intent and entered into
exclusive negotiations with Royal Automobile Club Limited ("RACL") to
acquire their RAC Motoring Services subsidiary for approximately $750
million in cash. Closing is subject to the execution of a definitive
agreement and approval by seventy-five percent of RACL's voting members and
is anticipated in the summer of 1998. RAC Motoring Services is the
second-largest roadside assistance company in the UK and also owns the UK's
largest driving school company.
Financing Transactions
Credit Facility. On May 4, 1998, the Company and a bank executed a
commitment letter in which the bank committed to provide a $2 billion term
loan facility to the Company. Such commitment is subject to certain
conditions, including the execution of definitive documentation.
Redemption of 4-3/4% Notes. On May 4, 1998, the Company redeemed all of the
outstanding ($144.5 million principal amount) 4-3/4% Convertible Senior
Notes at a price of 103.393% of the principal amount together with interest
accrued to the redemption date. Prior to May 4, 1998, holders of such notes
exchanged $90.5 million of the 4-3/4% Notes for 2.5 million shares of
Company common stock.
Redemption of 6-1/2% Notes. The Company exercised its option to call for
the redemption of all the outstanding 6-1/2% Convertible Subordinated Notes
(the "6-1/2% Notes") which was effective May 8, 1998, in accordance with
the provisions of the respective indenture. Prior to the redemption date,
all of the outstanding 6-1/2% Notes were converted into 2.1 million shares
of Company common stock.
Company Restatement, Investigation and Litigation
On April 15, 1998, the Company announced that it had discovered accounting
irregularities in certain former CUC business units, which are part of the
Company's Alliance Marketing segment (formerly the Membership segment) and
the Audit Committee of the Company's Board of Directors has initiated an
investigation into such matters. Accordingly, the Company will restate
annual and quarterly net income and earnings per share for 1997 and may
restate certain other previous periods related to the former CUC
businesses. The investigation is expected to be completed during the summer
of 1998.
Since the aforementioned Company announcement, and prior to the date
hereof, fifty-two purported class action lawsuits have been filed against
the Company, its predecessor, CUC, and certain current and former officers
and directors of the Company and CUC asserting claims under the Federal
Securities law. Forty-five of these actions were filed in the United States
District Court for the District of New Jersey, five were filed in the
United States District Court for the District of Connecticut, one was filed
in the United States District Court for the Eastern District of
Pennsylvania and one has been filed in New Jersey Supreme Court.
Certain of these actions purport to be brought on behalf of purchasers of
CUC or the Company's common stock during various periods from May 28, 1997
through April 15, 1998. Others are brought on behalf of persons who
exchanged common stock of HFS for the Company's common stock coincident
with the Cendant Merger. In addition, five actions pending in the United
States District Court for the District of New Jersey and one action pending
in New Jersey Superior Court purport to be brought either in their entirety
or in part on behalf of purchasers of the Company's PRIDES securities
offering. These actions were all commenced subsequent to the aforementioned
Company announcement. The complaints allege, among other things, that as a
result of accounting irregularities, the Company and CUC's previously
issued financial statements were materially false and misleading and that
the defendants knew or should have known that these financial statements
caused CUC's and the Company's common stock prices to rise artificially.
The actions variously allege violations of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5 promulgated
thereunder, Section 14(a) of the Exchange Act and SEC Rule 14a-9
promulgated thereunder, Section 20(a) of the Exchange Act, and Sections 11,
12 and 15 of the Securities Act of 1933. Certain actions also allege
violations of common law.
In addition, on April 27, 1998, a shareholder derivative complaint was
filed in the United States District Court for The District of New Jersey
against certain of the Company's directors, current or former officers, The
Bear Stearns Companies, Inc., Bear Stearns & Co., Inc. and, as a nominal
party, the Company. The shareholder derivative complaint alleges that
individual officers and directors of the Company have unlawfully profited
by selling shares of the Company's stock while in possession of non-public
material information concerning accounting irregularities. The complaint
also alleges various breaches of fiduciary duty, mismanagement, negligence
and corporate waste.
Another action was filed on April 29, 1998 in the Court of Chancery for the
State of Delaware (the "Corwin Action"). The Corwin Action is purportedly
brought on behalf of a class of all shareholders of HFS who exchanged their
HFS shares for CUC shares in connection with the Cendant Merger, and names
as defendants HFS and twelve individuals who were directors of HFS. The
complaint in the Corwin Action alleges that the defendants breached their
fiduciary duties of loyalty, good faith, care and candor in connection with
the Cendant Merger, in that they failed to properly investigate the
operations and financial statements of CUC before approving the Cendant
Merger at an allegedly inadequate price. The Corwin Action seeks, among
other things, recision of the Cendant Merger and compensation for all
losses and damages suffered in connection therewith.
Another action was filed on May 4, 1998 in the Superior Court of New
Jersey, Morris County (the "Rosenberg action"). The action is brought as a
purported class action on behalf of all purchasers of Income PRIDES, Growth
PRIDES, stock or any other securities issued by Cendant pursuant to the
registration statement and prospectus filed with the SEC on or about
February 25, 1998. The purported class period is February 25, 1998 to April
15, 1998. The Rosenberg action names as defendants, Cendant, Cendant
Capital I, E. Kirk Shelton and Walter A. Forbes. The complaint asserts that
the registration statement and prospectus were false and misleading in
violation of Section 11 of the Securities Act of 1933. It seeks damages in
an unspecified amount.
While it is not feasible to predict or determine the final outcome of these
proceedings, an adverse outcome with respect to such proceedings could have
a material adverse impact on the Company's financial position, results of
operations and cash flow.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General Overview
In December 1997, Cendant Corporation (the "Company") was created through the
merger (the "Cendant Merger") of HFS Incorporated ("HFS") and CUC International
Inc. ("CUC"). The Company is one of the foremost consumer and business services
companies in the world. The combination of HFS and CUC provides each of the
Company's businesses new access to consumer contacts through the Company's
expanded customer base, while providing such businesses with the
technology-driven and direct marketing expertise necessary to successfully
cross-market within its existing business units.
The Company provides fee-based services to consumers within the Alliance
Marketing, Travel Services and Real Estate Services business segments. The
Company generally does not own the assets or share the risks associated with the
underlying businesses of its customers. In the Alliance Marketing segment
(formerly known as the Membership segment), the Company is a technology-driven
leading provider of membership-based consumer services. In the Travel Services
segment, the Company is the world's largest franchisor of lodging facilities and
rental car facilities, the leading provider of vacation timeshare exchange
services and a leading provider of international fleet management services. In
the Real Estate Services segment, the Company is the world's largest franchisor
of residential real estate brokerage offices, the world's largest provider of
corporate relocation services and a leading mortgage lender in the United
States.
Recent Developments
On April 15, 1998, the Company announced that it had discovered accounting
irregularities in certain former CUC business units, which now comprise part of
the Company's Alliance Marketing segment. The Company also announced that the
Audit Committee of the Company's Board of Directors had initiated an
investigation into such matters. Accordingly, the Company will restate annual
and quarterly net income and earnings per share for 1997 and may restate
financial statements for periods prior to 1997. The investigation is expected to
be completed during the summer of 1998.
Since the aforementioned Company announcement, and prior to the date hereof,
fifty-two purported class action lawsuits have been filed against the Company,
its predecessor, CUC, and certain current and former officers and directors of
the Company and CUC asserting claims under the Federal Securities law.
Forty-five of these actions were filed in the United States District Court for
the District of New Jersey, five were filed in the United States District Court
for the District of Connecticut, one was filed in the United States District
Court for the Eastern District of Pennsylvania and one has been filed in New
Jersey Supreme Court.
Certain of these actions purport to be brought on behalf of purchasers of CUC
or the Company's common stock during various periods from May 28, 1997 through
April 15, 1998. Others are brought on behalf of persons who exchanged common
stock of HFS for the Company's common stock coincident with the Cendant Merger.
In addition, five actions pending in the United States District Court for the
District of New Jersey and one action pending in New Jersey Superior Court
purport to be brought either in their entirety or in part on behalf of
purchasers of the Company's PRIDES securities offering. These actions were all
commenced subsequent to the aforementioned Company announcement. The complaints
allege, among other things, that as a result of accounting irregularities, the
Company and CUC's previously issued financial statements were materially false
and misleading and that the defendants knew or should have known that these
financial statements caused CUC's and the Company's common stock prices to rise
artificially. The actions variously allege violations of Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5
promulgated thereunder, Section 14(a) of the Exchange Act and SEC Rule 14a-9
promulgated thereunder, Section 20(a) of the Exchange Act, and Sections 11, 12
and 15 of the Securities Act of 1933. Certain actions also allege violations of
common law.
In addition, on April 27, 1998, a shareholder derivative complaint was filed in
the United States District Court for The District of New Jersey against certain
of the Company's directors, current or former officers, The Bear Stearns
Companies, Inc., Bear Stearns & Co., Inc. and, as a nominal party, the Company.
The shareholder derivative complaint alleges that individual officers and
directors of the Company have unlawfully profited by selling shares of the
Company's stock while in possession of non-public material information
concerning accounting irregularities. The complaint also alleges various
breaches of fiduciary duty, mismanagement, negligence and corporate waste.
Another action was filed on April 29, 1998 in the Court of Chancery for the
State of Delaware (the "Corwin Action"). The Corwin Action is purportedly
brought on behalf of a class of all shareholders of HFS who exchanged their HFS
shares for CUC shares in connection with the Cendant Merger, and names as
defendants HFS and twelve individuals who were directors of HFS. The complaint
in the Corwin Action alleges that the defendants breached their fiduciary duties
of loyalty, good faith, care and candor in connection with the Cendant Merger,
in that they failed to properly investigate the operations and financial
statements of CUC before approving the Cendant Merger at an allegedly inadequate
price. The Corwin Action seeks, among other things, recision of the Cendant
Merger and compensation for all losses and damages suffered in connection
therewith.
Another action was filed on May 4, 1998 in the Superior Court of New Jersey,
Morris County (the "Rosenberg action"). The action is brought as a purported
class action on behalf of all purchasers of Income PRIDES, Growth PRIDES, stock
or any other securities issued by Cendant pursuant to the registration statement
and prospectus filed with the SEC on or about February 25, 1998. The purported
class period is February 25, 1998 to April 15, 1998. The Rosenberg action names
as defendants, Cendant, Cendant Capital I, E. Kirk Shelton and Walter A. Forbes.
The complaint asserts that the registration statement and prospectus were false
and misleading in violation of Section 11 of the Securities Act of 1933. It
seeks damages in an unspecified amount.
While it is not feasible to predict or determine the final outcome of these
proceedings, an adverse outcome with respect to such proceedings could have a
material adverse impact on the Company's financial position, results of
operations and cash flow.
Results of Operations - Three Months Ended March 31, 1998 vs Three Months
Ended March 31, 1997
The results of the aforementioned investigation by the Audit Committee of the
Company's Board of Directors into the accounting irregularities may impact the
underlying Alliance Marketing segment first quarter 1998 operating results,
although management does not expect such charges to be material. Previously
reported quarterly and annual results, including the underlying first quarter
1997 financial information will require restatement. In the underlying results
of operations discussion related to the Company and its business segments,
operating income excludes interest expense and income taxes.
Indicative of the Company's operating leverage, net income increased $63.6
million (38%) to $229.5 million, while net revenue increased $278.6 million
(24%) to $1.4 billion. Operating income increased $101.5 million (35%) to $391.9
million.
The $11.1 million (90%) increase in net interest expense was primarily
attributable to borrowings under revolving credit facilities which financed $1.1
billion of first quarter 1998 acquisitions, including Jackson Hewitt and The
Harpur Group. The weighted average effective interest rate decreased from 6.0%
to 5.3% as a result of fixed rate borrowings with low interest rates comprising
the majority of total debt outstanding. The Company's effective income tax rate
decreased from 40% to 36% as a result of the impact of lower tax rates in
international jurisdictions, lesser non-deductible amortization expense as a
percentage of pre-tax income and other tax planning initiatives.
Alliance Marketing Segment
The Alliance Marketing Segment provides consumers with access to a variety of
goods and services through more than 20 membership programs. The Company
generates revenue streams from the sale of 1 to 3 year membership programs.
Total memberships and customers at March 31, 1998 exceeded 70 million, making
the Company the largest consumer alliance marketing business worldwide.
Alliance Marketing growth is generated primarily from direct marketing to
consumers or reaching consumers through businesses such as banks, credit card
and travel companies that provide access to new members as a service enhancement
to their customers. Commencing with the Cendant Merger, alliance marketing
businesses have unfettered access to the Company's Travel Segment businesses
that account for 1 of 6 U.S. hotel rooms sold, 1 of 4 cars rented in the U.S.
and more than 70% of timeshare resort vacation exchanges worldwide. Membership
businesses also have access to real estate businesses that participate in more
than 25% of U.S. home sales, more than 50% of corporate employee relocations and
home buyers underlying nearly $20 billion of annual mortgage originations.
(In millions) Three Months Ended March 31,
Operating income 1998 1997 Variance
---------------- ------------- ------------ ---------
Net revenue $ 520.9 $ 438.2 19%
Operating expenses 434.7 336.7 29%
------------- ------------
Operating income $ 86.2 $ 101.5 (15%)
============= ============
Operating income decreased $15.3 million (15%) from $101.5 million in 1997. 1997
results included the impact of accounting irregularities in certain former CUC
business units which comprise the Alliance Marketing segment representing 22% of
first quarter 1998 operating income. Upon completion of the special
investigation directed by the Audit Committee of the Company's Board of
Directors, the Company will restate first quarter 1997 and full year 1997
earnings. Management believes that 1998 first quarter results were compiled in
accordance with appropriate accounting practices, and reflect the elimination of
known historical accounting irregularities currently under investigation by the
Audit Committee of the Company's Board of Directors. First quarter 1998 results
indicate operating margins including and excluding depreciation and amortization
expense approximating 17% and 19%, respectively.
Travel Services Segment
The Company operates business units that provide a spectrum of services
necessary to domestic and international travelers. The Company is the world's
largest franchisor of nationally recognized hotel brands and car rental
operations (Avis), which are responsible for 16% and 25% of all hotel rooms sold
and cars rented in the United States, respectively. Royalty revenue is received
from franchisees under contracts that generally range from 10 to 50 years in
duration. The Company is the world's largest provider of timeshare exchange
services (RCI) to timeshare owners under one to three year membership programs
which require both exchange fees for swapping vacation weeks and recurring and
renewal membership fees. Travelers that may or may not participate in the above
cross-marketed services frequently receive Value-Added Tax ("VAT") refunds from
international countries through Global Refund (TM), the largest
VAT refund facilitator worldwide. Travel Services operating units also provide
fleet management and leasing services and assist vehicle sales through the
largest consolidated classified advertiser worldwide.
(In millions) Three Months Ended March 31,
Operating income 1998 1997 Variance
---------------- ----------- ----------- ---------
Net revenue $ 410.5 $ 362.0 13%
Operating expenses 257.3 244.1 5%
----------- -----------
Operating income $ 153.2 $ 117.9 30%
========== ===========
Operating income increased $35.3 million (30%) as a result of a $48.5 (13%)
increase in revenue while expenses increased only $13.2 million (5%). All
business units comprising the Travel segment contributed double digit growth in
operating income except for ETS which comprised less than 2% of Travel Segment
operating income. Lodging operating income increased $8.2 million (23%) as a
result of a $4.8 million revenue increase and a $3.4 million reduction in
expenses. The revenue increase resulted from a 2% increase in franchisee revenue
per available room ("REVPAR") and a 2% royalty rate increase as well as
increased initial franchise fees received from new franchisees seeking to join
Company franchise systems. Expenses decreased due to lower amortization expense
corresponding to a reduction of intangible assets as part of the fourth quarter
1997 restructuring of franchise brands and a reduction of corporate overhead
allocated to the Travel Services segment as the Company leveraged its corporate
infrastructure among more businesses.
The $13.0 million (66%) increase in Timeshare operating income resulted from a
$12.6 million (13%) increase in revenue and a $0.5 million reduction in
expenses. The Timeshare revenue increase included continued increases in both
exchange volume and membership (6%) as well as average pricing (2%). The
decrease in expenses reflect continued benefits of the post acquisition
reorganization of timeshare operations. Car rental operating income increased
$10.0 million (65%) as a result of international trademark license fees and
increased royalties from Avis, which include acquired Los Angeles, California
area franchised locations in 1998. Avis franchisees also experienced a 6%
increase in car rental pricing. Fleet Management operating income increased $5.6
million primarily as a result of $3.6 million of reduced expenses primarily
associated with the restructuring of operations following the Company's May 1,
1997 merger with PHH Corporation.
Real Estate Services Segment
The Company operates business units that provide a range of services related to
home sales, principally in the United States. The Company is the world's largest
franchisor of real estate brokerage offices through its CENTURY 21(C), Coldwell
Banker(C) and ERA(C) franchise brands, which were involved in more than 25% of
homes sold in the United States in 1997. Similar to the Travel Services Segment
franchise business, the Company receives royalty revenue from approximately
11,000 franchisees under contracts with terms ranging from 5 to 30 years. The
Company operates the world's largest provider of corporate employee relocation
services and receives fees for providing services such as selling relocating
employees homes (without recourse to the Company), assisting the relocating
employee in finding a home or providing an array of services such as moving
household goods, expense reporting and others. The Company also operates the
largest in-bound mortgage telemarketing operation in the United States. Cendant
Mortgage Corporation generates origination profits from the sale of mortgage
notes, generally within 45 days of origination but retains recurring servicing
revenue streams over the life of the mortgage. Each Real Estate Services
business provides customer referrals from other Real Estate Services businesses
as well as fertile data-base for prospective Alliance Marketing Segment
cross-selling.
(In millions)
Three Months Ended March 31,
Operating income 1998 1997 Variance
---------------- ---------- ----------- ----------
Net revenue 279.1 $ 190.1 47%
Operating expenses 172.2 140.3 23%
---------- -----------
Operating income $ 106.9 $ 49.8 115%
======== ============
Operating income increased $57.1 million (115%) as a result of corresponding
double digit increases in the Real Estate franchise, Relocation and Mortgage
Service business unit. Revenue increased $89.0 million (47%) while expenses
increased only $31.9 million (23%). Real estate franchise operating income grew
$26.4 million (134%) primarily as a result of a $22.8 million increase in
royalty revenue. The increase in royalty revenue was attributable to a 21%
increase in franchisee home sales volume and a 14% increase in the underlying
average sale price of homes sold. The Company relocation services business
operating income increased $10.5 million (75%) primarily as a result of $6.5
million of incremental home sale assistance fees (13% increase) and a $2.2
million increase in other relocation service fees. Operating income at the
Mortgage Service business unit increased $22.9 million (179%) due to a $2.8
billion (159%) increase in mortgage originations and a $5.8 billion (23%)
increase in the average loan servicing portfolio. These factors contributed to
$34.5 million and $9.0 million increases in production and service fee revenue,
respectively, while operating expenses reflecting the increase in loan
origination volume increased only $21.5 million (103%).
Other Segment
The Company operates a variety of other businesses, other than those which
comprise each of the Company's core business segments. Such business operations
and transactions are primarily comprised of (i) the development and sale of
educational and entertainment software for home and school use; (ii) franchising
the second largest tax preparation service system in the United States as a
result of the Company's first quarter 1998 acquisition of Jackson Hewitt, Inc.;
(iii) information technology and reservation system support services provided to
the car rental and hotel industry (the "Wizcom Business"); (iv) casino credit
information and marketing services (the "Casino Marketing Business") and the
equity in earnings from the Company's investment in the Avis Rent A Car Inc.
("Avis") car rental company.
(In millions)
Three Months Ended March 31,
Operating income 1998 1997 Variance
- ---------------- --------- ----------- -----------
Net revenues $ 226.1 $ 167.7 35%
Operating expenses 180.5 146.5 23%
--------- ------------
Operating income $ 45.6 $ 21.2 115%
========= ============
Operating income increased $24.4 million (115%) primarily as a result of $27.5
million of profits from acquired Jackson Hewitt operations and a $17.5 million
pre-tax gain on the sale of Avis common stock in Avis' March secondary offering.
Increases in operating income were partially offset by a $28.9 decrease in
operating income generated from software business operations. Delayed release of
the Starcraft entertainment title until April 1998 and the January 1997 release
of titles scheduled for December 1996 contributed to the decrease in operating
income. Software company amortization expense increased $3.0 million as a result
of goodwill amortization associated with purchase business combinations.
Liquidity and Capital Resources
Acquisition Overview
The Company continues to seek to expand and strengthen its leadership position
in each of its business segments with strategic acquisitions. The Company's
acquired businesses share similar characteristics, foremost of which is that
each was immediately accretive to Company cash flow and earnings. Revenue is
generally generated substantially from service fees and is not dependent on
tangible assets or the need for capital expenditures other than certain
technology investments. These service businesses each generate significant cash
flow which is enhanced by the Company's operating leverage that supports
acquired revenue streams without corresponding increases in operating
infrastructure expenses.
Completed and Proposed Acquisitions
RAC Motoring Services. On May 1, 1998, the Company signed a letter of intent and
entered into exclusive negotiations with Royal Automobile Club Limited ("RACL")
to acquire their RAC Motoring Services subsidiary for approximately $750 million
in cash. Closing is subject to approval by seventy-five percent of RACL's voting
members and is anticipated in the summer of 1998. RAC Motoring Services is the
second-largest roadside assistance company in the United Kingdom ("UK") and also
owns the UK's largest driving school company.
National Parking Corporation. On April 27, 1998, the Company acquired National
Parking Corporation ("NPC") for $1.3 billion in cash. NPC is the largest private
(non-municipal) single car park operator in the UK with approximately 500
locations. NPC has also developed a broad-based roadside assistance group under
the name of Green Flag. Green Flag offers a wide-range of emergency support and
rescue services to approximately 3.5 million members.
American Bankers Insurance Group, Inc. On March 23, 1998, the Company entered
into a definitive agreement to acquire American Bankers Insurance Group, Inc.
("American Bankers") for $67 per share in cash and stock, for aggregate
consideration of approximately $3.1 billion. The Company intends to purchase
23.5 million shares of American Bankers at $67 per share through its pending
cash tender offer, to be followed by a merger in which the Company will deliver
Cendant shares with a value of $67 for each remaining share of American Bankers
common stock outstanding. The Company has received anti-trust clearance to
acquire American Bankers. The tender offer is subject to the receipt of tenders
representing at least 51 percent of the common shares of American Bankers as
well as customary closing conditions, including regulatory approvals. The
transaction is expected to be completed following the restatement of the
Company's financial statements, receipt of approval of American Bankers'
shareholders and receipt of regulatory approvals. American Bankers provides
affordable, specialty insurance products and services through financial
institutions, retailers and other entities offering consumer financing.
In connection with the company's proposal to acquire American Bankers, on
January 23, 1998, the Company received a bank commitment to provide a $1.5
billion, 364-day revolving credit facility which will bear interest, at the
option of the Company, at rates based on Prime or LIBOR plus an applicable
variable margin.
Harpur Group. On January 20, 1998, the Company completed the acquisition of The
Harpur Group Ltd. ("Harpur"), a leading fuel card and vehicle management company
in the UK, from privately held H-G Holdings, Inc. for approximately $186.0
million in cash plus future contingent payments of up to $20.0 million over the
next two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition of
Jackson Hewitt Inc. ("Jackson Hewitt") for approximately $480.0 million in cash
or $68 per share of Jackson Hewitt common stock. Jackson Hewitt operates the
second largest tax preparation service franchise system in the United States
with locations in 41 states. Jackson Hewitt franchises a system of approximately
2,050 offices that specialize in computerized preparation of federal and state
individual income tax returns.
Other Completed 1998 Acquisitions. The Company paid cash to acquire certain
other entities and assets for an aggregate purchase price of approximately
$378.7 million in cash. Additionally during the first quarter of 1998, the
Company paid $100.0 million to the seller of RCI in satisfaction of a contingent
purchase liability.
Providian. On December 9, 1997, the Company executed a definitive agreement to
acquire Providian Auto and Home Insurance Company for approximately $219.0
million in cash. Closing is subject to receipt of required regulatory approval
which will require restated financial statements of the Company and other
customary conditions. Providian sells automobile insurance to consumers through
direct response marketing in 45 states and the District of Columbia.
Financing (Exclusive of Management and Mortgage Program Financing)
The Company believes that it has excellent liquidity and access to liquidity
through various sources. The Company has also demonstrated its ability to access
equity and public debt markets and financial institutions to generate capital
for strategic acquisitions. The Company is unable to access equity and public
debt markets until the completion of the restatement of its prior year financial
statements. Accordingly, the Company has secured additional liquidity through
other sources including a 364-day, $2 billion term loan facility which will be
provided to the Company on May 29, 1998, pursuant to bank commitments received
in May 1998. Such commitments are subject to certain conditions, including the
execution of definitive documentation. Proceeds will repay $2.0 billion of
borrowings under existing Company revolving credit facilities and accordingly,
create $2.0 billion of availability under the revolving credit facilities.
Current Company committed revolving credit facilities include $4.5 billion of
parent company arrangements and $175.0 million of subsidiary credit facilities.
Revolving Credit facilities totaling $1.0 billion will terminate upon the
execution of the $2.0 billion term loan anticipated on May 29, 1998. Revolving
credit facilities include a bank commitment to provide a $1.5 billion 364 day
revolving facility which is available to fund the American Bankers acquisition
upon consummation. Additionally, the Company may also seek to access public debt
markets through a wholly-owned subsidiary.
The Company's primary credit facility, as amended, consists of (i) a $750.0
million, five year revolving credit facility (the "Five Year Revolving Credit
Facility") and (ii) a $1.25 billion, 364 day revolving credit facility (the "364
Day Revolving Credit Facility") and collectively with the Five Year Revolving
Credit Facility, (the "Revolving Credit Facilities"). The 364 Day Revolving
Credit Facility will mature on September 30, 1998 but may be renewed on an
annual basis for an additional 364 days upon receiving lender approval. The Five
Year Revolving Credit Facility will mature on October 1, 2001. The Revolving
Credit Facilities, at the option of the Company, bear interest based on
competitive bids of lenders participating in the facilities, at prime rates or
at LIBOR plus a margin of approximately 22 basis points. The Company is required
to pay a per annum facility fee of .08% and .06% of the average daily
availability of the Five Year Revolving Credit Facility and 364 Day Revolving
Credit Facility, respectively. The interest rates and facility fees are subject
to change based upon credit ratings on the Company's senior unsecured long-term
debt by nationally recognized statistical rating companies. The Revolving Credit
Facilities contain certain restrictive covenants including restrictions on
indebtedness, mergers, liquidations and sale and leaseback transactions and
requires the maintenance of certain financial ratios, including a 3:1 minimum
interest coverage ratio and a 3.5:1 maximum coverage ratio, as defined.
Company long-term debt was $1.1 billion at March 31, 1998, which primarily
consisted of $70.0 million of borrowings under the Company's primary revolving
credit facilities and $933.1 million of primarily publicly issued fixed rate
debt. Substantially all borrowings under the Company's primary revolving credit
facilities of $1.1 billion in the first quarter 1998, which financed the Jackson
Hewitt, Harpur and other transactions, were completely repaid in March 1998 with
the proceeds of the Company's FELINE PRIDES Offering (see below). Of the $933.1
million of fixed rate debt, $783.2 million represents publicly issued
convertible securities which mature beginning in 2001 but may be redeemed in
part and under certain conditions commencing in 1998. Approximately $149.9
million of senior notes mature in December 1998.
The Company filed an amended shelf registration statement (the "Shelf
Registration Statement") on February 6, 1998 with the Securities and Exchange
Commission for the issuance of up to an aggregate $4.0 billion of debt and
equity securities. Pursuant to the Shelf Registration Statement, the Company
issued 29.9 million FELINE PRIDES(sm) and 2.3 million trust preferred securities
on March 2, 1998 and received approximately $1.4 billion in gross proceeds
therefrom. The issuance of the FELINE PRIDES resulted in the utilization of
approximately $3 billion of availability under the Shelf Registration Statement.
The FELINE PRIDES consist of 27.6 million Income PRIDES and 2.3 million Growth
PRIDES, each with a face amount of $50 per PRIDE. The Income PRIDES consist of
trust securities and stock purchase contracts under which the holders will
purchase common stock from the Company in February of 2001. The Growth PRIDES
consist of stock purchase contracts under which the holders will purchase common
stock from the Company in February 2001 and zero coupon U.S. Treasury
securities. The trust preferred securities will bear interest at the annual rate
of 6.45 percent, and the forward purchase contract forming a part of the Income
PRIDES will pay 1.05 percent annually in the form of a contract adjustment
payment. The forward purchase contract forming a part of the Growth PRIDES will
pay 1.3 percent annually in the for of a contract adjustment payment. The
forward purchase contracts call for the holder to purchase a minimum of 1.0395
shares and a maximum of 1.3514 shares of the Company common stock per PRIDES
security, depending upon the average of the closing price per share of Company
common stock for a 20 consecutive trading day period ending in mid-February of
2001.
On May 4, 1998, the Company redeemed all of the outstanding ($144.5 million
principal amount) of 4-3/4 Convertible Notes at a price of 103.393% of the
principal amount together with interest accrued to the redemption date. Prior to
May 4, 1998, $90.5 million of such notes were exchanged for 2.5 million shares
of Company common stock.
The Company exercised its option to call for the redemption of all of the
outstanding 6-1/2% Convertible Subordinated Notes (the "6-1/2% Notes") which was
effective May 8, 1998, in accordance with the provisions of the respective
indenture. Prior to the redemption date, all of the outstanding 6-1/2% Notes
were converted into 2.1 million shares of Company common stock.
Long-term debt decreased $241.9 million to $1.1 billion at March 31, 1998 when
compared to amounts outstanding at December 31, 1997, primarily as a result of a
decrease in borrowings from the Company's primary revolving facilities as a
result of the issuance of the FELINE PRIDES.
Management and Mortgage Program Financing
PHH operates their mortgage services, fleet management services and relocation
services businesses as a separate public reporting entity and supports purchases
of leased vehicles and originated mortgages primarily by issuing commercial
paper and medium term notes. PHH's publicly filed financial statements and
underlying publicly issued debt was not impacted by the accounting
irregularities previously disclosed and PHH continues to issue debt securities
in public markets. Such borrowings are not classified based on contractual
maturities, but rather are included in liabilities under management and mortgage
programs rather than long-term debt since such debt corresponds directly with
high quality related assets.
PHH debt is issued without recourse to the Company. The Company expects to
continue to have broad access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing credit
standards to minimize credit risk and the potential for losses. Depending upon
asset growth and financial market conditions, PHH utilizes the United States,
European and Canadian commercial paper markets, as well as other cost-effective
short-term instruments. In addition, PHH will continue to utilize the public and
private debt markets as sources of financing. Augmenting these sources, PHH will
continue to manage outstanding debt with the potential sale or transfer of
managed assets to third parties while retaining fee-related servicing
responsibility. PHH's aggregate outstanding borrowings at the underlying balance
sheet dates were as follows ($ billions):
March 31, December 31,
1998 1997
----------- ------------
Commercial paper $ 2.2 $ 2.6
Medium-term notes 3.4 2.7
Other 0.2 0.3
----------- -----------
$ 5.8 $ 5.6
=========== ===========
To provide additional financial flexibility, the Company's current policy is to
ensure that minimum committed facilities aggregate 80 percent of the average
amount of outstanding commercial paper. PHH maintains a $2.5 billion syndicated
unsecured credit facility which is backed by domestic and foreign banks and is
comprised of $1.25 billion of lines of credit maturing in 364 days and $1.25
billion maturing in the year 2000. In addition, PHH has approximately $181
million of uncommitted lines of credit with various financial institutions which
were unused at December 31, 1997. Management closely evaluates not only the
credit of the banks but also the terms of the various agreements to ensure
ongoing availability. The full amount of PHH's committed facilities in 1997 to
date are undrawn and available. Management believes that its current policy
provides adequate protection should volatility in the financial markets limit
PHH=s access to commercial paper or medium-term notes funding.
PHH minimizes its exposure to interest rate and liquidity risk by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities.
The Company and PHH currently operate under policies limiting (a) the payment of
dividends on PHH's capital stock to 40% of net income of PHH on an annual basis
excluding one-time charges, less the outstanding principal balance of loans from
PHH to the Company as of the date of the proposed dividend payment, and (b) the
outstanding principal balance of loans from PHH to the Company to 40% of net
income of PHH on an annual basis excluding one-time charges, less payment of
dividends on PHH's capital stock during the year.
PHH filed a shelf registration statement with the Securities and Exchange
Commission effective January 30, 1998, for the aggregate issuance of up to $3
billion of medium-term note debt securities. These securities may be offered
from time to time, together or separately, based on terms to be determined at
the time of sale. The proceeds will be used to finance assets PHH manages for
its clients and for general corporate purposes.
Credit Ratings
The Company's long-term debt credit ratings from S&P, Duff and Moody's remain at
A, A and A3, respectively, however, such ratings are being reviewed by such
agencies with negative implications following the Company's March 23, 1998
announcements relating to the Company's agreements to acquire American Bankers
and NPC and its April 15, 1998 announcement regarding accounting irregularities
discovered at certain former CUC business units. Following the Cendant Merger in
December 1997, S&P, Moody's and Fitch Investors Service, LP ("Fitch") affirmed
investment grade ratings to PHH debt of A+, A2 and A+, respectively and A1, P1
and F1, respectively to PHH commercial paper. Such ratings remain following the
April 15, 1998 announcement, however, with negative implications. Duff recently
assigned credit ratings of A+ and D1 to PHH debt and commercial paper,
respectively. A credit rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal at any time by the assigning
rating organization. Each rating should be evaluated independent of any other
rating.
Cash Flows
The Company generated $198.0 million of cash flows from operations in 1998,
representing a $218.0 million decrease from the same period in 1997. The
decrease in cash flows from operations was primarily due to $131.6 million of
merger-related payments in 1998 and a $192.3 million incremental increase in
mortgages held for sale associated with a 159% increase in mortgage loan
originations partially offset by increases in net income and depreciation and
amortization. The Company used $1.6 billion in cash flows from investing
activities, which consisted of $1.1 billion of acquisitions and
acquisition-related payments and $318.8 million of net investment in assets
under management and mortgage programs. Cash provided by financing activities of
$1.5 billion primarily reflects the issuance of the FELINE PRIDES.
Impact of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" effective for annual periods beginning after
December 15, 1997 and interim periods subsequent to the initial year of
application. SFAS No. 131 establishes standards for the way that public business
enterprises report information about their operating segments in their annual
and interim financial statements. It also requires public enterprises to
disclose company-wide information regarding products and services and the
geographic areas in which they operate. The Company will adopt SFAS No.
131 in 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pension and Other Postretirement Benefits" effective for period beginning after
December 15, 1997. The Company will adopt SFAS No. 132 effective for the 1998
calendar year end.
The aforementioned recently issued accounting pronouncements establish standards
for disclosures only and therefore will have no impact on the Company's
financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In recurring operations, the Company must deal with effects of changes in
interest rates and currency exchange rates. The following discussion presents an
overview of how such changes are managed and a view of their potential effects.
The Company uses various financial instruments, particularly interest rate and
currency swaps and currency forwards, to manage its respective interest rate and
currency risks. The Company is exclusively an end user of these instruments,
which are commonly referred to as derivatives. The Company does not engage in
trading, market-making or other speculative activities in the derivatives
markets. Established practices require that derivative financial instruments
relate to specific asset, liability or equity transactions or to currency
exposures.
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates and currency
exchange in their financial statements. Although the rules offer alternatives
for presenting this information, none of the alternatives is without
limitations. The following discussion is based on so-called "shock tests," which
model effects of interest rate and currency shifts on the reporting company.
Shock tests, while probably the most meaningful analysis permitted, are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to include the
extraordinarily complex market reactions that normally would arise from the
market shifts modeled. While the following results of shock tests for interest
rate and currencies may have some limited use as benchmarks, they should not be
viewed as forecasts.
One means of assessing exposure in interest rate changes is a duration-based
analysis that measures the potential loss in net earnings resulting from a
hypothetical 10% change (decrease) in interest rates across all maturities
(sometimes referred to as a "parallel shift in the yield curve"). Under this
model, it is estimated that, all else constant, such decrease would not
adversely impact the 1998 net earnings of the Company based on March 31, 1998
positions.
One means of assessing exposure to changes in currency exchange rates is to
model effects on future earnings using a sensitivity analysis. March 31, 1998
consolidated currency exposures, including financial instruments designated
and effective as hedges, were analyzed to identify the Company's assets and
liabilities denominated in other than their relevant functional currency. Net
unhedged exposures in each currency were then remeasured assuming a 10%
change (decrease) in currency exchange rates compared with the U.S. dollar.
Under this model, it is estimated that, all else constant, such a decrease
would not adversely impact the 1998 net earnings of the Company based on
March 31, 1998 positions.
The categories of primary market risk exposure of the Company are: (i) long-term
U.S. interest rates due to mortgage loan origination commitments and an
investment in mortgage loans held for resale; (ii) short-term interest rates as
they impact vehicle and relocation receivables; and (iii) LIBOR and commercial
paper interest rates due to their impact on variable rate borrowings.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The discussion contained under the heading "Company Restatement, Investigation
and Litigation" in Note 10 contained in Part 1 - FINANCIAL INFORMATION, Item 1 -
Financial Statements, is incorporated herein by reference.
ITEM 6. Exhibits and Reports On Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated January 14, 1998 reporting
in Item 5 the acquisition of Jackson Hewitt, Inc.
The Company filed a report on Form 8-K dated January 22, 1998 reporting in
Item 4 the change in principal independent accountants and in Item 5 the
acquisition of The Harpur Group Ltd.
The Company filed a report on Form 8-K dated January 27, 1998 reporting in
Item 5 the proposed acquisition of American Bankers Insurance Group, Inc.
("ABI") and certain supplemental financial highlights of the Company.
The Company filed a report on Form 8-K dated January 29, 1998 reporting in
Item 5 the supplemental consolidated financial statements and management's
discussion and analysis of financial condition and results of operations of the
Company.
The Company filed a report on Form 8-K dated February 4, 1998 reporting in
Item 5 financial results covering at least 30 days of post-merger combined
operations of the Company.
The Company filed a report on Form 8-K dated February 6, 1998 reporting in
Item 5 and Item 7 the filing of certain exhibits to be incorporated by reference
into the Company's registration statements.
The Company filed a report on Form 8-K dated February 17, 1998 reporting
in Item 5 and Item 7 the filing of certain exhibits to be incorporated by
reference into the Company's registration statements.
The Company filed a report on Form 8-K dated March 6, 1998 reporting in
Item 5 and Item 7 the offering by the Company of 29,900,000 FELINE PRIDES
and the filing of certain exhibits related thereto.
The Company filed a report on Form 8-K dated March 25, 1998 reporting in
Item 5 and Item 7 the execution of a definitive agreement to acquire ABI and the
filing of exhibits related thereto.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Cendant Corporation
By:
/s/ Scott E. Forbes
Scott E. Forbes
Executive Vice President
Date: May 15, 1998 and Chief Accounting Officer
EXHIBIT INDEX
Exhibit
No. Descriptions
5
1,000,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
259
0
1,692
0
0
2,716
0
0
16,527
1,691
1,106
0
0
9
4,886
16,527
0
1,437
0
1,045
0
0
23
369
134
234
0
0
0
234
0.27
0.26
