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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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July 14, 1998 (July 14, 1998)
(Date of Report (date of earliest event reported))
Cendant Corporation
(Exact name of Registrant as specified in its charter)
Delaware 1-10308 06-0918165
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification Number)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive office) (Zip Code)
(973) 428-9700
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if applicable)
Item 5. Other
On July 14, 1998, Cendant Corporation announced that it believes that accounting
irregularities at the former CUC International Inc. ("CUC") were greater than
those initially discovered by Cendant management in April of this year. In
addition, Cendant's investigation now confirms that accounting irregularities
existed in CUC's financial statements in years prior to 1997 and that, in
addition to 1997, 1996 and 1995 results will be restated to correct the
irregularities.
Cendant now believes its restatement will lower 1997 net income before
merger-related and one-time charges by 22 to 28 cents per share. On April 15,
Cendant made a preliminary estimate, pending completion of its investigation,
that the impact would be between 11 and 13 cents per share. Prior to any
restatement, Cendant reported 1997 earnings per share before one-time charges of
$1.00. Between 16 and 19 cents of the 22 and 28 cent 1997 impact of the
restatement will result from the correction of accounting irregularities.
The information set forth in the press release attached hereto as Exhibit 99.1
is incorporated herein by reference in its entirety.
Item 7. Exhibits
Exhibit
No. Description
99.1 Press Release: Cendant Revises Estimate of Accounting
Irregularities, dated July 14, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CENDANT CORPORATION
By: /s/ James E. Buckman
James E. Buckman
Senior Executive Vice President
and General Counsel
Date: July 14, 1998
CENDANT CORPORATION
CURRENT REPORT ON FORM 8-K
Report Dated July 14, 1998 (July 14, 1998)
EXHIBIT INDEX
Exhibit No. Description
99.1 Press Release: Cendant Revises Estimate of Accounting
Irregularities, dated July 14, 1998.
EXHIBIT 99.1
PRESS RELEASE
FOR IMMEDIATE RELEASE
CENDANT REVISES ESTIMATE OF ACCOUNTING IRREGULARITIES
Now Expects Restatement to Lower 1997 Net Income Before One-time Charges by 22
to 28 Cents Per Share
Restatements of 1996 and 1995 Results Expected
Restatement Also to Correct Accounting Errors Not Associated with
Irregularities
Reduced One-time Charges to Offset Impact of Irregularities:
Impact on 1997 Net Income After One-
time Charges Could Range Between No Impact
to a Reduction of Six Cents Per Share
Outlook for 1998 Earnings Revised Downward by Five to Six Cents Per Share
Parsippany, NJ and Stamford, CT, July 14, 1998 - Cendant Corporation (NYSE: CD)
announced today it believes that accounting irregularities at the former CUC
International ("CUC") were greater than those initially discovered by Cendant
management in April of this year. "We have now received evidence that for at
least the last three years the financial results of the former CUC reflected a
continuing program of false entries which misrepresented the financial
performance and condition of that company," said Michael P. Monaco, Vice
Chairman and Chief Financial Officer of Cendant.
"These accounting practices were widespread and systemic and affected the
accounting records of all the major business units of CUC," he continued.
"Information recently reported to us by independent investigators from Arthur
Andersen, confirmed by work done by Deloitte & Touche, led us to increase our
estimate of these accounting irregularities, which the Company and its auditors
define as accounting errors made with an intent to deceive.
"Our previous estimate of the irregularities, developed in April, relied heavily
on the mid-level CUC managers who helped us discover this problem," said Monaco.
"The newly discovered irregularities involve practices that were uncovered by
the subsequent investigation."
In addition, Cendant's investigation now confirms that accounting irregularities
existed in CUC's financial statements in years prior to 1997 and that in
addition to 1997, 1996 and 1995 results will be restated to correct
irregularities.
"Cendant's probe of CUC's financial records, while not finished, is
substantially complete," Monaco continued. "Arthur Andersen is expected to
provide a report to our Audit Committee in two weeks, and Cendant expects to
issue full restated and audited historical financial statements in early
August." Deloitte & Touche acts as principal independent accountants to Cendant
and has replaced Ernst & Young as the auditor of these historical statements.
Arthur Andersen's forensic audit was commissioned by Willkie Farr & Gallagher as
part of its overall investigation of the accounting irregularities on behalf of
the Audit Committee of the Cendant Board. The Audit Committee's report of that
investigation should be complete in August.
Cendant also continues to cooperate with the Securities and Exchange Commission
and the United States Attorney's office in Newark in their investigations of
these matters.
"The combined efforts of Cendant, Arthur Andersen and Deloitte & Touche have
delivered a level of accounting scrutiny several orders of magnitude greater
than that afforded by a normal audit process," said Monaco. "We are of course
outraged by these most recent findings. However, the length, breadth and depth
of the investigation ordered by our Board and management have now proven its
worth by uncovering additional systemic irregularities beyond those initially
discovered and immediately disclosed by Cendant management. We believe our
thoroughness will benefit our shareholders and help restore confidence in our
Company's prospects and financial results. Cendant continues to be a premier
franchise in the services industry whose earnings should approach one billion
dollars in 1998."
Accounting Irregularities
Cendant now believes its restatement will lower 1997 net income before
merger-related and one-time charges by 22 to 28 cents per share. On April 15,
Cendant made a preliminary estimate, pending completion of its investigation,
that the impact would be between 11 and 13 cents per share. Prior to any
restatement, Cendant reported 1997 earnings per share before one-time charges of
$1.00. Between 16 and 19 cents of the 22 to 28 cent 1997 impact of restatement
will result from the correction of accounting irregularities. Some of the most
significant irregularities now confirmed include:
Irregular charges against merger reserves. Operating results at the former CUC
business units were artificially boosted by recording fictitious revenues
through inappropriately reversing restructuring charge liabilities to
revenues. Many other irregularities were also generated by inappropriate
use of these reserves.
Falsecoding of services sold to customers. Significant revenues from members
purchasing long-term benefits were intentionally misclassified in
accounting records as revenue from shorter-term products. The falsely
recorded revenues generated higher levels of immediately recognized
revenues and profits for CUC.
Delayed recognition of cancellation of memberships and "charge-backs" (a
charge-back is a rejection by a credit card-issuing bank of a charge to a
member's credit card account). In addition to overstating revenues, these
delayed charges caused CUC's cash and working capital accounts to be
overstated.
Quarterly recording of fictitious revenues. Large amounts of accounts receivable
entries made in the first three quarters of 1997 were fabricated, had no
associated clients or customers and no associated sale of services. This
practice also occurred in 1996 and 1995.
Cendant expects to provide detailed information regarding all material CUC
irregular accounting practices when it releases its restated and re-audited
financial statements for the 1995-1997 period.
Accounting Errors
Cendant, working with Deloitte & Touche, has also discovered accounting errors
in CUC's financial records that are not classified as accounting irregularities.
Approximately six to nine cents per share of the total estimated restatement of
1997 earnings will result from the elimination of these errors. These accounting
errors include inappropriate useful lives for certain intangible assets, delayed
recognition of insurance claims, and use of accounting policies that do not
conform to generally accepted accounting principles. Cendant will revise the
revenue recognition policies at the former CUC's Entertainment Publications
subsidiary ("EPUB") to record revenue upon the sale of its coupon books. Past
practice was to defer and spread revenue over subsequent quarters. The impact of
these changes will substantially shift revenue and earnings from the first and
second quarters to the third and fourth quarters. While the full year 1998 will
not be affected by this accounting change, it will cause the Company to lower
recognized earnings for EPUB by approximately two cents per share in the first
quarter of 1998 and one cent in the second quarter of 1998. The third and fourth
quarters of 1998 are anticipated to benefit by an approximately similar
aggregate amount.
Cendant will also correct accounting practices associated with the recognition
of revenue, expenses and earnings for its Privacy Guard and certain other
individual membership businesses. CUC recognized revenue and earnings from these
memberships at the time of sale. In the future, Cendant will amortize revenues,
expenses and earnings over the twelve-month period after a member is charged his
or her full membership fee.
Finally, the Company will now accrue revenues and earnings associated with
individual memberships only after the Company bills a full membership fee
payment to its customer. The previous practice called for accruals to begin at
the time of sale, even if the sale was for a one-dollar three-month trial
period.
Reversal of Merger Charges
In addition, the Company anticipates that it will reverse a material portion
(currently estimated at $200 million after-tax) of the one-time merger and
unusual expense charge taken by CUC at the time of the merger that formed
Cendant at the end of 1997. Cendant also expects to reverse a portion of the
merger charges recognized by CUC International upon the acquisitions of Ideon
Group, Inc., Davidson & Associates, Inc. and Sierra On-Line, Inc. in 1996.
Cendant will reverse portions of these reserves because many of the initiatives
(and the associated costs) identified and reserved for have not materialized and
the reserve amounts originally established cannot be substantiated.
The total impact of the restatement on Cendant's net income after one-time
charges and its shareholders' equity will be relatively immaterial after
reversal of these merger charges. 1997 net income after one-time charges could
range between from no impact to a reduction of six cents. Cendant's
shareholder's equity at approximately $4.5 billion should be relatively
unaffected by the 1997 restatement.
Revision of 1998 Outlook
Cendant now expects 1998 earnings per share from continuing operations will be
five to six cents lower than previously expected. The individual membership
business will contribute the majority of this reduction. Monaco explained that
"in the course of our in-depth review of these businesses, we
have revised and refined our historical database of cancellation and charge-back
experience. In this business, revenues and earnings from membership assets are
accrued using accounting grids that calculate our financial benefit over time
while incorporating appropriate inputs for cancellations and other sources of
attrition. Refinements in these assumptions in connection with the investigation
changed our forecast for 1998."
Also contributing are lower earnings expectations at Cendant's EPUB unit. This
change in expectations is unrelated to changes in the quarterly timing of
earnings recognition at this unit. Correction of other accounting irregularities
and errors at EPUB will lower 1997 results for this business. New forecasts
incorporating the lower 1997 base level of revenues have lowered management's
expectations for 1998. On April 15, Cendant management had not detected material
accounting irregularities or errors in EPUB's historical financial results.
Cendant expects the balance of the lower expectations to arise from lower
earnings at its consumer software unit that will cause second quarter 1998
earnings to be one cent per share less than it had earlier expected. The
revision in expectation is based on the performance of this unit in the recently
completed second quarter.
Certain matters discussed in the news release are forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to a number of known and unknown risks
and uncertainties including, but not limited to, the outcome of the Audit
Committee's investigation; 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.
Cendant (NYSE: CD) is the world's premier provider of consumer and business
services. Cendant operates in three principal segments: Alliance Marketing,
Travel and Real Estate Services. Headquartered in Stamford, CT and Parsippany,
NJ, the company has more than 40,000 employees, operates in over 100 countries
and makes approximately 100 million customer contacts annually.
Media Contacts:
Elliott Bloom Jim Fingeroth/Thomas Davies
(973) 496-8414 Kekst and Company
(212) 521-4800
Investor Contact:
David M. Johnson
(973) 496-7909