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10/9/98 10:07 PM
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 10-Q/A
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 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)
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 [(check)] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the Registrant's classes of
common stock was 851,531,353 shares of Common Stock outstanding as of September
25, 1998.
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CENDANT CORPORATION AND SUBSIDIARIES
INDEX
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 - Financial Statements
Consolidated Statements of Operations - Three Months Ended
March 31, 1998 and 1997 3 - 4
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 5 - 6
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 7 - 8
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 38
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 39
Item 6 - Exhibits and Reports on Form 8-K 40
Certain statements in this Quarterly Report on Form 10-Q/A constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward looking statements. These forward looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward looking statements, include, but are not limited to: the
outcome of the pending litigation relating to the previously announced
accounting irregularities, uncertainty as to the Company's future
profitability, the Company's ability to develop and implement operational and
financial systems to manage rapidly growing operations; competition in the
Company's existing and potential future lines of business; the Company's
ability to integrate and operate successfully acquired and merged businesses
and the risks associated with such businesses, including the Company's ability
to obtain financing on acceptable terms to finance the Company's growth
strategy and for the Company to operate within the limitations imposed by
financing arrangements; uncertainty as to the future profitability of acquired
businesses, the ability of the Company and its vendors to complete the
necessary actions to achieve a year 2000 conversion for its computer systems
and applications and other factors. Other factors and assumptions not
identified above were also involved in the derivation of these forward looking
statements, and the failure of such other assumptions to be realized as well as
other factors may also cause actual results to differ materially from those
projected. The Company assumes no obligation to update these forward looking
statements to reflect actual results, changes in assumptions or changes in
other factors affecting such forward looking statements.
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
AS RESTATED (NOTE 2)
--------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
---------- --------
REVENUES
Service and membership fees, net $ 1,039.4 $ 897.5
Fleet leasing (net of depreciation and interest costs of
$311.6 and $286.1) 19.2 14.2
Other 70.8 42.0
---------- --------
Net revenues 1,129.4 953.7
---------- --------
EXPENSES
Operating 334.5 312.0
Marketing and reservation 264.8 222.5
General and administrative 146.0 161.0
Depreciation and amortization 65.8 57.2
Interest, net 18.9 10.1
Merger-related costs and other unusual charges 3.1 --
---------- --------
Total expenses 833.1 762.8
---------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 296.3 190.9
Provision for income taxes 107.5 77.1
Minority interest, net 4.9 --
---------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 183.9 113.8
---------- --------
Income (loss) from discontinued operations, net of taxes (Note 7) (11.0) 2.8
---------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 172.9 116.6
Cumulative effect of accounting change, net of tax -- (283.1)
---------- --------
NET INCOME (LOSS) $ 172.9 $ (166.5)
========== ========
See accompanying notes to consolidated financial statements.
3
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
AS RESTATED (NOTE 2)
---------------------
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
------- -------
INCOME (LOSS) PER SHARE:
BASIC
Income from continuing operations
before cumulative effect of accounting change $ 0.22 $ 0.14
Income (loss) from discontinued operations, net (0.01) --
Cumulative effect of accounting change, net -- (0.35)
------- -------
Net income (loss) $ 0.21 $ (0.21)
======= =======
DILUTED
Income from continuing operations before cumulative
effect of accounting change 0.21 0.13
Income (loss) from discontinued operations, net (0.01) --
Cumulative effect of accounting change, net -- (0.32)(1)
------- -------
Net income (loss) $ 0.20 $ (0.19)(1)
======= =======
(1) The number of weighted average shares used to compute income from
continuing operations per share was also used to calculate the per share
amounts for the cumulative effect of accounting change, net and net loss.
As a result of losses recorded for such amounts, the per share amounts
for the cumulative effect of accounting change, net and net loss are
anti-dilutive to their respective basic per share amounts.
See accompanying notes to consolidated financial statements.
4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
AS
RESTATED
(NOTE 2)
----------
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 152.3 $ 67.0
Receivables, net 1,248.1 1,170.7
Deferred income taxes 317.7 311.9
Other current assets 783.2 767.2
Net assets of discontinued operations 491.5 273.3
---------- ----------
Total current assets 2,992.8 2,590.1
---------- ----------
Franchise agreements, net 900.2 890.3
Goodwill, net 2,920.2 2,148.2
Other intangibles, net 1,035.1 897.5
Other assets 1,263.2 1,103.6
---------- ----------
Total assets exclusive of assets under programs 9,111.5 7,629.7
---------- ----------
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 $ 15,778.5 $ 14,073.4
========== ==========
See accompanying notes to consolidated financial statements.
5
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
AS
RESTATED
(NOTE 2)
-----------
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,296.5 $ 1,492.4
Deferred income 1,119.8 1,042.0
----------- -----------
Total current liabilities 2,416.3 2,534.4
----------- -----------
Deferred income 240.2 292.1
Long-term debt 1,056.9 1,246.0
Other noncurrent liabilities 236.5 181.2
----------- -----------
Total liabilities exclusive of liabilities under programs 3,949.9 4,253.7
----------- -----------
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 1,469.8 --
Commitments and contingencies (Note 12)
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 3,267.4 3,088.4
Retained earnings 1,113.5 940.6
Accumulated other comprehensive loss (48.8) (38.2)
Restricted stock, deferred compensation (2.9) (3.4)
Treasury stock, at cost 6,750,546 shares (74.4) (74.4)
----------- -----------
Total shareholders' equity 4,263.4 3,921.4
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,778.5 $ 14,073.4
=========== ===========
See accompanying notes to consolidated financial statements.
6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
AS RESTATED (NOTE 2)
---------------------------
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 172.9 $ (166.5)
(Income) loss from discontinued operations, net of tax 11.0 (2.8)
Depreciation and amortization 65.8 57.2
Cumulative effect of accounting change, net of tax -- 283.1
Merger-related costs and other unusual charges 3.1 --
Payments of merger-related costs and other unusual charge liabilities (97.0) --
Other (91.7) (81.8)
---------- ----------
NET CASH PROVIDED BY CONTINUING OPERATIONS, EXCLUSIVE OF MANAGEMENT
AND MORTGAGE PROGRAMS 64.1 89.2
---------- ----------
Management and mortgage programs:
Depreciation and amortization 278.5 281.4
Mortgage loans held for sale (159.4) 32.9
----------- ----------
119.1 314.3
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 183.2 403.5
---------- ----------
INVESTING ACTIVITIES
Property and equipment additions (58.8) (31.4)
Loans and investments (139.2) (24.8)
Net change in marketable securities (8.8) (811.3)
Net assets acquired, exclusive of cash acquired
and acquisition-related payments (943.2) (85.4)
Other, net 47.6 7.0
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS, EXCLUSIVE OF
MANAGEMENT AND MORTGAGE PROGRAMS (1,102.4) (945.9)
----------- -----------
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 leases 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 OF CONTINUING OPERATIONS (1,421.2) (1,262.7)
---------- -----------
See accompanying notes to consolidated financial statements.
7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
AS RESTATED (NOTE 2)
------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
--------- --------
FINANCING ACTIVITIES
Proceeds from borrowings $ -- $ 236.4
Principal payments on borrowings (205.1) (27.5)
Issuance of convertible debt -- 542.7
Issuance of common stock 121.1 35.7
Purchases of common stock -- (171.3)
Proceeds from mandatorily redeemable preferred securities
issued by subsidiaries, net 1,469.8 --
Other, net -- (1.2)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS,
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 1,385.8 614.8
--------- --------
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 OF CONTINUING OPERATIONS 1,580.1 481.8
--------- --------
Effect of changes in exchange rates on cash and cash equivalents (24.3) 45.5
Net cash used in discontinued operations (232.5) (4.0)
--------- --------
Net increase (decrease) in cash and cash equivalents 85.3 (335.9)
Cash and cash equivalents, beginning of period 67.0 448.1
--------- --------
Cash and cash equivalents, end of period $ 152.3 $ 112.2
========= ========
See accompanying notes to consolidated financial statements.
8
CENDANT CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Cendant Corporation, together with its subsidiaries (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 with the
resultant company being renamed Cendant Corporation. The Company provides
travel services, real estate services and membership-based consumer
services.
The consolidated balance sheet of the Company as of March 31, 1998 and
consolidated statements of operations 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 intercompany
balances and transactions have been eliminated in consolidation. The
accompanying unaudited 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. The December 31, 1997 consolidated balance
sheet was derived from the Company's audited financial statements
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1997 and should be read in conjunction with such
consolidated financial statements and notes thereto.
In the opinion of the Company's management, all adjustments (consisting
of normal recurring accruals except as discussed in Note 2) 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. RESTATEMENT
As publicly announced on April 15, 1998, the Company discovered
accounting irregularities in certain business units of CUC. As a result,
the Company together with its counsel and assisted by auditors,
immediately began an intensive investigation (the "Company
Investigation"). In addition, the Audit Committee of the Company's Board
of Directors initiated an investigation into such matters (the "Audit
Committee Investigation", together with the Company Investigation, the
"Investigations"). On July 14, 1998, the Company announced that the
accounting irregularities were greater than those initially discovered in
April and that the irregularities affected the accounting records of the
majority of the CUC business units. On August 13, 1998, the Company
announced that the Company Investigation was complete, and on August 27,
1998, the Company announced that the Audit Committee had submitted its
report to the Board of Directors on the Audit Committee Investigation
into the accounting irregularities and its conclusions regarding
responsibility for those actions. As a result of the findings from the
Investigations, the Company restated its financial statements for the
years ended December 31, 1997, 1996 and 1995. Such financial statements
were audited and filed, on Form 10-K/A with the Securities and Exchange
Commission ("SEC") on September 29, 1998. The 1997 restated amounts also
included certain adjustments related to the former HFS businesses, which
are substantially comprised of $47.8 million in reductions to
merger-related costs and other unusual charges which increased 1997
income from continuing operations. Also, as a result of the Investigation
and a concurrent internal financial review process by the Company which
revealed both accounting errors and accounting irregularities, the
financial information for the three months ended March 31, 1998 and 1997,
included herein has been restated to incorporate all relevant information
therefrom.
In connection with the aforementioned accounting irregularities, the
staff of the SEC and the United States Attorney for the District of New
Jersey are also conducting investigations relating to the accounting
irregularities (See Note 12). In connection with the SEC's investigation,
9
in August 1998, the SEC requested that the Company change its accounting
policies with respect to revenue and expense recognition for its
membership businesses effective January 1, 1997. Although the Company
believed that its accounting for memberships had been appropriate and
consistent with industry practice, the Company complied with the SEC's
request and adopted new accounting policies for its membership
businesses. (See Note 3 -- Accounting Change). Accordingly, the financial
results for the three months ended March 31, 1998 and 1997 as set forth
herein have also been restated for the accounting change. The Company has
recorded all corrections arising from the findings of the Investigations.
Such corrections were the result of accounting irregularities, the
misapplication of generally accepted accounting principles and the
aforementioned change in accounting for memberships. Adjustments
resulting from the findings of the Investigations and the corresponding
restatement of the Company's audited financial statements also have an
impact on subsequent interim 1998 periods included herein. Provided below
is a summary of the impact of such corrections and a reconciliation of
the financial results from amounts previously reported to the restated
financial statement amounts, as presented in this quarterly report on
Form 10-Q/A. While management has made all adjustments considered
necessary as a result of the findings of the Investigations, there can be
no assurance that additional adjustments will not be required as a result
of the ongoing SEC investigation. In addition, the financial statements
have been reclassified for discontinued operations (See Note 7).
STATEMENT OF OPERATIONS
(In millions, except per share data)
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS, RESTATED
IRREGULARITIES BEFORE RECLASSIFICATION
AS PREVIOUSLY AND ACCOUNTING DISCONTINUED FOR DISCONTINUED AS
REPORTED CHANGE OPERATIONS OPERATIONS RESTATED
--------- --------- --------- --------- ---------
Net revenues $ 1,436.6 $ (148.5) $ 1,288.1 $ (158.7) $ 1,129.4
--------- --------- --------- --------- ---------
Expenses:
Operating 425.3 (29.4) 395.9 (61.4) 334.5
Marketing and reservation 342.4 (43.7) 298.7 (33.9) 264.8
General and administrative 198.6 13.8 212.4 (66.4) 146.0
Depreciation and amortization 78.4 (3.6) 74.8 (9.0) 65.8
Interest, net 23.4 .8 24.2 (5.3) 18.9
Merger-related costs and other
unusual charges -- 3.1 3.1 -- 3.1
--------- --------- --------- --------- ---------
Total expenses 1,068.1 (59.0) 1,009.1 (176.0) 833.1
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes and
minority interest 368.5 (89.5) 279.0 17.3 296.3
Provision for income taxes 134.1 (32.9) 101.2 6.3 107.5
Minority interest, net 4.9 -- 4.9 -- 4.9
--------- --------- --------- --------- ---------
Income from continuing operations 229.5 (56.6) 172.9 11.0 183.9
Loss from discontinued operations,
net of taxes -- -- -- (11.0) (11.0)
--------- --------- --------- --------- ---------
Net income $ 229.5 $ (56.6) $ 172.9 $ -- $ 172.9
========= ========= ========= ========= =========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing
operations $ 0.27 $ 0.22
Loss from discontinued
operations, net -- (0.01)
--------- ---------
Net income $ 0.27 $ 0.21
========= =========
DILUTED
Income from continuing
operations $ 0.26 $ 0.21
Loss from discontinued
operations, net -- (0.01)
--------- ---------
Net income $ 0.26 $ 0.20
========= =========
WEIGHTED AVERAGE SHARES
Basic 838.7 838.7
Diluted 908.5 908.5
11
STATEMENT OF OPERATIONS
(In millions, except per share data)
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS, RESTATED
IRREGULARITIES BEFORE RECLASSIFICATION
AS PREVIOUSLY AND ACCOUNTING DISCONTINUED FOR DISCONTINUED AS
REPORTED CHANGE OPERATIONS OPERATIONS RESTATED
--------- -------- --------- --------- --------
Net revenues $ 1,158.0 $ (67.0) $ 1,091.0 $ (137.3) $ 953.7
--------- -------- --------- --------- --------
Expenses:
Operating 360.7 13.0 373.7 (61.7) 312.0
Marketing and reservation 276.9 (18.6) 258.3 (35.8) 222.5
General and administrative 169.1 14.2 183.3 (22.3) 161.0
Depreciation and amortization 60.9 2.4 63.3 (6.1) 57.2
Interest, net 12.3 2.2 14.5 (4.4) 10.1
--------- -------- --------- --------- --------
Total expenses 879.9 13.2 893.1 (130.3) 762.8
--------- -------- --------- --------- --------
Income from continuing operations
before income taxes and
cumulative effect
of accounting change 278.1 (80.2) 197.9 (7.0) 190.9
Provision for income taxes 112.2 (30.9) 81.3 (4.2) 77.1
--------- -------- --------- --------- --------
Income from continuing
operations before
cumulative effect of
accounting change 165.9 (49.3) 116.6 (2.8) 113.8
Income from discontinued
operations, net of taxes -- -- -- 2.8 2.8
--------- -------- --------- --------- --------
Income before cumulative
effect of accounting change 165.9 (49.3) 116.6 -- 116.6
Cumulative effect of
accounting change, net of tax -- (283.1) (283.1) -- (283.1)
--------- -------- --------- --------- --------
Net income (loss) $ 165.9 $ (332.4) $ (166.5) $ -- $ (166.5)
========= ======== ========= ========= ========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing
operations before cumulative
effect of accounting change $ 0.21 $ 0.14
Income from discontinued
operations, net -- --
Cumulative effect of
accounting change, net -- (0.35)
--------- --------
Net income (loss) $ 0.21 $ (0.21)
========= ========
12
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS, RESTATED
IRREGULARITIES BEFORE RECLASSIFICATION
AS PREVIOUSLY AND ACCOUNTING DISCONTINUED FOR DISCONTINUED AS
REPORTED CHANGE OPERATIONS OPERATIONS RESTATED
--------- -------- --------- --------- --------
DILUTED
Income from continuing
operations before cumulative
effect of accounting change $ 0.19 $ 0.13
Income from discontinued
operations, net -- --
Cumulative effect of
accounting change, net -- (0.32)
--------- ---------
Net income (loss) $ 0.19 $ (0.19)
========= =========
WEIGHTED AVERAGE SHARES
Basic 799.4 799.4
Diluted 877.1 877.1
13
BALANCE SHEET
(IN MILLIONS)
AT MARCH 31, 1998
------------------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS, RESTATED
IRREGULARITIES BEFORE RECLASSIFICATION
AS PREVIOUSLY AND ACCOUNTING DISCONTINUED FOR DISCONTINUED AS
REPORTED CHANGE OPERATIONS OPERATIONS RESTATED
--------- -------- --------- --------- --------
ASSETS
Cash and cash equivalents $ 259.4 $ (79.7) $ 179.7 $ (27.4) $ 152.3
Receivables, net 1,691.6 (311.4) 1,380.2 (132.1) 1,248.1
Other current assets 765.3 415.3 1,180.6 (79.7) 1,100.9
Net assets of discontinued
operations -- -- -- 491.5 491.5
Deferred membership
acquisition costs 437.5 (437.5) -- -- --
Goodwill - net 3,412.4 (114.0) 3,298.4 (378.2) 2,920.2
Other assets 3,293.5 (3.9) 3,289.6 (91.1) 3,198.5
--------- -------- --------- -------- ---------
Total assets exclusive of
assets under programs 9,859.7 (531.2) 9,328.5 (217.0) 9,111.5
--------- -------- --------- -------- ---------
Assets under management
and mortgage programs 6,667.0 -- 6,667.0 -- 6,667.0
--------- -------- --------- -------- ---------
TOTAL ASSETS $16,526.7 $(531.2) $15,995.5 $(217.0) $15,778.5
========= ======== ========= ======== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and other $ 1,691.4 $(259.0) $ 1,432.4 $(135.9) $ 1,296.5
Deferred income 1,046.5 313.5 1,360.0 - 1,360.0
Long-term debt 1,106.4 2.6 1,109.0 (52.1) 1,056.9
Other liabilities 245.4 20.1 265.5 (29.0) 236.5
--------- ------- --------- -------- ---------
Total liabilities exclusive of
liabilities under programs 4,089.7 77.2 4,166.9 (217.0) 3,949.9
--------- ------- --------- -------- ---------
Liabilities under management
and mortgage programs 6,095.4 -- 6,095.4 -- 6,095.4
--------- -------- --------- -------- ---------
Mandatorily redeemable
preferred securities issued
by subsidiaries 1,447.0 22.8 1,469.8 -- 1,469.8
--------- ------- --------- -------- ---------
Total shareholders' equity 4,894.6 (631.2) 4,263.4 -- 4,263.4
--------- -------- --------- -------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $16,526.7 $(531.2) $15,995.5 $(217.0) $15,778.5
========= ======== ========= ======== =========
14
3. ACCOUNTING CHANGE
Effective January 1, 1997, the Company adopted a change in accounting for
the recognition of membership revenues and expenses. Prior to such
adoption, the Company recorded deferred membership income, net of
estimated cancellations, at the time members were billed (upon expiration
of the free trial period), which was recognized as revenue ratably over
the membership term and modified periodically based on actual
cancellation experience. In addition, membership acquisition and renewal
costs, which related primarily to membership solicitations, were
capitalized as direct response advertising costs due to the Company's
ability to demonstrate that the direct response advertising resulted in
future economic benefits. Such costs were amortized on a straight-line
basis as revenues were recognized (over the average membership period).
The Company believed that such accounting policies were appropriate and
consistent with industry practice.
In August 1998, in connection with the Company's cooperation with the SEC
investigation into accounting irregularities discovered in the CUC
business units, the SEC concluded that when membership fees are fully
refundable during the entire membership period, membership revenue should
be recognized at the end of the membership period upon the expiration of
the refund offer. The SEC Staff further concluded that non-refundable
solicitation costs should be expensed as incurred since such costs are
not recoverable if membership fees are refunded. Accordingly, effective
January 1, 1997, the Company recorded a non-cash after-tax charge of
$283.1 million or $.32 per diluted share for the quarter ended March 31,
1997, to account for the cumulative effect of the accounting change.
4. EARNINGS PER SHARE ("EPS")
Basic EPS is computed based solely on the weighted average number of
common shares outstanding during the period. Diluted EPS reflects all
potential dilution of common stock. Basic and diluted EPS from continuing
operations is calculated as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
(In millions, except per share amounts) 1998 1997
--------------- --------------
Income from continuing operations before cumulative
effect of accounting change $ 183.9 $ 113.8
Convertible debt interest 3.1 3.6
-------------- --------------
Income from continuing operations before cumulative
effect of accounting change, as adjusted $ 187.0 $ 117.4
============== ==============
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
============== ==============
EPS - continuing operations before cumulative
effect of accounting change
Basic $ 0.22 $ 0.14
============== ==============
Diluted $ 0.21 $ 0.13
============== ==============
15
5. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" effective January 1, 1998. The statement
establishes standards for reporting an alternative income measurement and
its components in the financial statements.
Components of comprehensive income (loss) are summarized as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------------------
(In millions) 1998 1997
--------------- ---------------
Net income (loss) $ 172.9 $ (166.5)
-------------- ---------------
Other comprehensive loss, net of tax:
Currency translation adjustment (10.4) (13.2)
Net unrealized loss on marketable securities:
Net unrealized holding loss arising during the period (.2) --
Reclassification adjustment for gains included in earnings -- (4.3)
--------------- ---------------
Other comprehensive loss (10.6) (17.5)
--------------- ---------------
Comprehensive income (loss) $ 162.3 $ (184.0)
=============== ===============
The components of accumulated other comprehensive loss are as follows:
NET UNREALIZED ACCUMULATED ACCUMULATED
GAIN (LOSS) ON CURRENCY OTHER
(IN MILLIONS) MARKETABLE TRANSLATION COMPREHENSIVE
SECURITIES ADJUSTMENT LOSS
------------------ ------------------ ------------------
Balance, January 1, 1998 $ .2 $ (38.4) $ (38.2)
Currency translation adjustment -- (10.4) (10.4)
Net unrealized loss on marketable securities (.2) -- (.2)
------------------ ------------------ ------------------
Balance, March 31, 1998 $ -- $ (48.8) $ (48.8)
================== ================== ==================
6. 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 5 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
the operating results of the Company for the three months ended March 31,
1998 and 1997.
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.
16
(In millions)
Total consideration:
Cash paid (net of $23.0 million of cash acquired) $ 943.2
--------------
Assets acquired 181.3
Liabilities assumed 24.6
--------------
Fair value of identifiable net assets acquired 156.7
--------------
Goodwill $ 786.5
==============
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 two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480.0
million in cash. Jackson Hewitt operates the second largest tax
preparation service franchise system in the United States. The Jackson
Hewitt franchise system specializes in computerized preparation of
federal and state individual income tax returns.
Other 1998 Acquisitions and Acquisition-Related Payments. The Company
acquired certain other entities during the first quarter of 1998 for an
aggregate purchase price of approximately $189.6 million in cash.
Additionally, the Company made a $100.0 million cash payment to the
seller of Resort Condominiums International, Inc. in satisfaction of a
contingent purchase liability.
7. DISCONTINUED OPERATIONS
On August 12, 1998 (the "Measurement Date"), the Company announced that
its Executive Committee of the Board of Directors committed to
discontinue the Company's classified advertising and consumer software
businesses by disposing of Hebdo Mag International, Inc. ("Hebdo Mag")
and Cendant Software Corporation ("Cendant Software"), respectively. The
Company has since entered into a definitive agreement to sell Hebdo Mag
to its former 50% owners for 7.1 million shares of Company common stock
and approximately $400 million in cash. The transaction is expected to be
consummated in the fourth quarter of 1998 and is subject to certain
conditions, including regulatory approval and financing by the purchaser.
The Company expects to recognize a gain of approximately $200 million
upon the disposal of Hebdo Mag, assuming a Company stock price of $8.00
per share, the closing price of the Company's common stock on October 7,
1998. In addition, the Company has engaged investment bankers to analyze
various strategic alternatives in regard to the disposition of Cendant
Software. The Company anticipates that the disposition of Cendant
Software will also result in a significant gain.
17
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
(In millions) CONSUMER SOFTWARE CLASSIFIED ADVERTISING
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31 MARCH 31,
------------------------------------------ -----------------------------------------
1998 1997 1998 1997
------------------ ------------------ ------------------ -----------------
Net revenues $ 95.9 $ 91.7 $ 62.8 $ 45.6
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes (26.5) .7 9.2 6.3
Provision (benefit) for income taxes (9.6) 1.8 3.3 2.4
------------------ ----------------- ----------------- -----------------
Net income (loss) $ (16.9) $ (1.1) $ 5.9 $ 3.9
================== ================= ================= =================
The Company has allocated $4.4 million and $1.2 million of interest
expense to discontinued operations for the three months ended March 31,
1998 and 1997, respectively. Such interest expense represents the cost
of funds associated with businesses acquired by the discontinued business
segments at an interest rate consistent with the Company's consolidated
effective borrowing rate.
BALANCE SHEET DATA:
(In millions) CONSUMER SOFTWARE CLASSIFIED ADVERTISING
-------------------------------------- ------------------------------------------
AT MARCH 31 AT DECEMBER 31, AT MARCH 31, AT DECEMBER 31,
1998 1997 1998 1997
---------------- ---------------- ------------------ ------------------
Current assets $ 174.0 $ 209.1 $ 65.2 $ 58.6
Goodwill 125.1 42.2 253.1 181.5
Other assets 53.4 49.2 37.7 33.2
Total liabilities (63.8) (127.0) (153.2) (173.5)
---------------- ---------------- ------------------ ------------------
Net assets of discontinued
operations $ 288.7 $ 173.5 $ 202.8 $ 99.8
=============== =============== ================= ==================
8. MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
The Company incurred merger-related costs and other unusual charges
("Unusual Charges") in 1997 related to continuing operations of $704.1
million primarily associated with and/or coincident to the Cendant
Merger, (the "Fourth Quarter 1997 Charge") and the merger with PHH
Corporation (the "Second Quarter 1997 Charge"). The remaining Unusual
Charge liabilities at December 31, 1997 and reduction of such liabilities
for the three months ended March 31, 1998, are summarized by category of
expenditure and by charge as follows:
LIABILITIES AT CASH LIABILITIES AT
(In millions) DECEMBER 31, 1997 PAYMENTS NON-CASH ADJUSTMENTS MARCH 31, 1998
----------------- ----------- --------- ------------- --------------
Professional fees $ 50.7 $ (30.0) $ -- $ 1.9 $ 22.6
Personnel related 168.5 (60.1) -- 1.2 109.6
Business terminations 3.9 (0.6) -- -- 3.3
Facility related and other 50.4 (6.3) 3.0 -- 47.1
---------- -------- --------- ---------- ---------
Total $ 273.5 $ (97.0) $ 3.0 $ 3.1 $ 182.6
========== ======== ========= ========== =========
LIABILITIES AT CASH LIABILITIES AT
(In millions) DECEMBER 31, 1997 PAYMENTS NON-CASH ADJUSTMENTS MARCH 31, 1998
----------------- ----------- --------- ------------- --------------
Fourth Quarter 1997 Charge $ 197.4 $ (84.9) $ -- $ 1.9 $ 114.4
Second Quarter 1997 Charge 76.1 (12.1) 3.0 1.2 68.2
---------- -------- -------- -------- --------
Total $ 273.5 $ (97.0) $ 3.0 $ 3.1 $ 182.6
========== ======== ======== ======== ========
18
Fourth Quarter 1997 Charge. The $114.4 million of liabilities remaining
at March 31, 1998 are primarily comprised of $71.4 million of severance
and other personnel related costs. Approximately $8.0 million of such
remaining costs will be paid upon the closure of nine European call
centers, which will be substantially complete in 1998. Approximately
$41.9 million of executive termination benefits will be paid or otherwise
extinguished upon settlement of employment obligations. Approximately
$21.4 million of outstanding facility-related liabilities will be paid or
otherwise extinguished upon the closure of nine European call centers and
other office consolidations. The Company incurred $1.9 million of Unusual
Charges during the three months ended March 31, 1998 associated with
professional fees that were period costs and accordingly, not accrued at
December 31, 1997.
Second Quarter 1997 Charge. The remaining $68.2 million of liabilities
remaining at March 31, 1998, primarily consists of $38.2 million of
future severance and benefit payments and $29.0 million of future
contract and lease termination payments. The Company incurred $1.2
million of Unusual Charges during the three months ended March 31, 1998
associated with severance that represented period costs and accordingly,
was not accrued at December 31, 1997.
9. INVESTMENT IN AVIS RENT A CAR, INC.
The Company's equity interest in Avis Rent A Car, Inc. ("Avis") was
reduced from 27.5% to 20.4% as a result of a secondary offering by Avis
of its common stock in March 1998. The Company recognized a pre-tax gain
of approximately $17.7 million as a result of the sale, which is included
in other revenue in the consolidated statement of operations.
10. ISSUANCE OF FELINE PRIDES AND TRUST PREFERRED SECURITIES.
On March 2, 1998, Cendant Capital I (the "Trust"), a statutory business
Trust formed under the laws of the State of Delaware and a wholly-owned
consolidated subsidiary of the Company, issued 29.9 million FELINE PRIDES
and 2.3 million trust preferred securities and received approximately
$1.5 billion in gross proceeds therefrom. The Trust invested the proceeds
in 6.45% Senior Debentures due 2003 (the "Debentures"), issued by the
Company, which represents the sole asset of the Trust. The obligations of
the Trust related to the FELINE PRIDES and trust preferred securities are
unconditionally guaranteed by the Company to the extent the Company makes
payments pursuant to the Debentures. Upon the issuance of the FELINE
PRIDES and trust preferred securities, the Company recorded a liability
of $37.3 million with a corresponding reduction to shareholders' equity
equal to the present value of the total future contract adjustment
payments to be made under the FELINE PRIDES. The FELINE PRIDES, upon
issuance, consisted 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 forward purchase contracts
under which the holders are required to purchase common stock from the
Company in February 2001. The Growth PRIDES consist of zero coupon U.S.
Treasury securities and forward purchase contracts under which the
holders are required to purchase common stock from the Company in
February 2001. The trust preferred securities and the trust preferred
securities forming a part of the Income PRIDES, each with a face amount
of $50, 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.
Payments under the forward purchase contract forming a part of the Income
PRIDES will be made by the Company in the form of a contract adjustment
payment at an annual rate of 1.05 percent. The forward purchase contract
forming a part of the Growth PRIDES will be made by the Company in the
form of a contract adjustment payment at an annual rate of 1.30 percent.
The forward purchase contracts require the holder to purchase a minimum of
1.0395 shares and a maximum of 1.3514 shares of Company common stock per
PRIDES security, depending upon the average of the closing price per
share of Company common stock for a 20 consecutive day period ending in
mid-February of 2001. The Company has the right to defer the contract
adjustment payments and the payment of interest on its Debentures to the
Trust. Such election will subject the Company
19
to certain restrictions, including restrictions on making dividend
payments on its common stock, until all such payments in arrears are
settled.
11. PENDING ACQUISITION OF AMERICAN BANKERS INSURANCE GROUP, INC. ("AMERICAN
BANKERS")
On March 23, 1998, the Company entered into a definitive agreement (the
"ABI Merger Agreement") to acquire American Bankers for $67 per share in
cash and stock, for aggregate consideration of approximately $3.1
billion. The Company has agreed to purchase 23.5 million shares of
American Bankers at $67 per share through its pending cash tender offer,
to be followed by a merger in which the Company has agreed to deliver
Cendant shares with a value of $67 for each remaining share of American
Bankers common stock outstanding. The Company has already received
anti-trust clearance to acquire American Bankers. The tender offer is
subject to the receipt of tenders representing at least 51 percent of the
common shares of American Bankers as well as customary closing
conditions, including regulatory approvals. From time to time,
representatives of the Company and representatives of American Bankers
have discussed possible modifications to the terms of the ABI Merger
Agreement, including a change in the mix of consideration to increase the
cash component and decrease the stock component and changing the
transaction to a taxable transaction. No agreement regarding any such
modification has been reached and there can be no assurance that such
discussion will result in any agreement being reached. The transaction is
expected to be completed in the fourth quarter of 1998 or the first
quarter of 1999. If no agreement regarding the terms of any modification
to the terms of the ABI Merger Agreement is reached, the current ABI
Merger Agreement will remain in effect in accordance with its terms.
American Bankers provides affordable, specialty insurance products and
services through financial institutions, retailers and other entities
offering consumer financing.
In connection with the Company's proposal to acquire American Bankers,
the Company has received a bank commitment to provide a $650 million,
364-day revolving credit facility, the proceeds of which are to be used
to partially fund the acquisition. This credit facility will bear
interest, at the option of the Company, at rates based on prime rates, as
defined, or LIBOR plus an applicable variable margin.
12. COMPANY INVESTIGATION AND LITIGATION
Since the Company's April 15, 1998 announcement of the discovery of
accounting irregularities in the former CUC business units, and prior to
the date hereof, seventy-one purported class action lawsuits and one
individual lawsuit have been filed against the Company and certain
current and former officers and directors of the Company and HFS,
asserting various claims under the federal securities law (the "Federal
Securities Actions"). Some of the actions also name as defendants Merrill
Lynch & Co. and, in one case, Chase Securities, Inc., underwriters for
the Company's PRIDES securities offering; two others also name Ernst &
Young LLP, the Company's former independent accountants. Sixty-four of
the Federal Securities Actions were filed in the United States District
Court for the District of New Jersey, six were filed in the United States
District Court for the District of Connecticut (including the individual
action), one was filed in the United States District Court for the
Eastern District of Pennsylvania, and one has been filed in New Jersey
Superior Court. The Federal Securities Actions filed in the District of
Connecticut and Eastern District of Pennsylvania have been transferred to
the District of New Jersey. On June 10, 1998, the Company moved to
dismiss or stay the Federal Securities Actions filed in New Jersey
Superior Court on the ground that, among other things, it is duplicative
of the actions filed in federal courts. The court granted that motion on
August 7, 1998 without prejudice to the plaintiff's right to refile the
case in the District of New Jersey.
Certain of these Federal Securities Actions purport to be brought on
behalf of purchasers of the Company's common stock and/or options on
common stock during various periods, most frequently beginning May 28,
1997 and ending April 15, 1998 (although the alleged class periods begin
as early as March 21, 1995 and end as late as July 15, 1998). Others
claim to be brought on behalf of persons who exchanged common stock of
HFS for the Company's common stock in connection with the Cendant Merger.
Some plaintiffs purport to represent both of these types of investors.
20
In addition, eight actions pending in the District of New Jersey purport
to be brought, either in their entirety or in part, on behalf of
purchasers of the Company's PRIDES securities. The complaints in the
Federal Securities Actions allege, among other things, that as a result
of accounting irregularities, the Company's previously issued financial
statements were materially false and misleading and that the defendants
knew or should have known that these financial statements caused the
prices of the Company's securities to be inflated artificially. The
Federal Securities Actions variously allege violations of Section 10(b)
of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
and Rule 10b-5 promulgated thereunder, Section 14(a) of the Exchange Act
and Rule 14a-9 promulgated thereunder, Section 20(a) of the Exchange Act
and Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the
"Securities Act"). Certain actions also allege violations of common law.
The individual action also alleges violations of Section 18(a) of the
Exchange Act and the Florida securities law. The class action complaints
seek damages in unspecified amounts. The individual action seeks damages
in the amount of approximately $9 million plus interest and expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
order consolidating the 50 Federal Securities Actions that had at that
time been filed in the United States District Court for the District of
New Jersey, under the caption In re: Cendant Corporation Litigation,
Master File No. 98-1664 (WHW). Pursuant to the Order, all related actions
subsequently filed in the District of New Jersey are to be consolidated
under that caption. United States District Court Judge William H. Walls
has selected lead plaintiffs to represent all potential class members in
the consolidated actions. He also ordered that applications seeking
appointment as lead counsel to represent the lead plaintiffs are to be
filed with the Court by September 17, 1998. The selection of lead counsel
is pending.
In addition, on April 27, 1998 a shareholder derivative action, Deutch v.
Silverman, et al., No. 98-1998 (WHW), was filed in The District of New
Jersey against certain of the Company's current and former directors and
officers; The Bear Stearns Companies, Inc., Bear Stearns & Co., Inc. and,
as a nominal party, the Company. The complaint in the Deutch action
alleges that certain individual officers and directors of the Company
breached their fiduciary duties by selling shares of the Company's stock
while in possession of non-public material information concerning
accounting irregularities. The complaint also alleges various other
breaches of fiduciary duty, mismanagement, negligence and corporate waste
and seeks damages on behalf of the Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of
Delaware. The Corwin action is purportedly brought both derivatively, on
behalf of the Company, and as a class action, on behalf of all
shareholders of HFS who exchanged their HFS shares for the Company's
shares in connection with the Cendant Merger. The Corwin action names as
defendants HFS and twenty-eight individuals who are and were directors of
Cendant and HFS. The complaint in the Corwin action 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 the
Company before approving the Cendant Merger at an allegedly inadequate
price. The amended complaint also alleges that the Company's directors
breached their fiduciary duties by entering into an employment agreement
with Cendant's former Chairman, Walter Forbes, in connection with the
Cendant Merger that purportedly amounted to corporate waste. The Corwin
action seeks, among other things, recision of the Cendant Merger and
compensation for all losses and damages allegedly suffered in connection
therewith.
The staff of the Securities and Exchange Commission (the "SEC") and the
United States Attorney for the District of New Jersey are conducting
investigations relating to the matters referenced above. The SEC staff
has advised the Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have
occurred.
In connection with the Cendant Merger, certain officers and directors of
HFS exchanged their shares of HFS common stock and options exercisable
for HFS common stock for shares of the Company's common stock and options
21
exercisable for the Company's common stock, respectively. As a result of
the aforementioned accounting irregularities, such officers and directors
have advised the Company that they believe they have claims against the
Company in connection with such exchange. In addition, certain current
and former officers and directors of the Company would consider
themselves to be members of any class ultimately certified in the Federal
Securities Actions now pending in which the Company is named as a
defendant by virtue of their have been HFS stockholders at the time of
the Cendant Merger.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss
with respect to these matters, management believes that an adverse
outcome with respect to such proceedings could have a material adverse
impact on the financial condition, results of operations and cash flows
of the Company.
13. NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" for fiscal years beginning
after June 15, 1999. SFAS No. 133 requires the recognition of all
derivatives in the consolidated balance sheet as either assets or
liabilities measured at fair value. The Company will adopt SFAS No. 133
effective for the 2000 calendar year end. The Company has not yet
determined the impact SFAS No. 133 will have on its financial position
or results of operations when such statement is adopted.
14. SUBSEQUENT EVENTS
COMPLETED ACQUISITION
National Parking Corporation. On April 27, 1998, the Company completed
the acquisition of National Parking Corporation Limited ("NPC") for $1.6
billion in cash, which included the repayment of approximately $227
million of outstanding NPC debt. NPC is substantially comprised of two
operating subsidiaries; National Car Parks and Green Flag. National Car
Parks is the largest private (non-municipal) single car park operator in
the UK and Green Flag is the third largest roadside assistance group in
the UK and offers a wide-range of emergency support and rescue services.
PENDING ACQUISITION
RAC Motoring Services. On May 21, 1998, the Company announced that it has
reached a definitive agreement with the Board of Directors of Royal
Automobile Club Limited ("RACL") to acquire their RAC Motoring Services
subsidiary ("RACMS") for approximately $735 million in cash. The sale of
RACMS has subsequently been approved by its shareholders. On September
27, 1998, the UK Secretary of State for Trade and Industry referred the
RACMS acquisition to the U.K. Monopolies and Mergers Commission (the
"MMC"). Closing is subject to certain conditions, including MMC approval.
Although no assurances can be made, the Company currently anticipates
that the transaction will be completed in the spring of 1999. 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
Term Loan Facility. On May 29 1998, the Company entered into a 364-day
term loan agreement with a syndicate of financial institutions which
provided for borrowings of $3.25 billion (the "Term Loan Facility"). The
Term Loan Facility, as amended, bears interest at LIBOR plus an
applicable LIBOR spread, as defined. Upon the execution of the Term Loan
Facility, temporary credit agreements, which provided for $1.0 billion of
borrowings, were terminated. The Term Loan Facility, as amended, contains
certain restrictive covenants, which are substantially similar to and
consistent with the covenants in effect for the Company's existing
revolving credit agreements.
Redemption of 4-3/4% Notes. On May 4, 1998, the Company redeemed all of
its outstanding ($144.5 million principal amount) 4-3/4% Convertible
Senior Notes (the "4-3/4% Notes") at a price of 103.393% of the principal
amount together with interest accrued to the redemption date. Prior to
the redemption date, during 1998, holders of such notes exchanged $95.5
million of the 4-3/4% Notes for 3.4 million shares of Company common
stock.
22
Redemption of 6-1/2% Notes. On April 8, 1998, the Company exercised its
option to call its 6-1/2% Convertible Subordinated Notes (the "6-1/2%
Notes") for redemption on May 11, 1998, in accordance with the provisions
of the indenture relating to the 6-1/2% Notes. Prior to the redemption
date, during 1998, all of the outstanding 6-1/2% Notes were converted
into 2.1 million shares of Company common stock.
SEVERANCE AGREEMENT
On July 28, 1998, the Company announced that Walter A. Forbes resigned as
Chairman of the Company and as a member of the Board of Directors. The
severance agreement reached with Mr. Forbes entitles him the benefits
required by his employment contract relating to a termination of Mr.
Forbes' employment with the Company for reasons other than for cause.
Aggregate benefits resulted in a $50.4 million third quarter 1998 expense
comprised of $37.9 million in cash payments and 1.3 million of Company
stock options with a Black-Scholes value of $12.5 million. Such options
were immediately vested and expire on July 28, 2008.
REPRICING OF STOCK OPTIONS
On July 28, 1998, the Compensation Committee of the Board of Directors
approved, in principle, a program to reprice certain Company stock
options granted to employees of the Company, other than executive
officers, during December 1997 and the first quarter of 1998. The new
option price for such stock options is to be the market price of the
Company's common stock as reported on the New York Stock Exchange shortly
after the filing of the Company's restated Quarterly Reports on Form
10-Q/A for the quarterly periods ended March 31, 1998 and June 30, 1998
(the "New Price"). On September 23, 1998, the Compensation Committee
extended a repricing and option exchange program to certain executive
officers and senior managers of the Company subject to certain conditions
including revocation of a portion of existing options plus repricing of
other portions at prices at and above fair market value at the time of
repricing. Additionally, a management equity ownership program was
adopted that requires these executive officers and senior managers to
acquire Company common stock at various levels commensurate with their
respective compensation levels. The repricing will be accomplished by
canceling existing options and issuing new options at the New Price.
TERMINATION OF ACQUISITION AGREEMENT
On October 5, 1998, the Company announced it terminated its agreement to
acquire Providian Auto and Home Insurance Company ("Providian"). The
termination date in the Company's agreement to acquire Providian was
September 30, 1998. Certain representations and covenants in the
acquisition agreement had not been fulfilled and the conditions to
closing had not been met. The Company did not pursue an extension of the
termination agreement date of the agreement because Providian no longer
met the Company's acquisition criteria.
23
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 its Travel,
Real Estate and Alliance Marketing business segments. The Company generally
does not own the assets or share the risks associated with the underlying
businesses of its customers. In the Travel Services segment, the Company is the
world's largest franchisor of lodging facilities and rental car facilities, the
leading provider of vacation timeshare exchange services and a leading provider
of international fleet management services. In the Real Estate Services
segment, the Company is the world's largest franchisor of residential real
estate brokerage offices, the world's largest provider of corporate relocation
services and is a leading mortgage lender in the United States. In the Alliance
Marketing segment, the Company is a leading provider of membership consumer
services and products.
RESTATEMENT
As publicly announced on April 15, 1998, the Company discovered
accounting irregularities in certain business units of CUC. As a result, the
Company together with its counsel and assisted by auditors, immediately began
an intensive investigation (the "Company Investigation"). In addition, the
Audit Committee of the Company's Board of Directors initiated an investigation
into such matters (the "Audit Committee Investigation", together with the
Company Investigation, the "Investigations"). On July 14, 1998, the Company
announced that the accounting irregularities were greater than those initially
discovered in April and that the irregularities affected the accounting records
of the majority of the CUC business units. On August 13, 1998, the Company
announced that the Company Investigation was complete and on August 27, 1998,
the Company announced that the Audit Committee had submitted its report to the
Board of Directors on the Audit Committee Investigation into the accounting
irregularities and its conclusions regarding responsibility for those actions.
As a result of the findings from the Investigations and a concurrent internal
financial review process by the Company which revealed both accounting errors
and accounting irregularities, the underlying financial information for the
three months ended March 31, 1998 and 1997 has been restated to incorporate all
relevant information obtained therefrom. Such quarterly results presented
herein have also been restated for (i) a change in accounting, effective
January 1, 1997, related to revenue and expense recognition for memberships and
(ii) discontinued operations.
Restated net income (loss) totaled $172.9 million and ($166.5) million
for the quarters ended March 31, 1998 and 1997, respectively, ($.20 and $(.19)
per diluted share, respectively). The Company originally reported (prior to
restatement) net income of $229.5 million and $165.9 million for the quarters
ended March 31, 1998 and 1997, respectively ($.26 and $.19 per diluted share,
respectively), which included income from continuing operations of $235.0
million ($.26 per diluted share) in 1998 and $160.8 million ($.19 per diluted
share) in 1997.
The corresponding restated income from continuing operations, before the
cumulative effect of a change in accounting and merger related costs and other
unusual charges, for the quarterly periods ended March 31, 1998 and 1997
totaled $186.2 million ($.20 per diluted share) and $113.8 million ($.13 per
diluted share), respectively. The decreases in such restated amounts
(1998 - $48.8 million, 1997 - $47.0 million) compared to those amounts
originally reported were the result of additional net after-tax expense in 1998
and 1997 of $34.6 million ($.04 per diluted share) and $1.8 million,
respectively, due to the aforementioned change in accounting, $14.0 million
($.02 per diluted share) associated with the correction of an error related to
the misapplication of accounting policies in connection with the sale of coupon
books within the Lifestyle division of Alliance Marketing in 1998 and other
accounting errors and/or irregularities in 1998 and 1997 of $0.2 million
($.00 per diluted share) and $45.2 million ($.05 per diluted share),
respectively.
24
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 VS THREE MONTHS ENDED
MARCH 31, 1997
The operating results of the Company and its underlying business segments
for the three months ended March 31, 1998 and 1997 are comprised of business
combinations accounted for by the purchase method of accounting. Accordingly,
the results of operations of such acquired companies have been included in the
consolidated operating results of the Company and its applicable business
segments from the respective dates of acquisition.
In the underlying Results of Operations discussion of the Company and its
business segments, operating expenses exclude net interest expense, income
taxes and minority interest. The operating results of the Company for the three
months ended March 31, 1998 and 1997 are as follows:
(In millions) THREE MONTHS ENDED MARCH 31,
-------------------------------------
1998 1997 VARIANCE
-------- --------- ---------
- -------------------------------------------------------------------------------
CONTINUING OPERATIONS:
Net revenues $1,129.4 $ 953.7 18%
Operating expenses 814.2 752.7 8%
-------- ---------
OPERATING INCOME 315.2 201.0 57%
Interest, net 18.9 10.1 87%
-------- ---------
Pre-tax income before minority interest
and cumulative effect of accounting
change 296.3 190.9 55%
Provision for income taxes 107.5 77.1 39%
Minority interest, net 4.9 -- *
-------- ---------
INCOME FROM CONTINUING OPERATIONS 183.9 113.8 62%
- -------------------------------------------------------------------------------
Income (loss) from discontinued
operations, net of taxes (11.0) 2.8 *
Cumulative effect of accounting
change, net of tax -- (283.1) *
-------- --------- --
Net income (loss) $ 172.9 $ (166.5) *
======== =========
- ---------------------
*Not meaningful
Operating income from continuing operations increased $114.2 million
(57%) due to a $175.7 million (18%) increase in net revenues and only a $61.5
million (8%) increase in operating expenses. The lower percentage increase in
operating expenses was partially attributable to a $15.0 million decrease in
general and administrative expenses primarily associated with a $12.2 million
reduction in PHH corporate and relocation business expenses resulting from post
PHH merger savings as well as the elimination of $3.9 million of expenses
associated with Interval International, Inc., ("Interval"), which was sold in
December 1997. Businesses acquired in 1998 (Jackson Hewitt and The Harpur Group)
contributed $27.2 million to the increase in operating income while the
remainder was due to internal growth within existing businesses owned by the
Company for the full 1998 and 1997 quarterly periods. A discussion of operating
income is included in the segment discussion to follow.
The $8.8 million (87%) increase in interest expense, net was primarily
attributable to (i) incremental average borrowings under revolving credit
facilities during the first of quarter 1998 (prior to the March 1998 issuance
of the FELINE PRIDES), which were used to substantially finance $943.2 million
of the Company's first quarter 1998
25
acquisitions, including Jackson Hewitt and The Harpur Group; and (ii) interest
income earned in 1997 on the proceeds from the February 1997 issuance of $550
million 3% Notes and other available cash, which were invested in short-term
marketable securities.
The Company's effective income tax rate related to continuing operations
decreased from 41% in 1997 to 36% in 1998 as a result of the impact of lower
tax rates in international jurisdictions, lower non-deductible amortization
expense as a percentage of pre-tax income and other executed tax planning
initiatives.
The Company recorded minority interest expense of $4.9 million in 1998
related to the preferred dividend payable on mandatorily redeemable preferred
securities issued on March 2, 1998 (See "LIQUIDITY AND CAPITAL RESOURCES -
Financing Exclusive of Management and Mortgage Program Financing").
Discontinued operations, consisting of the Company's consumer software
and classified advertising businesses generated net income (loss) in 1998 and
1997 of $(11.0) million and $2.8 million, respectively. The consumer software
business incurred incremental net losses of $15.8 million on a net revenue
increase of $4.2 million, principally due to incremental development and
marketing costs. Net income of the classified advertising business increased
$2.0 million on a net revenue increase of $17.2 million. Such increases within
the classified advertising business were primarily the result of profits from
businesses acquired by Hebdo Mag International, Inc. prior to its merger with
the Company, during the fourth quarter of 1997. The operating income increase
within the classified advertising segment was partially offset by a higher
effective tax rate in 1998.
The Company recorded a non-cash after tax charge in 1997 of $283.1
million to account for the cumulative effect of an accounting change, effective
January 1, 1997, related to revenue and expense recognition for memberships.
SEGMENT DISCUSSION
The underlying discussion of each segment's continuing operating results
focuses on profits from continuing operations, excluding interest, taxes, and
cumulative effect of a change in accounting ("Operating Income"). Management
believes such discussion is the most informative representation of recurring,
non-transactional related operating results of the Company's business segments.
TRAVEL SERVICES SEGMENT
The Company operates business units that provide services necessary to
domestic and international travelers. The Company is the world's largest
franchisor of nationally recognized hotel brands and car rental operations
(Avis), which are responsible for 16% of all hotel rooms sold and 25% of all
cars rented in the United States, respectively. Royalty revenue is received
from franchisees under contracts that generally range from 10 to 50 years in
duration. The Company is the world's largest provider of timeshare exchange
services (RCI) to timeshare owners under one to three year membership programs
which require both exchange fees for swapping vacation weeks and recurring and
renewal membership fees. In addition, the Company is a leading provider of
corporate fleet management and leasing services and is also the largest
value-added tax processor worldwide.
(In millions) THREE MONTHS ENDED MARCH 31,
-------------------------------------------
1998 1997 VARIANCE
----------- ------------ --------
Net revenue $ 361.5 $ 327.0 11%
Operating expenses 209.1 217.6 (4%)
----------- ------------
Operating income $ 152.4 $ 109.4 39%
=========== ============
26
Operating income increased $43.0 million (39%) as a result of
double-digit percentage point growth in business units comprising 98% of the
combined Travel Segment operating income. Revenue increased $34.5 million (11%)
while expenses decreased $8.5 million (4%). Harpur, acquired in January 1998,
accounted for $7.4 million of net revenues and $4.4 million in operating
expenses during the 1998 quarter. On a comparable basis, excluding the 1998
acquisition of Harpur, operating income increased $40.0 million (37%) and
operating margins increased from 33% to 42%.
Lodging operating income increased $8.8 million (25%) as a result of a
$4.8 million revenue increase and a $4.0 million reduction in expenses. The
revenue increase resulted from a 2% increase in franchisee revenue per
available room and a 2% royalty rate increase as well as increased initial
franchise fees received from new franchisees seeking to join Company franchise
systems. Expenses within the lodging business decreased due to: (i) lower
amortization expense corresponding to a reduction of intangible assets as part
of the fourth quarter 1997 restructuring of franchise brands and (ii) a
reduction of corporate overhead allocated to the lodging business unit as the
Company leveraged its corporate infrastructure among more businesses. Timeshare
operating income increased $16.1 million (81%) primarily as a result of a $12.6
million (13%) increase in revenue, while expenses decreased $3.5 million. The
$12.6 million (13%) revenue increase included continued volume growth in both
exchanges and memberships (6%) and an increase in average pricing (2%). The
decrease in Timeshare expenses reflect continued benefits of post-acquisition
reorganization of timeshare operations. Car rental operating income increased
$12.3 million (80%) as a result of increased international trademark license
fees and as well as increased royalties from Avis, which 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 $8.4 million (25%) as a result of $5.1 million of increased revenue
and $3.3 million of decreased expenses. The Fleet management revenue increase
resulted primarily from a $5.1 million increase in net leasing revenue. The
reduction in Fleet management expenses primarily results from reduced expenses
mainly associated with the restructuring of operations following the Company's
second quarter 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, COLDWELL BANKER and ERA 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 businesses, the Company receives royalty revenue
from approximately 11,500 franchisees under contracts with terms ranging from 5
to 50 years. The Company operates the world's largest provider of corporate
employee relocation services and receives fees for providing an array of
services which include selling relocating employees' homes (without recourse to
the Company), assisting the relocating employee in finding a home, moving
household goods, expense reporting and other services. The Company also
operates the largest in-bound mortgage telemarketing operation in the United
States. Cendant Mortgage Corporation generates origination profits from the
sale of mortgage notes, generally within 45 days of origination but retains
recurring servicing revenue streams over the life of the mortgage. Each Real
Estate Services business provides customer referrals to other Real Estate
Services businesses.
27
(In millions) THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1998 1997 VARIANCE
----------- ---------- --------
Net revenue $ 279.1 $ 191.1 46%
Operating expenses 176.1 143.2 23%
----------- ----------
Operating income $ 103.0 $ 47.9 115%
=========== ==========
Operating income increased $55.1 million (115%) as a result of
corresponding double-digit percentage point increases in the Real Estate
franchise, Relocation Services and Mortgage Services business units. Revenue
increased $88.0 million (46%) while expenses increased only $32.9 million
(23%). Real Estate franchise operating income grew $26.6 million (135%)
primarily as a result of a $22.8 million increase in royalty revenue while
expenses increased only $2.4 million driving a 19 percentage point increase in
the operating margin. The increase in real estate franchise royalty revenue was
attributable to a 21% increase in franchisee home sales volume and a 14%
increase in the underlying average sales price of homes sold. Relocation
Services operating income increased $8.5 million (61%) primarily as a result of
a $14.4 million net increase in home sale, referral and other relocation fees
while expenses increased only $5.9 million. Operating income at the Mortgage
Services business unit increased $21.2 million (166%) due primarily 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
$34.7 million and $9.3 million increases in production and service fee revenue,
respectively, while operating expenses reflecting the increase in loan
origination volume increased $23.2 million (111%).
ALLIANCE MARKETING SEGMENT
The Company derives its Alliance Marketing revenue principally from
membership fees, insurance premiums and product sales. The Alliance Marketing
Segment is divided into three divisions: individual membership ("Individual
Membership"); insurance/wholesale ("Insurance/Wholesale"); and lifestyle
("Lifestyle"). Individual Membership, with more than 33 million members,
provides customers with access to a variety of products and services in such
areas as retail shopping, credit information, travel, auto, dining and home
improvement. Insurance/Wholesale, with nearly 31 million customers, markets and
administers insurance products, primarily accidental death insurance.
Insurance/wholesale also provides services such as checking account enhancement
packages, various financial products and discount programs to financial
institutions, which in turn provide these services to their customers.
Lifestyle, with over 11 million customers, provides customers with unique
products and services that are designed to enhance a customer's lifestyle.
Alliance Marketing growth is generated primarily from direct marketing to
consumers or by partnering with businesses such as banks, credit card and
travel companies which furnish access to their client base. Commencing with the
Cendant Merger, Alliance Marketing businesses have unfettered access to the
customers of the Company's Travel Segment businesses which account for 1 of 6
U.S. hotel rooms sold, 1 of 4 cars rented in the U.S. and more than 70% of
timeshare resort vacation exchanges worldwide. Alliance Marketing businesses
also have access to customers of the Company's Real Estate Segment business
which participate in more than 25% of U.S. home sales, more than 50% of
corporate employee relocations and more than $25 billion in annual mortgage
originations.
(In millions) THREE MONTHS ENDED MARCH 31,
-------------------------------------------
1998 1997 VARIANCE
--------- ---------- --------
Net revenue $ 372.0 $ 353.9 5%
Operating expenses 377.5 321.1 18%
--------- ----------
Operating income (loss) $ (5.5) $ 32.8 (117%)
========= ==========
Operating income for the Alliance Marketing segment decreased $38.3
million (117%), resulting in a $5.5 million operating loss due primarily to
increased membership solicitation expenses.
28
Individual Membership operating income decreased $27.9 million (234%)
from operating income in 1997 of $11.9 million to a 1998 operating loss of
$16.0 million. The revenue increase was more than offset by a $32.0 million
(21%) increase in operating expenses. Revenue increased $4.1 million (2%) due
primarily to a $7.8 million (46%) increase in travel agent commissions, due
primarily to increased membership solicitation costs, which are expensed as
incurred.
Insurance/Wholesale operating income increased $11.1 million (45%) to
$36.0 million. Revenue increased $22.1 million (20%) to $134.0 million and was
partially offset by an increase in operating expenses of $11.1 (13%). Domestic
revenues increased $15.3 million (17%) to $107.2 million. This revenue increase
was primarily due to new customer additions. Domestic expenses increased by
$5.0 million (7%) due primarily to increased marketing and servicing expenses.
International revenues increased $6.8 million (34%) to $26.8 million while
expenses increased $6.1 million (33%) to $24.6 million. The international
business continued its expansion into new countries and markets, accounting for
growth in both revenue and expenses.
Lifestyle operating loss increased $21.5 million to $25.4 million. The
increased loss was due to a revenue decrease of $8.2 million (11%) and an
expense increase of $13.3 million (17%). Revenue and operating income at
Entertainment Publications, Inc. ("EPub") decreased by $7.3 million (44%) and
$9.1 million (66%), respectively. This decline reflects a change in sales focus
from community group to school distribution channels, which impacted 1998
revenue. School and community group distribution channels both generate
revenues in the third and fourth quarters, but community group distribution
channels also generate first quarter sales. The North American Outdoor Group
("NAOG") posted revenue gains of $2.8 million (12%), but operating income fell
$6.7 million (203%). These changes were due primarily to an increase in book,
video and advertising revenues being offset by higher membership solicitation
costs of $5.8 million and losses associated with the introduction of a new Golf
membership club.
OTHER SERVICES SEGMENT
The Company operates a variety of other businesses in addition to those
which comprise each of the Company's core business segments. Such business
operations and transactions are primarily comprised of (i) 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.; (ii)
information technology and reservation system support services provided to the
car rental and hotel industry ("Wizcom"); (iii) casino credit information and
marketing services ("Casino Marketing"); and (iv) 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,
--------------------------------------
1998 1997 VARIANCE
--------- --------- --------
Net revenue $ 116.8 $ 81.7 43%
Operating expenses 51.5 70.8 (27%)
--------- ---------
Operating income $ 65.3 $ 10.9 499%
========= =========
Operating income increased $54.4 million primarily as a result of $24.2
million of profits from acquired Jackson Hewitt operations, a $17.7 million
pre-tax gain on the sale of Avis common stock in a March secondary offering and
incremental investment income.
Revenue increased $35.1 million, which includes $36.3 million of revenue
from acquired Jackson Hewitt operations, $28.9 million from the sale of Avis
stock and investment income net of $28.6 million decrease in revenue associated
with Interval operations sold in December 1997. Operating expenses decreased
$19.3 million (27%) primarily from $18.8 million of expenses associated with
sold Interval operations and a $10.0 million reduction in corporate
administrative expenses net of $12.1 million of expenses associated with
acquired Jackson Hewitt operations.
29
LIQUIDITY AND CAPITAL RESOURCES
PENDING ACQUISITIONS
American Bankers. On March 23, 1998, the Company entered into a definitive
agreement (the "ABI Merger Agreement") to acquire American Bankers Insurance
Group, Inc. ("American Bankers") for $67 per share in cash and stock, for
aggregate consideration of approximately $3.1 billion. The Company agreed to
purchase 23.5 million shares of American Bankers at $67 per share through its
pending cash tender offer, to be followed by a merger in which the Company
agreed to deliver Cendant shares with a value of $67 for each remaining share
of American Bankers common stock outstanding. The Company has received
anti-trust clearance to acquire American Bankers. The tender offer is subject
to the receipt of tenders representing at least 51 percent of the common shares
of American Bankers as well as customary closing conditions, including
regulatory approvals. The Company plans to fund this acquisition with proceeds
received from either its new term loan arrangement, borrowings under other
committed facilities, operating cash flow or a combination of the above. The
Company may also fund a portion of the purchase price with equity or proceeds
from the disposition of its consumer software and classified advertising
businesses. (See - Discontinued Operations) From time to time, representatives
of the Company and representatives of American Bankers have discussed possible
modifications to the terms of the ABI Merger Agreement, including a change in
the mix of consideration to increase the cash component and decrease the stock
component and changing the transaction to a taxable transaction. No agreement
regarding any such modification has been reached and there can be no assurance
that such discussion will result in any agreement being reached. If no
agreement regarding the terms of any modifications to the terms of the ABI
Merger Agreement is reached, the current ABI Merger Agreement will remain in
effect in accordance with its terms. The transaction is expected to be
completed in the fourth quarter of 1998 or the first quarter of 1999. American
Bankers provides affordable, specialty insurance products and services through
financial institutions, retailers and other entities offering consumer
financing.
RAC Motoring Services. On May 21, 1998, the Company announced that it has
reached a definitive agreement with the Board of Directors of Royal Automobile
Club Limited ("RACL") to acquire their RAC Motoring Services subsidiary
("RACMS") for approximately $735 million in cash. The sale of RACMS has
subsequently been approved by its shareholders. On September 27, 1998, the UK
Secretary of State for Trade and Industry referred the RACMS acquisition to the
U.K. Monopolies and Mergers Commission (the "MMC"). Closing is subject to
certain conditions, including MMC approval. Although no assurances can be made,
the Company currently anticipates that the transaction will be completed in the
spring of 1999. The Company plans to fund this acquisition with proceeds from
either its new term loan arrangement, borrowings under other committed
facilities, operating cash flow or a combination of the above.
COMPLETED ACQUISITIONS
National Parking Corporation. On April 27, 1998, the Company acquired National
Parking Corporation ("NPC") for $1.6 billion in cash, which included the
repayment of approximately $227 million of outstanding NPC debt. NPC is
substantially comprised of two operating subsidiaries; National Car Parks and
Green Flag. National Car Parks is the largest private (non-municipal) single
car park operator in the UK and Green Flag operates the third largest roadside
assistance group in the UK and offers a wide-range of emergency support and
rescue services. The Company funded the NPC acquisition with borrowings under
its revolving credit facilities.
Harpur Group. On January 20, 1998, the Company completed the acquisition of
Harpur, a leading fuel card and vehicle management company in the UK, from
privately held H-G Holdings, Inc. for approximately $186 million in cash plus
future contingent payments of up to $20 million over two years.
30
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition of
Jackson Hewitt Inc. ("Jackson Hewitt") for approximately $480 million in cash.
Jackson Hewitt operates the second largest tax preparation service franchise
system in the United States. The Jackson Hewitt franchise system specializes in
computerized preparation of federal and state individual income tax returns.
Other Completed 1998 Acquisitions. The Company acquired certain other entities
for an aggregate purchase price of approximately $348.5 million in cash during
the six months ended June 30, 1998. Such acquisitions were accounted for under
the purchase method of accounting. Additionally, the Company made a $100.0
million cash payment to the seller of Resort Condominium International, Inc. in
satisfaction of a contingent purchase liability.
TERMINATION OF ACQUISITION AGREEMENT
On October 5, 1998, the Company announced it terminated its agreement to
acquire Providian Auto and Home Insurance Company ("Providian"). The
termination date in the Company's agreement to acquire Providian was September
30, 1998. Certain representations and covenants in the acquisition agreement
had not been fulfilled and the conditions to closing had not been met. The
Company did not pursue an extension of the termination date of the agreement
because Providian no longer met the Company's acquisition criteria.
DISCONTINUED OPERATIONS
On August 12, 1998 (the "Measurement Date"), the Company announced that its
Executive Committee of the Board of Directors committed to discontinue the
Company's classified advertising and consumer software businesses by disposing
of Hebdo Mag International ("Hebdo Mag") and Cendant Software Corporation
("Cendant Software"), respectively. The Company has since entered into a
definitive agreement to sell Hebdo Mag to its former 50% owners for 7.1 million
shares of Company common stock and approximately $400 million in cash. The
transaction is expected to consummate in the fourth quarter of 1998 and is
subject to certain conditions, including regulatory approval and financing by
the purchaser. The Company expects to recognize a gain of approximately $200
million upon the disposal of Hebdo Mag, assuming a Company stock price of $8.00
per share, the closing price of the Company's common stock on October 7, 1998.
In addition, the Company has engaged investment bankers to analyze various
strategic alternatives in regard to the disposition of Cendant Software, which
is to occur within one year of the Measurement Date. The Company anticipates
that the disposition of Cendant Software will also result in a significant
gain. The Company believes that the divesting of its Hebdo Mag and Cendant
Software subsidiaries will generate significant proceeds.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
The Company believes that it has sufficient liquidity and access to
liquidity through various sources. The Company has been unable to
access equity and public debt markets pending the filing of its restated
financial statements with the Securities and Exchange Commission. Accordingly,
the Company has secured additional liquidity through other sources including a
364-day, $3.25 billion term loan facility and committed revolving credit
facilities of $2.458 billion, including a bank commitment to provide a $650
million, 364-day revolving facility, which is available to partially fund the
American Bankers acquisition.
On May 29, 1998, the Company entered into a 364-day term loan facility
with a syndicate of financial institutions which provides for borrowings of
$3.25 billion (the "Term Loan Facility"). The Term Loan Facility bears
interest at LIBOR plus the applicable LIBOR spread, as defined. The Company
intends to repay all outstanding borrowings under the Term Loan Facility as
soon as practicable. Upon the execution of the Term Loan Facility, temporary
credit
31
agreements, which provided for $1.0 billion of borrowings, were terminated. The
Term Loan Facility contains certain restrictive covenants, which are
substantially similar to and consistent with the covenants in effect for the
Company's existing revolving credit agreements. At June 30, 1998, the full
amount of the commitment under the Term Loan Facility was drawn. The Company
used $2.0 billion of the proceeds from the Term Loan Facility to repay the
outstanding borrowings under its revolving credit facilities and intends to use
the remainder for the acquisition of American Bankers, RACMS and for general
corporate purposes.
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 $1.058 billion, 364 day revolving credit facility
(the "364 Day Revolving Credit Facility") (collectively the "Revolving Credit
Facilities"). The 364 Day Revolving Credit Facility will mature on October 30,
1998 but may be renewed on an annual basis for an additional 364 days upon
receiving lender approval. The Company has submitted an extension request to
the lenders under the 364 Day Revolving Credit Facility and anticipates that
approximately $1.0 billion will be renewed. The Five Year Revolving Credit
Facility will mature on October 1, 2001. Borrowings under the Revolving Credit
Facilities, at the option of the Company, bear interest based on competitive
bids of lenders participating in the facilities, at prime rates or at LIBOR
plus a margin of approximately 22 basis points. The Company is required to pay
a per annum facility fee of .08% and .06% of the average daily unused
commitments under the Five Year Revolving Credit Facility and 364 Day Revolving
Credit Facility, respectively. The interest rates and facility fees are subject
to change based upon credit ratings on the Company's senior unsecured long-term
debt by nationally recognized debt rating agencies. The Revolving Credit
Facilities contain certain restrictive covenants including restrictions on
indebtedness, mergers, liquidations and sale and leaseback transactions and
requires the maintenance of certain financial ratios, including a 3:1 minimum
interest coverage ratio and a 3.5:1 maximum debt coverage ratio, as defined.
The Company's 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 outstanding at March 31,
1998, $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. Long-term debt decreased $189.1 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.
The Company's debt was $4.0 billion at June 30, 1998, which primarily consisted
of $3.25 billion of borrowings under the company's Term Loan Facility and $700
million of publicly issued fixed rate debt.
The Company filed an amended shelf registration statement (the "Shelf
Registration Statement") on February 6, 1998 with the Securities and Exchange
Commission for the issuance of up to an aggregate $4.0 billion of debt and
equity securities. Pursuant to the Shelf Registration Statement on March 2,
1998, Cendant Capital I (the "Trust"), a statutory business Trust formed under
the laws of the State of Delaware and a wholly-owned subsidiary of the Company
issued 29.9 million FELINE PRIDES' and 2.3 million trust preferred securities
and received approximately $1.5 billion in gross proceeds therefrom. The Trust
invested the proceeds in 6.45% Senior Debentures due 2003 (the "Debentures"),
issued by the Company, which represent the sole asset of the Trust. The
obligations of the Trust related to the FELINE PRIDES and trust preferred
securities are unconditionally guaranteed by the Company to the extent the
Company makes payments pursuant to the Debentures. The issuance of the FELINE
PRIDES and trust preferred securities resulted in the utilization of
approximately $3.0 billion of availability under the Shelf Registration
Statement. Upon issuance, the FELINE PRIDES consisted 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 forward purchase
contracts under which the holders are required to purchase common stock from
the Company in February of 2001. The Growth PRIDES consist of zero
32
coupon U.S. Treasury securities and forward purchase contracts under which the
holders are required to purchase common stock from the Company in February
2001. The trust preferred securities and the trust preferred securities forming
a part of the Income PRIDES, each with a face amount of $50 per security, bear
interest, in the form of preferred stock dividends, at the annual rate of 6.45
percent. The forward purchase contract forming a part of the Income PRIDES will
be made by the Company in the form of a contract adjustment payment at an
annual rate of 1.05 percent. The forward purchase contract forming part of the
Growth PRIDES will be made by the Company in the form of a contract adjustment
payment at an annual rate of 1.30 percent. Payments under the forward purchase
contracts require 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 the Company common
stock for a 20 consecutive trading day period ending in mid-February of 2001.
The Company has the right to defer the contract adjustment payments and the
payment of interest on its debentures to the Trust. Such election will subject
the Company to certain restrictions, including restrictions on making dividend
payments on its common stock until all such payments in arrears are settled.
The Company filed a shelf registration statement with the Securities and
Exchange Commission, which has not yet become effective for the aggregate
issuance of up to $3.0 billion of debt and equity securities.
On May 4, 1998, the Company redeemed all of the outstanding ($144.5
million principal amount) 4-3/4% Convertible Senior Notes due 2003 at a
price of 103.393% of the principal amount, together with interest accrued to
the redemption date. Prior to the redemption date, during 1998, $95.5 million
of such notes were exchanged for 3.4 million shares of Company common stock.
On April 8, 1998, the Company exercised its option to call its 6-1/2%
Convertible Subordinated Notes (the "6-1/2% Notes") for redemption on May 11,
1998, in accordance with the provisions of the indenture relating to the 6-1/2%
Notes. Prior to the redemption date, during 1998, all of the outstanding 6-1/2%
Notes were converted into 2.1 million shares of Company common stock.
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH operates their mortgage services, fleet management services and
relocation services businesses as a separate public reporting entity and
supports purchases of leased vehicles and originated mortgages primarily by
issuing commercial paper and medium term notes. Financial covenants related to
such debt are designed to ensure the self-sufficient liquidity status of PHH.
Accordingly, PHH's publicly filed financial statements and underlying publicly
issued debt were not impacted by the accounting irregularities previously
disclosed and PHH continues to issue debt securities in public markets. Such
borrowings are not classified based on contractual maturities, but rather are
included in liabilities under management and mortgage programs rather than
long-term debt since such debt corresponds directly with high quality related
assets. Additionally, PHH continues to pursue opportunities to reduce its
borrowing requirements by securitizing increasing amounts of its high quality
assets. In May 1998, PHH commenced a program to sell originated mortgage loans
to an unaffiliated buyer, at the option of the Company, up to the buyer's asset
limit of $1.5 billion. The buyer may sell or securitize such mortgage loans
into the secondary market, however, servicing rights are retained by the
Company.
PHH debt is issued without recourse to the Company. PHH expects to
continue to have broad access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing credit
standards to minimize credit risk and the potential for losses. Depending upon
asset growth and financial market conditions, PHH utilizes the United States,
European and Canadian commercial paper markets, as well as other cost-effective
short-term instruments. In addition, PHH will continue to utilize the public
and private debt markets as sources of financing. Augmenting these sources, PHH
will continue to manage outstanding debt with the potential sale or transfer of
managed assets to third parties while retaining fee-related servicing
responsibility. At March 31, 1998, PHH's outstanding debt was comprised of
commercial paper, medium-term notes and other borrowings of $2.2 billion, $3.4
33
billion and $0.2 billion, respectively. At June 30, 1998, PHH had outstanding
debt of $6.8 billion comprised of $3.2 billion in commercial paper, $3.4
billion of medium term notes and other borrowings of $0.2 billion.
PHH filed a shelf registration statement with the Securities and Exchange
Commission effective March 2, 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. As of July 31, 1998, PHH had
issued $795 million of medium-term notes under this shelf registration
statement.
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 80 percent of the
average amount of outstanding commercial paper. PHH maintains a $2.5 billion
syndicated unsecured credit facility which is backed by domestic and foreign
banks and is comprised of $1.25 billion of lines of credit maturing in 364 days
and $1.25 billion maturing in the year 2000. In addition, PHH has a $200
million revolving credit facility, which matures on June 24, 1999, and has
approximately $186 million of uncommitted lines of credit with various
financial institutions, which were unused at June 30, 1998. Management closely
evaluates not only the credit of the banks but also the terms of the various
agreements to ensure ongoing availability. The full amount of PHH's committed
facilities at June 30, 1998 was undrawn and available. Management believes that
its current policy provides adequate protection should volatility in the
financial markets limit PHH's access to commercial paper or medium-term notes
funding.
PHH minimizes its exposure to interest rate and liquidity risk by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
domestic and international funding sources, and securing available credit under
committed banking facilities.
On July 10, 1998, the Company entered into a Supplemental Indenture No. 1
(the "Supplemental Indenture") with The First National Bank of Chicago, as
trustee, under the Senior Indenture dated as of June 5, 1997, which formalizes
the policy for PHH of limiting the payment of dividends and the outstanding
principal balance of loans to the Company to 40% of consolidated net income (as
defined in the Supplemental Indenture) for each fiscal year. The Supplemental
Indenture prohibits PHH from paying dividends or making loans to the Company if
upon given effect to such dividend and/or loan, PHH's debt to equity ratio
exceeds 8 to 1.
CREDIT RATINGS
On October 9, 1998, Moody's reduced the Company's long-term debt credit
rating to Baa1. The Company's long-term debt credit ratings from Standard &
Poor's ("S&P") and Duff & Phelps ("Duff") remain at A, however such ratings are
being reviewed by such agencies with negative implications. On October 9, 1998,
Moody's reduced PHH's long-term and short-term debt ratings to A3/P2 from
A2/P1. PHH's long-term and short-term debt ratings remain A+/A1, A+/F1 and
A+/D1 with S&P, Fitch IBCA and Duff, respectively. Presently, the ratings of
S&P, related to PHH debt are on watch with negative implications. While the
recent down grading and negative watch period will cause PHH and Cendant to
incur a marginal increase in cost of funds, management believes its sources of
liquidity continue to be adequate. (A security rating is not a recommendation
to buy, sell or hold securities and is subject to revision or withdrawal at any
time).
CASH FLOWS
The Company generated $183.2 million of cash flows from operations for
the three months ended March 31, 1998, representing a $220.3 million decrease
from the same period in 1997. Cash flows from operations decreased despite an
increase in income from continuing operations, primarily due to $97.0 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. In 1998, the Company used $1.4 billion in cash flows from
investing activities, which consisted of $943.2 million of acquisitions and
acquisition-related payments and $318.8 million of net investment in assets
under
34
management and mortgage programs. The Company used $1.3 billion for investing
activities in 1997 for $811.3 million of the net purchase of marketable
securities and $316.8 million for the net investment in assets under management
and mortgage programs. Cash provided by financing activities in 1998 of $1.6
billion primarily reflects gross proceeds of approximately $1.5 billion from
the issuance of the FELINE PRIDES. Net cash from financing activities in 1997
of $481.8 million primarily consisted of $542.7 million of proceeds from the
issuance of convertible debt.
CAPITAL EXPENDITURES
The Company incurred $58.8 million of the cost of capital expenditures in
the first quarter of 1998 and anticipates investing approximately $250 million
in capital expenditures for the entire year. Such capital expenditures are
primarily associated with the development of integrated corporate relocation
business systems in accordance with the merger plan developed upon the PHH
merger date, mortgage services office and system additions to support the rapid
growth in origination volume and the consolidation of internationally-based
call centers.
LITIGATION
As a result of the aforementioned accounting irregularities, which were
discovered in the former CUC business units, numerous purported class action
lawsuits, a purported derivative lawsuit and an individual lawsuit have been
filed against the Company and, among others, its predecessor HFS, and certain
current and former officers and directors of the Company and HFS, asserting
various claims under the federal securities laws and certain state statutory
and common laws. In addition, the staff of the SEC and the United States
Attorney for the District of New Jersey are conducting investigations relating
to the accounting issues. The SEC staff advised the Company that its inquiry
should not be construed as an indication by the SEC or its staff that any
violations of law have occurred.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material impact on the financial
condition, results of operations and cash flows of the Company.
SEVERANCE AGREEMENT
On July 28, 1998, the Company announced that Walter A. Forbes resigned as
Chairman of the Company and as a member of the Board of Directors. The
severance agreement reached with Mr. Forbes entitles him the benefits required
by his employment contract relating to a termination of Mr. Forbes' employment
with the Company for reasons other than cause. Aggregate benefits resulted in a
$50.4 million third quarter 1998 expense comprised of $37.9 million in cash and
1.3 million Company stock options with a Black Scholes value of $12.5 million.
Such options were immediately vested and expire July 28, 2008.
REPRICING OF STOCK OPTIONS
On July 28, 1998, the Compensation Committee of the Board of Directors
approved, in principle, a program to reprice certain Company stock options
granted to employees of the Company, other than executive officers, during
December 1997 and the first quarter of 1998. The new option price for such
stock options is to be the market price of the Company's common stock as
reported on the New York Stock Exchange shortly after the filing of the
Company's restated Quarterly Reports on Forms 10-Q/A for the quarterly periods
ended March 31, 1998 and June 30, 1998 (the
35
"New Price"). On September 23, 1998, the Compensation Committee extended a
repricing and option exchange program to certain executive officers and senior
managers of the Company subject to certain conditions including revocation of a
portion of existing options plus repricing of other portions at prices at and
above fair market value at the time of repricing. Additionally, a management
equity ownership program was adopted that requires these executive officers and
senior managers to acquire Company common stock at various levels commensurate
with their respective compensation levels. The repricing will be accomplished
by canceling existing options and issuing new options at the New Price.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
effective for the 1998 calendar year end.
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.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instrument and Hedging Activities" effective for all quarterly and annual
periods beginning after June 15, 1999. SFAS No. 133 requires the recognition of
all derivatives in the consolidated balance sheet as either assets or
liabilities measured at fair value. The Company will adopted SFAS No. 133
effective January 1, 2000. The Company has not yet determined the impact SFAS
No. 133 will have on its financial statements.
YEAR 2000 COMPLIANCE
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after
January 1, 2000.
To minimize or eliminate the effect of the year 2000 risk on the Company's
business systems and applications, the Company is continually identifying,
evaluating, implementing and testing changes to its computer systems,
applications and software necessary to achieve Year 2000 compliance. The
Company's predecessor implemented a Year 2000 initiative in March 1996 that has
now been adopted by all business units of the Company. As part of such
initiative, the company has selected a team of managers to identify, evaluate
and implement a plan to bring all of the Company's critical business systems
and applications into Year 2000 compliance prior to December 31, 1999. The Year
2000 initiative consists of four phases: (i) identification of all critical
business systems subject to Year 2000 risk (the "Identification Phase"); (ii)
assessment of such business systems and applications to determine the method of
correcting any Year 2000 problems (the "Assessment Phase"); (iii) implementing
the corrective measures (the "Implementation Phase"); and (iv) testing and
maintaining system compliance (the "Testing Phase"). The Company has
substantially completed the Identification and Assessment Phases and has
identified and assessed five areas of risk: (i) internally
36
developed business applications; (ii) third party vendor software, such as
business applications, operating systems and special function software; (iii)
computer hardware components; (iv) electronic data transfer systems between the
Company and its customers; and (v) embedded systems, such as phone switches,
check writers and alarm systems. Although no assurances can be made, the
Company believes that it has identified substantially all of its systems,
applications and related software that are subject to Year 2000 compliance risk
and has either implemented or initiated the implementation of a plan to correct
such systems that are not Year 2000 compliant. The Company has targeted
December 31, 1998 for completion of the Implementation Phase. Although the
Company has begun the Testing Phase, it does not anticipate completion of the
Testing Phase until sometime prior to December 1999.
The Company relies on third party service providers for services such as
telecommunications, internet service, utilities, components for its embedded
and other systems and other key services. Interruption of those services due to
Year 2000 issues could affect the Company's operations. The Company has
initiated an evaluation of the status of such third party service providers'
efforts and to determine alternative and contingency requirements. While
approaches to reducing risks of interruption of business operations vary by
business unit, options include identification of alternative service providers
available to provide such services if a service provider fails to become Year
2000 compliant within an acceptable timeframe prior to December 31, 1999.
The total cost of the Company's Year 2000 compliance plan is anticipated to
be $53 million. Approximately $17 million of these costs have been incurred
through August 31, 1998, and the Company expects to incur the balance of such
costs to complete the compliance plan. The Company has been expensing and
capitalizing the costs to complete the compliance plan in accordance with
appropriate accounting policies. Variations from anticipated expenditures and
the effect on the Company's future results of operations are not anticipated to
be material in any given year. However, if Year 2000 modifications and
conversions are not made, or are not completed in time, the Year 2000 problem
could have a material impact on the operations and financial condition of the
Company.
The estimates and conclusions herein are forward-looking statements and are
based on management's best estimates of future events. Risks of completing the
plan include the availability of resources, the ability to discover and correct
the potential year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of the Company's service providers to bring
their systems into Year 2000 compliance.
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.
o 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.
o 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.
38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion contained under the heading "Company Investigation and
Litigation" in Note 12 contained in Part 1 - FINANCIAL INFORMATION, Item 1 -
Financial Statements, is incorporated herein by reference.
39
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.
40
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/ Michael P. Monaco
------------------------------
Michael P. Monaco
Vice Chairman and
Chief Financial Officer and
Director
BY: /s/ Scott E. Forbes
------------------------------
Scott E. Forbes
Executive Vice President
and Chief Accounting Officer
Date: October 13, 1998
41
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTIONS
- ------- ------------
42
5
1,000,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
152
0
1,248
0
0
2,993
0
0
15,779
2,416
1,057
0
0
8
4,255
15,779
0
1,129
0
811
3
0
19
296
108
(11)
0
0
0
173
0.21
0.20
