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 June 30, 1998
COMMISSION FILE NO. 1-10308
------------
CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0918165
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive (Zip Code)
office)
(973) 428-9700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if applicable)
------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the Registrant's classes of
common stock was 851,531,353 shares of Common Stock outstanding as of September
25, 1998.
CENDANT CORPORATION AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Statements of Operations - Three and Six Months Ended
June 30, 1998 and 1997 3-4
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 5-6
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 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 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
PART II OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 6. Exhibits and Reports on Form 8-K 44
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.
PART I - 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
REVENUES
Membership and service fees - net $ 1,223.1 $ 935.7 $ 2,262.5 $ 1,833.2
Fleet leasing (net of depreciation and interest
costs of $318.1, $298.2, $629.7 and $584.3) 19.8 15.9 39.0 30.1
Other 35.0 48.0 105.8 90.0
----------- ----------- ---------- -----------
Net revenues 1,277.9 999.6 2,407.3 1,953.3
----------- ----------- ---------- -----------
EXPENSES
Operating 456.5 301.8 791.0 613.8
Marketing and reservation 291.3 249.3 556.0 471.8
General and administrative 153.8 143.3 299.8 304.4
Depreciation and amortization 86.6 59.2 152.4 116.4
Other charges:
Merger related costs and other unusual charges (27.5) 278.9 (24.4) 278.9
Investigation related costs 19.5 _ 19.5 _
Financing costs 12.7 _ 12.7 _
Interest - net 22.9 12.8 41.9 22.9
----------- ----------- ---------- -----------
Total expenses 1,015.8 1,045.3 1,848.9 1,808.2
----------- ----------- ---------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, MINORITY INTEREST AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 262.1 (45.7) 558.4 145.1
Provision for income taxes 92.3 23.7 199.8 100.8
Minority interest, net 14.9 - 19.8 -
----------- ----------- ---------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 154.9 (69.4) 338.8 44.3
Loss from discontinued operations,
net of taxes (Note 7) (1.9) (14.6) (12.9) (11.8)
------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 153.0 (84.0) 325.9 32.5
Cumulative effect of accounting change, net of tax - - - (283.1)
----------- ----------- ----------- ------------
NET INCOME (LOSS) $ 153.0 $ (84.0) $ 325.9 $ (250.6)
=========== ============ ========== ============
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
INCOME (LOSS) PER SHARE:
BASIC
Income (loss) from continuing operations
before cumulative effect of accounting change $ 0.18 $ (0.09) $ 0.40 $ 0.06
Loss from discontinued operations, net - (0.02) (0.01) (0.02)
Cumulative effect of accounting change, net - - - (0.35)
---------- ----------- -------- ------------
Net income (loss) $ 0.18 $ (0.11) $ 0.39 $ (0.31)
========== ============ ========= ============
DILUTED
Income (loss) from continuing operations
before cumulative effect of accounting change $ 0.18 $ (0.09) $ 0.38 $ 0.05
Loss from discontinued operations, net - (0.02) (0.01) (0.01) (1)
Cumulative effect of accounting change, net - - - (0.34) (1)
---------- ----------- ---------- ------------
Net income (loss) $ 0.18 $ (0.11) $ 0.37 $ (0.30) (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 net loss from discontinued operations, 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 net loss from
discontinued operations, the cumulative effect of accounting change, net
and net loss are anti-dilutive to their respective basic per share
amounts. In addition, due to losses recorded during the three months ended
June 30, 1997, the sum of diluted per share amounts for the first and
second quarters in 1997 does not equal the calculation for the full six
months.
See accompanying notes to consolidated financial statements.
4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
AS
RESTATED
(NOTE 2)
---------------
JUNE 30, DECEMBER 31,
1998 1997
--------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 1,528.3 $ 67.0
Receivables, net 1,341.6 1,170.7
Deferred income taxes 331.4 311.9
Other current assets 940.8 767.2
Net assets of discontinued operations 504.0 273.3
--------------- -------------
Total current assets 4,646.1 2,590.1
--------------- -------------
Property and equipment 1,238.8 460.8
Franchise agreements, net 974.9 890.3
Goodwill, net 4,064.8 2,148.2
Other intangibles, net 1,051.1 897.5
Other assets 763.2 642.8
--------------- -------------
Total assets exclusive of assets under programs 12,738.9 7,629.7
--------------- -------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,918.9 3,659.1
Relocation receivables 590.6 775.3
Mortgage loans held for sale 2,754.0 1,636.3
Mortgage servicing rights 480.5 373.0
--------------- -------------
7,744.0 6,443.7
--------------- -------------
TOTAL ASSETS $ 20,482.9 $ 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)
---------------
JUNE 30, DECEMBER 31,
1998 1997
--------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,443.2 $ 1,492.4
Term loan - current portion 1,850.0 -
Deferred income 1,368.6 1,042.0
--------------- ----------------
Total current liabilities 4,661.8 2,534.4
--------------- ----------------
Deferred income 207.8 292.1
Long-term debt 2,146.9 1,246.0
Other noncurrent liabilities 360.2 181.2
--------------- ----------------
Total liabilities exclusive of liabilities under programs 7,376.7 4,253.7
--------------- ----------------
Liabilities under management and mortgage programs
Debt 6,830.0 5,602.6
Deferred income taxes 259.0 295.7
Mandatorily redeemable preferred securities issued by subsidiaries 1,470.8 --
Commitments and contingencies (Note 14)
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 857,986,368
and 838,333,800 shares, respectively 8.6 8.4
Additional paid-in capital 3,396.6 3,088.4
Retained earnings 1,266.5 940.6
Accumulated other comprehensive loss (48.1) (38.2)
Restricted stock, deferred compensation (2.8) (3.4)
Treasury stock, at cost 6,750,546 shares (74.4) (74.4)
---------------- -----------------
Total shareholders' equity 4,546.4 3,921.4
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,482.9 $ 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)
--------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 325.9 $ (250.6)
Loss from discontinued operations, net of taxes 12.9 11.8
Depreciation and amortization 152.4 116.4
Cumulative effect of accounting change, net of tax - 283.1
Merger-related costs and other unusual charges (24.4) 278.9
Payments of merger-related costs and other unusual
charge liabilities (115.2) (126.7)
Other (99.4) (348.3)
----------- --------------
NET CASH PROVIDED BY OPERATIONS EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS 252.2 (35.4)
----------- --------------
Management and mortgage programs:
Depreciation and amortization 610.7 531.6
Mortgage loans held for sale (1,117.7) 427.7
------------ -------------
(507.0) 959.3
------------ -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
OF CONTINUING OPERATIONS (254.8) 923.9
------------ -------------
INVESTING ACTIVITIES
Property and equipment additions (167.2) (50.1)
Investments (107.2) (16.3)
Net change in marketable securities (11.2) (713.1)
Net assets acquired, exclusive of cash acquired
and acquisition-related payments (2,669.9) (331.6)
Other, net 48.7 (7.1)
----------- --------------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS EXCLUSIVE
OF MANAGEMENT AND MORTGAGE PROGRAMS (2,906.8) (1,118.2)
------------ --------------
Management and mortgage programs:
Investment in leases and leased vehicles (1,337.3) (1,243.4)
Payments received on investment in leases and leased vehicles 475.2 437.2
Proceeds from sales and transfers of leases and leased vehicles to third parties 27.3 63.5
Equity advances on homes under management (3,293.4) (2,136.7)
Repayment of advances on homes under management 3,483.1 2,203.7
Additions to originated mortgage servicing rights (220.4) (86.0)
Proceeds from sales of mortgage servicing rights 53.6 29.1
------------ --------------
(811.9) (732.6)
----------- --------------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (3,718.7) (1,850.8)
------------ --------------
See accompanying notes to consolidated financial statements.
7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
AS RESTATED (NOTE 2)
--------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------- ----------
FINANCING ACTIVITIES
Proceeds from borrowings $ 3,266.9 $ 455.2
Principal payments on borrowings (369.0) (30.2)
Issuance of convertible debt - 542.7
Issuance of common stock 128.2 66.8
Purchases of common stock - (171.3)
Proceeds from mandatorily redeemable preferred securities
issued by subsidiaries, net 1,470.8 -
Other, net - 15.2
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 4,496.9 878.4
----------- ----------
Management and mortgage programs:
Proceeds from debt issuance or borrowings 1,659.5 859.2
Principal payments on borrowings (1,125.5) (1,111.6)
Net change in short-term borrowings 693.4 (54.9)
----------- -----------
1,227.4 (307.3)
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS 5,724.3 571.1
----------- ----------
Effect of changes in exchange rates on cash and cash equivalents (15.5) 19.7
Net cash used in discontinued operations (274.0) (25.3)
------------ -----------
Net increase (decrease) in cash and cash equivalents 1,461.3 (361.4)
Cash and cash equivalents, beginning of period 67.0 448.1
----------- ----------
Cash and cash equivalents, end of period $ 1,528.3 $ 86.7
=========== ==========
See accompanying notes to consolidated inancial statements.
8
CENDANT CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
merged 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 June 30, 1998, the
consolidated statements of operations for the three and six months ended
June 30, 1998 and 1997 and the consolidated statements of cash flows for
the six months ended June 30, 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 of 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 and six months ended June 30, 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 completed 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 and six
months ended June 30, 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 14). In connection with the SEC's investigation,
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).
9
Accordingly, the financial results for the three and six months ended June
30, 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.
10
STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 1998
------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES
AS PREVIOUSLY AND ACCOUNTING AS
REPORTED CHANGE RESTATED
------------- -------------- -------------
Net revenues $ 1,306.3 $ (28.4) $ 1,277.9
------------- -------------- -------------
Expenses
Operating 459.9 (3.4) 456.5
Marketing and reservation 271.4 19.9 291.3
General and administrative 129.4 24.4 153.8
Depreciation and amortization 84.6 2.0 86.6
Other charges:
Merger related costs and other unusual charges (42.0) 14.5 (27.5)
Investigation related costs 19.5 -- 19.5
Financing costs 12.7 -- 12.7
Interest, net 23.6 (0.7) 22.9
---------- -------------- -------------
Total expenses 959.1 56.7 1,015.8
---------- ------------- -------------
Income from continuing operations
before income taxes and minority interest 347.2 (85.1) 262.1
Provision for income taxes 117.8 (25.5) 92.3
Minority interest, net 14.9 - 14.9
---------- ------------- -------------
Income from continuing operations 214.5 (59.6) 154.9
Loss from discontinued
operations, net of taxes (3.6) 1.7 (1.9)
----------- ------------- --------------
Net income $ 210.9 $ (57.9) $ 153.0
========== ============== =============
INCOME PER SHARE
BASIC
Income from continuing operations $ 0.24 $ 0.18
Loss from discontinued operations, net - -
---------- -------------
Net income $ 0.24 $ 0.18
========== =============
DILUTED
Income from continuing operations $ 0.24 $ 0.18
Loss from discontinued operations, net - -
---------- -------------
Net income $ 0.24 $ 0.18
========== =============
WEIGHTED AVERAGE SHARES
Basic 850.8 850.8
Diluted 900.9 900.9
11
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 1997
------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES
AS PREVIOUSLY AND ACCOUNTING AS
REPORTED CHANGE RESTATED
------------- -------------- -------------
Net revenues $ 1,024.0 $ (24.4) $ 999.6
------------- -------------- -------------
Expenses
Operating 303.8 (2.0) 301.8
Marketing and reservation 261.7 (12.4) 249.3
General and administrative 140.2 3.1 143.3
Depreciation and amortization 58.5 0.7 59.2
Merger related costs and other unusual charges 299.6 (20.7) 278.9
Interest, net 12.8 - 12.8
------------- ------------- -------------
Total expenses 1,076.6 (31.3) 1,045.3
------------- -------------- -------------
Loss from continuing operations
before income taxes (52.6) 6.9 (45.7)
Provision for income taxes 35.3 (11.6) 23.7
------------- -------------- -------------
Loss from continuing operations (87.9) 18.5 (69.4)
Loss from discontinued operations, net of taxes (4.4) (10.2) (14.6)
-------------- -------------- --------------
Net loss $ (92.3) $ 8.3 $ (84.0)
============== ============= ==============
LOSS PER SHARE
BASIC
Loss from continuing operations $ (0.11) $ (0.09)
Loss from discontinued operations, net - (0.02)
-------------- --------------
Net loss $ (0.11) $ (0.11)
============== ==============
DILUTED
Loss from continuing operations $ (0.11) $ (0.09)
Loss from discontinued operations, net - (0.02)
-------------- --------------
Net loss $ (0.11) $ (0.11)
============== ==============
WEIGHTED AVERAGE SHARES
Basic 804.2 804.2
Diluted 804.2 804.2
12
STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES
AS PREVIOUSLY AND ACCOUNTING AS
REPORTED CHANGE RESTATED
---------- -------------- -------------
Net revenues $ 2,461.2 $ (53.9) $ 2,407.3
---------- -------------- -------------
Expenses
Operating 788.7 2.3 791.0
Marketing and reservation 526.2 29.8 556.0
General and administrative 270.4 29.4 299.8
Depreciation and amortization 149.3 3.1 152.4
Unusual charges:
Merger related costs and other unusual charges (42.0) 17.6 (24.4)
Investigation related costs 19.5 19.5
Financing costs 12.7 12.7
Interest, net 42.8 (0.9) 41.9
---------- -------------- -------------
Total expenses 1,767.6 81.3 1,848.9
---------- ------------- -------------
Income from continuing operations
before income taxes and
minority interest 693.6 (135.2) 558.4
Provision for income taxes 243.8 (44.0) 199.8
Minority interest, net 19.8 - 19.8
---------- ------------- -------------
Income from continuing operations 430.0 (91.2) 338.8
Loss from discontinued operations, net of taxes (16.2) 3.3 (12.9)
----------- ------------- --------------
Net income $ 413.8 $ (87.9) $ 325.9
========== ============== =============
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations $ 0.51 $ 0.40
Loss from discontinued operations, net (0.02) (0.01)
----------- --------------
Net income $ 0.49 $ 0.39
========== =============
DILUTED
Income from continuing operations $ 0.48 $ 0.38
Loss from discontinued operations, net (0.02) (0.01)
----------- --------------
Net income $ 0.46 $ 0.37
========== =============
WEIGHTED AVERAGE SHARES
Basic 844.8 844.8
Diluted 907.8 907.8
13
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES
AS PREVIOUSLY AND ACCOUNTING AS
REPORTED CHANGE RESTATED
------------- -------------- -------------
Net revenues $ 1,981.8 $ (28.5) $ 1,953.3
---------- -------------- -------------
Expenses
Operating 621.7 (7.9) 613.8
Marketing and reservation 493.8 (22.0) 471.8
General and administrative 293.7 10.7 304.4
Depreciation and amortization 115.6 0.8 116.4
Merger-related costs and other unusual charges 299.6 (20.7) 278.9
Interest, net 22.8 0.1 22.9
---------- ------------- -------------
Total expenses 1,847.2 (39.0) 1,808.2
---------- -------------- -------------
Income from continuing
operations before income taxes and
cumulative effect of accounting change 134.6 10.5 145.1
Provision for income taxes 122.1 (21.3) 100.8
---------- -------------- -------------
Income from continuing operations
before cumulative effect of
accounting change 12.5 31.8 44.3
Loss from discontinued
operations, net of taxes (1.5) (10.3) (11.8)
----------- -------------- --------------
Income before cumulative effect of
accounting change 11.0 21.5 32.5
Cumulative effect of accounting
change, net of tax - (283.1) (283.1)
----------- -------------- --------------
Net income (loss) $ 11.0 $ (261.6) $ (250.6)
========== ============== ==============
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations
before cumulative effect of
accounting change $ 0.02 $ 0.06
Loss from discontinued operations, net (0.01) (0.02)
Cumulative effect of accounting
change, net - (0.35)
----------- --------------
Net income (loss) $ 0.01 $ (0.31)
=========== ==============
DILUTED
Income from continuing operations
before cumulative effect of
accounting change $ 0.02 $ 0.05
Loss from discontinued operations, net (0.01) (0.01)
Cumulative effect of accounting
change, net - (0.34)
----------- --------------
Net income (loss) $ 0.01 $ (0.30)
========== ==============
WEIGHTED AVERAGE SHARES
Basic 803.2 803.2
Diluted 803.2 839.2
14
BALANCE SHEET
(IN MILLIONS)
AT JUNE 30, 1998
----------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES
AS PREVIOUSLY AND ACCOUNTING AS
REPORTED CHANGE RESTATED
----------------- --------------- -------------
ASSETS
Cash and cash equivalents $ 1,549.7 $ (21.4) $ 1,528.3
Receivables, net 1,148.7 192.9 1,341.6
Deferred income taxes 224.8 106.6 331.4
Other current assets 792.7 148.1 940.8
Net assets of discontinued operations 522.3 (18.3) 504.0
Deferred membership acquisition costs 448.0 (448.0) -
Property and equipment 1,221.0 17.8 1,238.8
Goodwill - net 4,130.9 (66.1) 4,064.8
Other assets 2,694.7 94.5 2,789.2
------------- ------------- -------------
Total assets exclusive of
assets under programs 12,732.8 6.1 12,738.9
------------- ------------- -------------
Assets under management
and mortgage programs 7,744.0 - 7,744.0
------------- ------------- -------------
TOTAL ASSETS $ 20,476.8 $ 6.1 $ 20,482.9
============= ============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and other $1,970.5 $ (527.3) $ 1,443.2
Term loan - current portion 1,850.0 - 1,850.0
Deferred income 631.4 945.0 1,576.4
Long-term debt 2,185.4 (38.5) 2,146.9
Other liabilities 367.3 (7.1) 360.2
------------- -------------- -------------
Total liabilities exclusive of
liabilities under programs 7,004.6 372.1 7,376.7
------------- ------------- -------------
Liabilities under management
and mortgage programs 7,094.8 (5.8) 7,089.0
Mandatorily redeemable
preferred securities issued
by subsidiaries 1,426.5 44.3 1,470.8
------------- ------------- -------------
Total shareholders' equity 4,950.9 (404.5) 4,546.4
------------- -------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 20,476.8 $ 6.1 $ 20,482.9
============= ============= =============
15
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 former 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 $.34 per diluted share for the six months ended June 30,
1998, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(In millions, except per share amounts) 1998 1997 1998 1997
----------- ----------- ----------- ----------
Income (loss) from continuing operations
before cumulative effect of
accounting change $ 154.9 $ (69.4) $ 338.3 $ 44.3
Convertible debt interest 3.2 - 8.0 -
---------- ----------- ----------- -----------
Income (loss) from continuing operations,
before cumulative effect of
accounting change, as adjusted $ 158.1 $ (69.4) $ 346.3 $ 44.3
========== ============ =========== ==========
Weighted average shares - basic 850.8 804.2 844.8 803.2
Potential dilution of common stock:
Stock options 29.1 - 38.1 36.0
Convertible debt 21.0 - 24.9 -
---------- ----------- ----------- -----------
Weighted average shares - diluted 900.9 804.2 907.8 839.2
========== =========== =========== ==========
EPS - continuing operations before
cumulative effect of
accounting change
Basic $ 0.18 $ (0.09) $ 0.40 $ 0.06
========== ============ =========== ==========
Diluted $ 0.18 $ (0.09) $ 0.38 $ 0.05
========== ============ =========== ==========
16
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 and display of an alternative income
measurement and its components in the financial statements.
Components of comprehensive income (loss) are summarized as follows:
SIX MONTHS ENDED
JUNE 30,
---------------------------
(In millions) 1998 1997
----------- ------------
Net income (loss) $ 325.9 $ (250.6)
---------- ------------
Other comprehensive income (loss), net of tax:
Currency translation adjustment (10.1) (10.3)
Unrealized gains on marketable securities:
Unrealized holding gains arising during the period .2 -
Reclassification adjustment for gains included
in earnings - (4.3)
----------- ------------
Other comprehensive income (loss) (9.9) (14.6)
----------- ------------
Comprehensive income (loss) $ 316.0 $ (265.2)
========== ============
The components of accumulated other comprehensive income (loss) are as
follows:
NET UNREALIZED ACCUMULATED
GAIN ON CURRENCY OTHER
(In millions) MARKETABLE TRANSLATION COMPREHENSIVE
SECURITIES ADJUSTMENT INCOME (LOSS)
------------- ------------- -------------
Balance, January 1, 1998 $ .2 $ (38.4) $ (38.2)
Currency translation adjustment - (10.1) (10.1)
Net unrealized gain on marketable securities .2 - .2
------------- ------------- -------------
Balance, June 30, 1998 $ .4 $ (48.5) $ (48.1)
============= ============= ==============
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 reflected in the Company's consolidated statements
of income since the respective dates of acquisition.
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 six
months ended June 30, 1998.
(In millions)
Total consideration:
Cash paid (net of $52.3 million of cash acquired) $ 2,669.9
-----------
Assets acquired 1,127.4
Liabilities assumed 471.2
-----------
Fair value of identifiable net assets acquired 656.2
-----------
Goodwill $ 2,013.7
===========
17
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 comprised of two substantial
operating subsidiaries; National Car Parks and Green Flag. National Car
Parks is the largest private (non-municipal) single car park operator in
the United Kingdom ("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.
Harpur Group - On January 20, 1998, the Company completed the acquisition
of The Harpur Group Ltd. ("Harpur"), a leading fuel card and vehicle
management company in the UK 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 for an aggregate purchase price of
approximately $348.5 million in cash during the six-month period ended
June 30, 1998. 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.
Pro forma Information
The following table reflects the unaudited operating results of the
Company for the six months ended June 30, 1998 and 1997 on a pro forma
basis, which gives effect to the acquisitions of NPC and Jackson Hewitt,
accounted for under the purchase method of accounting. The remaining
acquisitions completed during 1998 were not material to the operating
results of the Company and therefore are not included in the pro forma
operating results. The pro forma results are not necessarily indicative of
the operating results that would have occurred had the NPC and Jackson
Hewitt transactions been consummated on January 1, 1997 nor are they
intended to be indicative of results that may occur in the future. The
underlying pro forma information includes the amortization expense
associated with the assets acquired, the Company's financing arrangements,
certain purchase accounting adjustments and the related income tax
effects.
(In millions, except per share amounts) SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
----------- -----------
Net revenues $ 2,593.5 $ 2,262.3
Income before cumulative effect of accounting change (1) 322.5 8.6
Income per share before cumulative effect of accounting change (1)
Basic $ 0.38 $ 0.01
Diluted 0.36 0.01
Weighted average shares outstanding:
Basic 844.8 803.2
Diluted 907.8 839.2
- -------------------
(1) Includes loss from discontinued operations for the six months ended
June 30, 1998 and 1997 of $12.9 million ($.01 per diluted share) and
$11.8 million ($.01 per diluted share), respectively.
18
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.
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
CONSUMER SOFTWARE
---------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(In millions) 1998 1997 1998 1997
----------- ----------- ----------- -----------
Net revenues $ 130.4 $ 79.0 $ 226.3 $ 170.7
----------- ----------- ---------- -----------
Loss before income taxes (10.5) (27.7) (37.1) (27.0)
Benefit from income taxes (3.5) (10.7) (13.2) (8.9)
------------ ------------ ----------- ------------
Net loss $ (7.0) $ (17.0) $ (23.9) $ (18.1)
============ ============ =========== ============
CLASSIFIED ADVERTISING
---------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------- ----------- ----------- -----------
(In millions) 1998 1997 1998 1997
----------- ----------- ----------- -----------
Net revenues $ 74.4 $ 48.9 $ 137.2 $ 94.5
----------- ----------- ---------- -----------
Income before income taxes 11.4 3.9 20.6 10.2
Provision for income taxes 6.3 1.5 9.6 3.9
----------- ----------- ---------- -----------
Net income $ 5.1 $ 2.4 $ 11.0 $ 6.3
=========== =========== ========== ===========
The Company has allocated $10.0 million and $2.5 million of interest
expense to discontinued operations for the six months ended June 30, 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:
CONSUMER SOFTWARE CLASSIFIED ADVERTISING
--------------------------------- ---------------------------------
(In millions) AT JUNE 30, AT DECEMBER 31, AT JUNE 30, AT DECEMBER 31,
1998 1997 1998 1997
------------- ---------------- ------------- ---------------
Current assets $ 171.1 $ 209.1 $ 77.4 $ 58.6
Goodwill 115.2 42.2 259.5 181.5
Other assets 75.4 49.2 37.9 33.2
Total liabilities (99.9) (127.0) (132.6) (173.5)
-------------- -------------- -------------- -------------
Net assets of discontinued operations $ 261.8 $ 173.5 $ 242.2 $ 99.8
============= ============= ============= =============
19
8. 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. At June 30, 1998, the Term Loan Facility was
fully utilized with $1.4 billion of borrowings classified as long-term
based on the Company's ability and intent to refinance such borrowings on
a long-term basis. The Company used $2 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 pending
acquisitions (See Note 13) and for general corporate purposes.
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 to certain restrictions, including restrictions on making dividend
payments on its common stock until all such payments in arrears are
settled.
Redemption of 4-3/4% Notes - On May 4, 1998, the Company redeemed all of
the outstanding ($144.5 million principal amount) 4-3/4% Convertible
Senior Notes (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 (See Note 11).
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.
9. 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
liabilities at December 31, 1997 and reduction of such liabilities for
the six months ended June 30, 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 JUNE 30, 1998
------------------ ----------- ----------- -------------- --------------
Professional fees $ 50.7 $ (35.8) $ - $ (9.3) $ 5.6
Personnel related 168.5 (69.1) - (18.2) 81.2
Business terminations 3.9 (0.7) 1.4 (2.4) 2.2
Facility related and other 50.4 (9.6) 2.7 5.5 49.0
------------- ------------ ----------- ------------- -------------
Total $ 273.5 $ (115.2) $ 4.1 $ (24.4) $ 138.0
============= ============ =========== ============== =============
LIABILITIES AT CASH LIABILITIES AT
(In millions) DECEMBER 31, 1997 PAYMENTS NON-CASH ADJUSTMENTS JUNE 30, 1998
------------------ ----------- ----------- -------------- --------------
Fourth Quarter 1997 Charge $ 197.4 $ (94.2) $ 1.1 $ (13.2) $ 91.1
Second Quarter 1997 Charge 76.1 (21.0) 3.0 (11.2) 46.9
------------- ------------ ----------- -------------- -------------
Total $ 273.5 $ (115.2) $ 4.1 $ (24.4) $ 138.0
============= ============ =========== ============== =============
Fourth Quarter 1997 Charge. The $91.1 million of liabilities remaining at
June 30, 1998 are primarily comprised of $65.1 million of severance and
other personnel related costs and $20.5 million of outstanding
facility-related liabilities. Approximately $5.9 million of such remaining
costs will be paid upon the closure of nine European call centers which
will be substantially completed in 1998. Approximately $37.8 million of
executive termination benefits will be paid or otherwise extinguished upon
the settlement of employment obligations. Outstanding facility-related
liabilities will be paid or otherwise extinguished upon the aformentioned
closures of European call centers and other office consolidations. During
the six months ended June 30, 1998, the Company recorded a net credit of
$13.2 million to Merger related costs and other unusual charges with a
corresponding reduction to liabilities primarily as a result of a change
in the original estimate of costs to be incurred.
Second Quarter 1997 Charge. The $46.9 million of liabilities remaining at
June 30, 1998 primarily consists of $16.1 million of future severance and
benefit payments and $28.5 million of future lease termination payments.
During the six months ended June 30, 1998, the Company recorded a net
credit of $11.2 million to Merger related costs and other unusual charges
with a corresponding reduction to liabilities as a result of a change in
the original estimate of costs to be incurred. Such credit was net of
$24.1 million of costs incurred related to lease terminations.
10. INVESTIGATION RELATED COSTS
The Company records all costs incurred in connection with and as a result
of the investigations into accounting irregularities as investigation
related costs in the consolidated statement of operations. Such costs for
the three and six months ended June 30, 1998 are primarily comprised of
professional fees and public relations costs.
11. OTHER CHARGES - FINANCING COSTS
The Company paid $25 million of banking fees in May 1998 in connection
with executing the Term Loan Facility (see Note 8 - Financing
Transactions). Such financing was arranged to ensure Company liquidity in
the absence of access to public financing markets as a result of the
Company's discovery and announcement of accounting irregularities and the
corresponding lack of audited financial statements. The financing costs
have been deferred and are being amortized over six months, the
anticipated borrowing period. As of June 30, 1998, the Company amortized
$4.6 million which is classified in the statement of operations as
"Other charges - financing costs".
In connection with the Company exercising its option to redeem the 4 3/4%
Notes, the Company anticipated that all holders of the 4 3/4% Notes would
elect to convert the 4 3/4% notes to Company common stock based upon the
fair value of the common stock at such time. However, during the
redemption period, the Company discovered and announced accounting
irregularities which resulted in a significant decrease in the Company's
common stock price. As a result, holders of the 4 3/4% Notes elected not
to convert the 4 3/4% notes to common stock and redeemed such notes at a
premium (see Note 8 - Financing Transactions). Accordingly, the Company
recorded a $7.2 million ($4.5 million after-tax) loss on early
extinguishment of debt which is classified in the statement of operations
as Other charges - financing costs.
12. 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 in which the Company sold 1 million shares
of Avis common stock. 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.
20
13. PENDING ACQUISITIONS
American Bankers Insurance Group, Inc. 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 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
21
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.
RAC Motoring Services - On May 21, 1998, the Company announced that it
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 UK 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.
14. 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 ends 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. 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
22
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
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.
23
15. 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.
16. SUBSEQUENT EVENTS
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.
24
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.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
In December 1997, Cendant Corporation (the "Company") was created through
the merger (the "Cendant Merger") of HFS Incorporated ("HFS") and CUC
International Inc. ("CUC"). The Company is one of the foremost consumer and
business services companies in the world. The combination of HFS and CUC
provides each of the Company's businesses new access to consumer contacts
through the Company's expanded customer base, while providing such businesses
with the technology-driven and direct marketing expertise necessary to
successfully cross-market within its existing business units.
The Company provides fee-based services to consumers within the 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 both the world?s largest franchisor of residential real
estate brokerage offices and 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 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, the underlying financial information
for the three and six months ended June 30, 1998 and 1997 has been restated to
incorporate all relevant information obtained therefrom. Such quarterly and six
month results presented herein have also been restated for a change in
accounting, effective January 1, 1997, related to revenue and expense
recognition for memberships.
Restated net income (loss) totaled $153.0 million and $(84.0) million for
the quarters ended June 30, 1998 and 1997, respectively, ($.18 and $(.11) per
diluted share, respectively). The Company originally reported (prior to
restatement) net income (loss) of $210.9 million and $(92.3) million for the
quarters ended June 30, 1998 and 1997, respectively ($.24 and $(.11)) per
diluted Share, respectively). The Company originally reported income from
continuing operations before Unusual Charges of $205.5 million ($.23 per
diluted share) in 1998 and $136.6 ($(.16) per diluted share) in 1997. The
corresponding restated income from continuing operations before unusual charges
for the quarterly periods ended June 30, 1998 and 1997 totaled $156.7 million
($.17 per diluted share) and $139.0 million $(.16 per diluted share),
respectively. The increases (decreases) in such restated amounts (1998 -
$(48.8) million, 1997 - $2.4 million) compared to those amounts originally
reported were the result of: (i) additional after-tax expenses in 1998 and 1997
of $(40.1) million ($.04 per diluted share) and $4.9 million ($.00 per diluted
share), respectively, due to the aforementioned change in accounting; and (ii)
accounting errors and irregularities in 1998 and 1997 of $(8.7) million ($.01)
per diluted share) and $(2.5) million ($0.00 per diluted share), respectively.
Restated net income (loss) totaled $325.9 million and $(250.6) million,
for the six months ended June 30, 1998 and 1997, respectively, ($.37 and
$(.30)) per diluted share, respectively). The Company originally reported
(prior to restatement) net income of $413.8 million and $11.0 million for the
six months ended June 30, 1998 and 1997,
26
respectively ($.46 and $.01 per diluted share, respectively).
The Company originally reported income from continuing operations before
merger related and other unusual charges and investigation related costs of
$421.2 million ($.46 per diluted share) in 1998 and $237.0 million ($.30 per
diluted share) in 1997. The corresponding restated income from continuing
operations, before merger related and other unusual charges, investigation
related costs and the cumulative effect of a change in accounting, for the six
months ended June 30, 1998 and 1997 totaled $343.2 million ($.38 per diluted
share) and $252.7 million ($.30 per diluted share), respectively. The
increases (decreases) in such restated amounts (1998 - $(78.0) million, 1997 -
$15.7 million) compared to those amounts originally reported were the result of
additional after-tax expenses in 1998 and 1997 of $(57.0) million ($.06) per
diluted share) and $4.9 million, respectively, due to the aforementioned change
in accounting and accounting errors and irregularities in 1998 and 1997 of
$(21.0) million ($(.02) per diluted share) and $10.8 million, respectively.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 VS THREE MONTHS ENDED
JUNE 30, 1997
The operating results of the Company and certain of its underlying
business segments for the three months ended June 30, 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 and income
taxes. The operating results of the Company for the three months ended June 30,
1998 and 1997 are as follows:
(In millions) THREE MONTHS ENDED JUNE 30,
--------------------------------------------
1998 1997 VARIANCE
----------- ----------- ---------
- ------------------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS:
Net revenues $ 1,277.9 $ 999.6 28%
Operating expenses:
Excluding Unusual Charges 1,007.7 753.6 34%
Unusual Charges (1) (27.5) 278.9 *
---------- -----------
Total operating expenses 980.2 1,032.5
---------- -----------
OPERATING INCOME (LOSS) 297.7 (32.9) *
Interest, net (2) 35.6 12.8 178%
---------- -----------
Pre-tax income (loss) before minority interest 262.1 (45.7) *
Provision for income taxes 92.3 23.7 *
Minority interest, net 14.9 - *
---------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 154.9 (69.4) *
- -----------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations, net of taxes (1.9) (14.6) *
---------- -----------
Net income (loss) $ 153.0 $ (84.0) *
========== ============
---------------------
(1) Merger-related costs and other unusual charges
(2) Includes $12.7 million of financing costs incurred as a result
of the Company's discovery and announcement of accounting
irregularies in the CUC business units.
* Not meaningful
27
Operating income from continuing operations in 1998 increased $330.6
million from 1997 which was comprised of a $278.3 million increase in net
revenues and a $52.3 million reduction in operating expenses. Contributing to
the increase in operating income was a reduction in Unusual Charges of $306.4
million primarily attributable to $278.9 million of Unusual Charges incurred
during the second quarter of 1997 principally in connection with and
coincident to the Company's merger with PHH Corporation. Net credits to
Unusual Charges of $27.5 million were recorded during 1998 primarily
representing changes in previously recorded estimates. Excluding Unusual
Charges, operating income increased $24.2 million in 1998 compared to 1997
despite that the Company incurred $19.5 million of investigation related
costs in 1998 and $37.8 million of incremental membership solicitation costs
which was planned before management was aware of the accounting change
which resulted in the expense of such costs as incurred. Businesses acquired
during 1998, accounted for $20.2 of the increase in operating income, while
the remainder was due to the internal growth within existing businesses
owned by the Company for the full 1998 and 1997 quarterly periods which was
primarily attributable to growth in the travel and real estate segments.
A discussion of operating income excluding merger related and other unusual
charges is included in the segment discussion to follow.
Interest expense-net, exclusive of $12.7 million of financing costs
incurred in 1998 as a result of the aforementioned discovery of accounting
irregularities (See Note 11 to the consolidated financial statements),
increased $10.1 million, primarily due to: (i) incremental average borrowings
which the Company used to finance more than $2.6 billion of acquisitions during
the three months ended June 30, 1998, including the acquisitions of National
Parking Corporation, Jackson Hewitt, Inc. ("Jackson Hewitt") and the Harpur
Group Ltd. ("Harpur"); 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. (See "LIQUIDITY
AND CAPITAL RESOURCES - Completed Acquisitions").
The Company's effective tax rate was reduced to 35.2% in 1998. In 1997,
the Company recorded a $23.7 million tax provision on a pre-tax loss of $45.7
million, due to the non-deductibility of a significant amount of Unusual
Charges recorded during 1997. The 1997 effective income tax rate on Unusual
Charges was 25%. Excluding Unusual Charges, the effective income tax rate on
income from continuing operations decreased from 40.4% in 1997 to 35.5% in
1998. Such decrease is due to the Company's execution of certain tax
minimization strategies, the favorable impact of lower tax rates in
international jurisdictions and lower non-deductible amortization expense as a
percentage of pre-tax income.
The Company recorded minority interest expense of $14.9 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 losses in 1998 and 1997 of $1.9
million and $14.6 million, respectively. The operating results of discontinued
operations in 1997 included Unusual Charges, after tax of $10.0 million for
severance associated with the termination of certain consumer software
executives. Excluding Unusual Charges, consumer software incurred net losses of
$7.0 million in both 1998 and 1997, although net revenues were $51.4 million
greater in 1998. Additional operating expenses were incurred during 1998 within
the consumer software business for development and marketing costs. Net income
of the classified advertising business increased $2.7 million on a net revenue
increase of $25.5 million. Operating income within the classified advertising
business increased $12.9 million primarily as a result of sales volume 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.
SEGMENT DISCUSSIONS
The underlying discussion of each segment's operating results for the
three months ended June 30, 1998 and 1997 focuses on profits from continuing
operations, excluding interest, taxes, and Unusual Charges ("Operating
Income"). Management believes such discussion is the most informative
representation of recurring, non-transactional related operating results of the
Company's business segments.
28
TRAVEL SERVICES SEGMENT
The Company operates business units that provide a spectrum of services
necessary to domestic and international travelers. The Company is the world's
largest franchisor of nationally recognized hotel brands and car rental
operations (Avis), which are responsible for 16% 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.
The Company acquired National Parking Corporation ("NPC") on April 27,
1998. NPC owns National Car Parks, the largest private (non-municipal)
single car park operator in the United Kingdom ("UK") with approximately 500
locations. NPC also owns Green Flag, the third largest roadside assistance
group in the UK, which offers a wide-range of emergency support and rescue
services to approximately 3.5 million members.
(In millions) THREE MONTHS ENDED JUNE 30,
------------------------------------------
1998 1997 VARIANCE
---------- ---------- ----------
Net revenues $ 489.4 $ 333.1 47%
Operating expenses 325.5 215.0 51%
---------- ----------
Operating income $ 163.9 $ 118.1 39%
========== ==========
Operating income, including the acquisitions of Harpur and NPC, increased
$45.8 million (39%) as a result of double-digit percentage point growth in
business units comprising 98% of combined Travel Segment operating income.
Revenue increased $156.3 million (47%) while expenses increased $110.5 million
(51%). Harpur, acquired January 20, 1998, contributed $4.3 million of operating
income, which included $8.2 million of revenue and $3.9 million of operating
expenses. NPC contributed $12.8 million of operating income in 1998 for the two
months of Company ownership, which included $111.5 million of revenue and $98.7
million of operating expenses. On a comparable basis, excluding the 1998
acquisitions of Harpur and NPC, operating income increased $28.6 million (24%)
while operating margins increased from 36% to 40%.
Lodging operating income increased $13.2 million (30%) due to a $9.1
million (8%) increase in revenue and a $3.9 million (6%) decrease in expenses.
The lodging revenue increase is primarily due to a $6.0 million increase in
franchise fees, including a $2.6 million (6%) increase in royalties and $3.6
million increase in initial fees from sales of master license agreements in
Europe. The royalty increase resulted from a 2% increase in franchisee growth
and a 2% increase in revenue per available room ("REVPAR") at franchised
hotels. Expenses within the lodging business unit decreased due to 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 $5.9 million (32%) due to an $8.7 million (10%)
increase in revenue offset by a $2.8 million (4%) increase in expenses. The
timeshare revenue increase is primarily due to a $3.8 million (9%) increase in
exchange revenue and a $2.4 million (8%) increase in subscription revenue. The
exchange revenue increase is the result of a 7% increase in pricing, while the
increase in subscription revenue is the result of a 7% increase in membership
growth. Car rental operating income increased $7.5 million (36%) on a $9.5
million (25%) increase in revenue. The car rental revenue increase primarily
resulted from a $7.3 million increase in franchise fees including a $4.1
million increase in international license fees and a $1.2 million (5%) increase
in royalty. Car rental royalty revenue increased as a result of a 3% increase
in pricing and a 4% increase in rental days. Fleet management, excluding the
incremental operating results of Harpur, contributed a $6.2 million (22%)
increase in operating income due primarily to a $4.5 million (13%) increase in
asset based (principally leasing) revenue and a $6.1 million (14%) increase in
service based revenue. The increase in asset based revenue is due to a 7%
increase in the number of leases and a 6% increase in pricing. The increase in
fleet management servicing revenue is due to a 29% increase in the number of
service cards partially offset by an 11% decrease in pricing. Including Harpur,
Fleet operating income increased $10.5 million (38%).
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(R),
29
COLDWELL BANKER(R) and ERA(R) franchise brands, which were involved in more
than 25% of homes sold in the United States in 1997. Similar to the Travel
Services Segment franchise business, the Company receives royalty revenue from
approximately 11,500 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 such as 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 ("Mortgage") 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. In addition,
the Company is a distributor of welcome packages to new homeowners, which
provide discounts from local merchants. Each Real Estate Services business
provides customer referrals from other Real Estate Services businesses as well
as a database for prospective Alliance Marketing Segment cross selling.
(In millions) THREE MONTHS ENDED JUNE 30,
--------------------------------------------
1998 1997 VARIANCE
----------- ----------- ---------
Net revenues $ 354.9 $ 246.0 44%
Operating expenses 198.3 159.7 24%
---------- ----------
Operating income $ 156.6 $ 86.3 81%
========== ==========
Operating income increased $70.3 million (81%) primarily as a result of
increases in the Real Estate franchise and Mortgage business units. Revenue
increased $108.9 million (44%) while expenses increased only $38.6 million
(24%). Real Estate franchise operating income increased $42.5 million (91%)
primarily as a result of a $34.2 million increase in royalty revenue and a
$10.6 million increase in preferred alliance revenue (revenue generated from
preferred alliance partners seeking access to franchisees and franchisee
customers), while expenses increased only $5.4 million. The increase in royalty
revenue was due to a 24% increase in home sale volume and a 17% increase in the
underlying average price of homes sold. Expenses remained relatively flat due
to their stable nature increasing the operating margin within the Real Estate
franchise business by 12 percentage points. Operating income at the Mortgage
business unit increased $24.1 million (129%) driven primarily by a $4.1 billion
(165%) increase in mortgage originations. The increase in mortgage originations
generated $50.1 million of additional production revenue while mortgage related
expenses (primarily production related) increased $27.3 million. Operating
income at the Relocation business unit increased $3.7 million (20%) as a result
of a $7.5 million net increase in home sale, referral and other relocation fees
offset by a $3.8 million increase in operating expenses primarily due to an
increase in information technology system support costs. The Company committed
to a $40 million, two-year capital expenditure program to combine the PHH and
Coldwell Banker Corporation relocation operating and customer delivery systems
following the PHH Merger.
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, 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 that account for 1 of 6
U.S. hotel rooms sold, 1 of 4 cars rented in the U.S. and more than 70% of
timeshare resort vacation exchanges worldwide. Alliance marketing businesses
also have access to customers of the Company's Real Estate Segment business
that 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.
30
(In millions) THREE MONTHS ENDED JUNE 30,
---------------------------------------------
1998 1997 VARIANCE
----------- ----------- ----------
Net revenues $ 377.2 $ 332.3 14%
Operating expenses 411.8 321.5 28%
----------- -----------
Operating income $ (34.6) $ 10.8 (420%)
============ ===========
Operating income for the Alliance Marketing segment decreased $45.4
million (420%) to a loss of $34.6 million due primarily to increased membership
solicitation expenses.
Individual membership operating income decreased $44.5 million from
operating income in 1997 of $1.5 million to a 1998 operating loss of $43.0
million. Revenues increased $20.2 million (13%) due primarily to increased
memberships. Individual membership operating expenses increased $64.6 million
(42%) due primarily to increased membership solicitation costs which are
expensed as incurred as well as increases in call center and membership
servicing expenses.
Insurance/Wholesale operating income decreased $0.8 million (1%) to $26.9
million. Revenue increased $18.1 million (15%) to $136.8 million and was more
than offset by an increase in expenses of $18.9 million (21%). Domestic
revenues increased $9.9 million (10%) to $107.8 million. This revenue increase
was primarily due to new customer additions. Domestic expenses increased by
$9.3 million (13%) due primarily to increased customer servicing expenses.
International revenues increased $8.2 million (40%) to $29.0 million but were
offset by increased expenses of $9.5 million (46%) to $30.2 million. The
international business continued its expansion into new countries and markets,
accounting for growth in both revenue and expenses.
Lifestyle operating income remained unchanged at a loss of $18.4 million
due to revenue increases of $6.7 million (11%) offset an increase in expenses
of $6.7 million (9%). Revenue at Entertainment Publications, Inc. ("EPub")
decreased by $3.4 million (37%) but operating income increased $3.4 million
(18%). During the second quarter, EPub received $8.7 million of cost
reimbursements for third party sales activities incurred prior to the second
quarter of 1998. The North American Outdoor Group ("NAOG") revenue increased
$8.7 million (39%), but operating income decreased $2.0 million to an operating
loss of $2.0 million. These changes were due primarily to increases in book,
video and advertising revenues being offset by higher membership solicitation
costs.
OTHER 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; (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) equity in earnings from the
Company's investment in the Avis Rent A Car, Inc. ("Avis") car rental company.
(In millions) THREE MONTHS ENDED JUNE 30,
------------------------------------------
1998 1997 VARIANCE
----------- ----------- ---------
Net revenues $ 56.4 $ 88.2 (36%)
Operating expenses 72.1 57.5 (25%)
---------- -----------
Operating income $ (15.7) $ 30.7 (151%)
========== ===========
Operating income decreased $46.4 million primarily as a result of a $16.6
million reduction in equity in earnings of Avis, a reduction of $7.9 million of
operating income associated with Interval International, Inc. ("Interval"),
which
31
was sold in December 1997 and $19.5 million of investigation related expenses.
The Company owned 100% of Avis common stock prior to its October 1997 initial
public offering and currently owns approximately 20%.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 VS SIX MONTHS ENDED
JUNE 30, 1997
The operating results of the Company and certain of its underlying business
segments for the six months ended June 30, 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 six
months ended June 30, 1998 and 1997 are as follows:
(In millions) SIX MONTHS ENDED JUNE 30,
-----------------------------------------------
1998 1997 VARIANCE
----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS:
Net revenues $ 2,407.3 $ 1,953.3 23%
----------- -----------
Operating expenses:
Excluding Unusual Charges 1,818.7 1,506.4 21%
Unusual Charges (1) (24.4) 278.9 *
----------- -----------
Total operating expenses 1,794.3 1,785.3
----------- -----------
OPERATING INCOME 613.0 168.0 *
Interest, net (2) 54.6 22.9 138%
----------- -----------
Pre-tax income before minority interest
and cumulative effect of accounting change 558.4 145.1 *
Provision for income taxes 199.8 100.8 *
Minority interest, net 19.8 - *
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 338.8 44.3 *
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations, net of taxes (12.9) (11.8) (9%)
Cumulative effect of accounting
change, net of tax - (283.1) *
----------- ------------
Net income (loss) $ 325.9 $ (250.6) *
=========== ============
---------------------
*Not meaningful
(1) Merger-related costs and other unusual charges
(2) Includes $12.7 million of financing costs incurred as a result of
the Company's discovery and announcement of accounting irregularities
in the CUC business units.
Operating income from continuing operations increased $445.0 million
comprised of a $454.0 million increase in net revenues and only a $9.0 million
increase in operating expenses. Contributing to the increase in operating
income was a reduction of Unusual Charges of $303.3 million primarily
attributable to $278.9 million of Unusual Charges incurred during the second
quarter of 1997 principally in connection with and coincident to the PHH Merger.
A net credit to Unusual Charges of $24.4 million was recorded in 1998 which
primarily represented changes in previously recorded estimates. Excluding
Unusual Charges operating income increased $141.7 million in 1998 from 1997
despite that the Company incurred $19.5 million of investigation related costs
in 1998 and $62.1 million of incremental individual membership solicitation
costs which was planned before Management was aware of the accounting change
resulting in expense of such costs as incurred.
32
Businesses acquired during 1998 accounted for $47.4 million of the increase in
operating income. The remainder was due to the internal growth of the
businesses owned by the Company for the full six month periods in 1998 and
1997, which was primarily attributable to growth in the travel and real estate
segments. A discussion of operating income excluding merger related costs and
other unusual charges is included in the segment discussion to follow.
Interest expense, net, exclusive of $12.7 million of financing costs
incurred during 1998 as a result of the aforementioned discovery of
irregularities, increased $19.0 million, primarily due to: (i) incremental
average borrowings which the Company used to finance more than $2.6 billion of
acquisitions during the six months ended June 30, 1998 including the
acquisitions of NPC, Jackson Hewitt and Harpur; 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. (See "LIQUIDITY AND CAPITAL RESOURCES Completed Acquisitions").
The Company's effective tax rate was reduced from 69.5% in 1997 to 35.8%
in 1998 due to the non-deductibility of a significant amount of Unusual Charges
recorded during 1997 and the Company's continued focus on executing strategies
to optimize its effective tax rate. The 1997 effective income tax rate includes
only a 28.9% effective tax rate on Unusual Charges due to the significant
non-deductibility of such costs. Excluding Unusual Charges, the effective
income tax rate on income from continuing operations decreased from 40.4% in
1997 to 35.9% in 1998. Such decrease is due to the Company's execution of
certain tax minimization strategies, the favorable impact of lower tax rates in
international jurisdictions and lower non-deductible amortization expense as a
percentage of pre-tax income.
The Company recorded minority interest expense of $19.8 million in 1998
primarily related to the preferred dividend payable on the FELINE PRIDES and
the trust 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 losses in 1998 and 1997 of
$12.9 million, and $11.8 million respectively. The operating results of
discontinued operations in 1997 included Unusual Charges, after tax, of $10.0
million for severance associated with the termination of certain consumer
software executives. Excluding Unusual Charges, consumer software incurred
incremental net losses of $15.8 million comprised of increased net revenues of
$55.6 million, which were more than offset by a $78.8 million increase in
operating expenses. Additional operating expenses were incurred during 1998 for
development and marketing costs. Net income of the classified advertising
business increased $4.7 million on a net revenue increase of $42.7 million.
Operating income within the classified advertising business increased $15.5
million primarily as a 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 operating results for the six
months ended June 30, 1998 and 1997 focuses on profits from continuing
operations, excluding interest, taxes, Unusual Charges and cumulative effect of
a change in accounting ("Operating Income"). Management believes such
discussion is the most informative representation of recurring,
non-transactions related operating results of the Company's business segments.
TRAVEL SERVICES SEGMENT
(In millions) SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1998 1997 VARIANCE
---------- ----------- ---------
Net revenues $851.0 $ 660.1 29%
Operating expenses 534.6 432.6 24%
---------- -----------
Operating income $316.4 $ 227.5 39%
========== ===========
33
Operating income, including the acquisitions of Harpur and NPC,
increased $88.9 million (39%) as a result of double-digit percentage point
growth in travel business units comprising 98% of combined Travel Services
Segment operating income. Revenue increased $190.9 million (29%) while
expenses increased only $102.0 million (24%). Harpur contributed $7.3 million
of operating income, which included $15.6 million of revenue and $8.3 million
of operating expenses. NPC contributed $12.8 million of operating income
during the two months of the Company's ownership including $111.5 million
of revenue and $98.7 million of operating expenses. On a comparable
basis, excluding the 1998 acquisitions of NPC and Harpur, operating income
increased $68.7 million (30%).
Lodging operating income increased $21.9 million (27%) due to a $14.0
million (7%) increase in revenue and a $7.9 million reduction in operating
expenses. The lodging revenue increase is primarily due to a $12.2 million
increase in franchise fees including a $4.7 million (6%) increase in royalty
revenue and sales of master license agreements in Europe. The lodging royalty
increase resulted from a 2% increase in royalty rate and a 2% increase in
REVPAR at franchised hotels. Expenses within the lodging business unit
decreased due to a reduction of corporate overhead allocated to the lodging
business unit in 1998, consistent with the changes in the Company's
infrastructure. Timeshare operating income increased $22.0 million (57%)
resulting from an $8.8 million (9%) increase in exchange revenue and a $4.0
million (6%) increase in membership fees. While the exchange fee increase was
driven by a 7% pricing increase, subscription revenue increased due to a 7%
increase in memberships. Car rental operating income increased $19.8 million
(55%) primarily from a $10.5 million increase in franchise fees, including $8.6
million associated with international license fees and a $1.9 million increase
in royalty. Furthermore, overhead allocations to car rental decreased $3.3
million as the Company leveraged its combined corporate overhead across all
merged business units. Fleet management, excluding Harpur, had a $11.6 million
(19%) increase in operating income due to a $9.7 million (14%) increase in net
asset based (principally leasing) revenue. Including Harpur, Fleet management
operating income increased $18.9 million (31%).
REAL ESTATE SERVICES SEGMENT
(In millions) SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1998 1997 VARIANCE
----------- ----------- ---------
Net revenue $634.0 $437.1 45%
Operating expenses 372.5 303.0 23%
---------- ----------
Operating income $261.5 $134.1 95%
========== ==========
Operating income increased $127.4 million (95%) primarily driven by
increases in the Real Estate franchise and Mortgage business units. Revenue
increased $196.9 million (45%) while expenses increased only $69.5 million
(23%). Real Estate franchise operating income increased $69.1 million (104%)
primarily as a result of a $56.9 million increase in royalty revenue and an
$11.3 million increase in preferred alliance revenue while expenses increased
only $7.7 million. The increase in Real Estate franchise royalty revenue was
due to a 23% increase in home sale volume and a 16% increase in the underlying
average price of homes sold. Expenses remained relatively flat due to their
stable nature, increasing the operating margin within the Real Estate
franchise
business unit 15 percentage points. Operating income at the Mortgage business
unit increased $47.2 million (150%) driven primarily by a $6.9 billion (163%)
increase in mortgage originations. The increase in mortgage originations
generated $84.8 million in additional production revenue while mortgage related
expenses (primarily production related) increased $48.6 million. Operating
income at the Relocation business unit grew $12.2 million (37%) on a revenue
increase of $22.0 million, while operating expenses increased $9.8 million. The
revenue increase primarily resulted from increases in relocation referrals and
other relocation fees while the expense increases were driven by information
technology system support associated with the consolidation of former PHH and
Coldwell Banker relocation operating and customer delivery systems as well as
other operating expenses.
ALLIANCE MARKETING SEGMENT
(In millions) SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1998 1997 VARIANCE
----------- ----------- ---------
Net revenues $ 749.2 $686.3 9%
Operating expenses 789.2 642.7 23%
----------- -----------
Operating income $ (40.0) 43.6 (192%)
=========== ===========
34
Operating income for the Alliance Marketing segment decreased $83.6
million (192%) to a loss of $40.0 million due primarily to increased membership
solicitation expenses.
Individual membership operating income decreased $72.4 million (540%) from
a 1997 operating income of $13.4 million to a 1998 operating loss of $59.0
million. Revenue increased $24.2 million (8%) due primarily to increased
memberships and increased travel agent commissions. Individual membership
operating expenses increased $96.6 million (31%) due primarily to increased
membership solicitation costs which are expensed as incurred as well as
increases in call center and membership servicing expenses.
Insurance/Wholesale operating income increased $10.2 million (19%) to
$62.8 million. Revenue increased $40.2 million (17%) to $270.8 million and was
partially offset by an increase in expenses of $30.0 million (17%). Domestic
revenues increased $25.2 million (13%) to $215.0 million. This revenue increase
was primarily due to new customer additions. Insurance claims (which are
treated as a reduction in profit sharing revenue) remained flat at 29% in both
years. Domestic expenses increased by $14.4 million (10%) due primarily to
increased customer servicing expenses. International revenue increased to $15.0
million (37%) to $55.8 million but were offset by increased expenses of $15.6
million (40%). The international business continued its expansion into new
countries and markets, accounting for growth in both revenue and expenses.
Lifestyle operating loss increased $21.4 million from a 1997 loss of
$22.4 million to a 1998 loss of $43.8 million. This decrease was due to revenue
decreases of $1.4 million (1%) and expense increases of $20.0 million (13%).
Revenue at EPub decreased $10.8 million (41%) and operating income decreased
$5.7 million (17%). This decline reflects a change in sales focus from
community group to school distribution channels, which impacted 1998 revenue.
School distribution channels generate revenue in the third and fourth quarter
while community group distribution channels also generate first quarter sales.
Additionally, during the first six months of 1998, EPub received $8.7 million
of cost reimbursements for third party sales activities incurred prior to the
second quarter of 1998. Revenues and operating income in the Company's dating
membership business decreased by $1.5 million (8%) and $5.8 million (79%),
respectively, due primarily to an inability to acquire radio time slots as well
as increases advertising expenses. NAOG revenue increased of $11.5 million
(25%), but operating income fell $8.7 million to a loss of $5.4 million. These
changes were due primarily to increases in book, video and advertising revenues
being offset by higher membership solicitation costs.
OTHER SEGMENT
(In millions) SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1998 1997 VARIANCE
----------- ----------- ---------
Net revenues $173.1 $169.8 2%
Operating expenses 122.4 128.1 (4%)
----------- -----------
Operating income $ 50.7 $ 41.7 22%
=========== ===========
Operating income increased $9.0 million (22%) primarily due to $27.3
million of earnings generated from the Jackson Hewitt tax service franchise
business acquired in January 1998 and a $17.7 million pre-tax gain on the sale
of Avis common stock in a February 1998 secondary offering. These increases in
operating income were offset by $17.7 million of 1997 operating income
attributable to Interval which was sold in December 1997 and $19.5 million of
investigation related costs. The 5.7 million (4%) decrease in expenses
primarily represents $41.1 million of expenses associated with sold Interval
operations and $19.5 million of investigation related costs, net of $21.7
million associated with acquired Jackson Hewitt operations.
LIQUIDITY AND CAPITAL RESOURCES
PENDING ACQUISITIONS
35
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
UK 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.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition of
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 1998 Acquisitions and Acquisition-Related Payments. 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 million cash payment to the seller of Resort Condominiums
International, Inc. in satisfaction of a contingent purchase liability.
36
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 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
37
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 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 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 under 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. 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 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
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.
The Company's long-term debt, including current portion, 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.
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
38
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 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.
39
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 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 Standard & Poor's
(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
downgrading 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 used $254.8 million of cash flows from operations in 1998,
representing a $1.2 billion decrease from the same period in 1997. The $1.2
billion decrease in operating cash flows reflects growth in mortgage loan
origination volume and a corresponding 1.5 billion decrease in related cash
flow. Rapid growth, which contributed to the 149% increase in Mortgage Services
operating income, also caused a temporary delay in selling mortgages to the
secondary market until July 1998. The Company used $3.7 billion in cash flows
from investing activities, which consisted of $2.7 billion of acquisitions and
acquisition-related payments and $811.9 million of net investment in assets
under management and mortgage-programs. Cash provided by financing activities
of $5.7 billion primarily reflects the issuance of the FELINE PRIDES and
proceeds of $3.3 billion from borrowings under the term loan facility.
CAPITAL EXPENDITURES
The Company incurred $167.2 million of costs for capital expenditures and
anticipates investing up to approximately $250 million in capital expenditures
in 1998. 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 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
40
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 "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 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
41
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 June 30, 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. Six
months ended June 30, 1998 consolidated currency exposures, including
financial instruments
42
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 June 30, 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.
43
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 in its entirety.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Restated financial data schedule for the quarterly periods ended
March 31, June 30, and September 30, 1997 and 1996.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 17, 1998 reporting
in Item 5 the discovery of accounting irregularities at the former CUC
International Inc. business units, the termination of Cosmo Corigliano and the
submission of resignations by Kirk Shelton and Amy Lipton.
The Company filed a report on Form 8-K dated May 5, 1998 reporting in
Item 2 the acquisition of National Parking Corporation Limited and in Item 5
the Company's first quarter 1998 earnings, the postponement of the Company's
Annual Meeting, the execution of a commitment for a new Term Loan Facility and
the availability of the Company's existing credit facilities.
The Company filed a report on Form 8-K dated May 18, 1998 reporting in
Item 4 the dismissal of Ernst & Young LLP as the independent accountants upon
whom Deloitte & Touche LLP, the Company's principal independent accountants,
previously relied in its report on the Company.
The Company filed a report on Form 8-K dated June 4, 1998 reporting in
Item 5 the execution of a new $3.25 billion term loan credit facility.
44
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
5
1,000,000
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
1,528
0
1,342
0
0
4,646
1,684
445
20,483
4,662
2,147
0
0
8
4,538
20,483
0
2,407
0
1,799
8
0
42
558
200
339
(13)
0
0
326
0.39
0.37
EXHIBIT 99.1
Pursuant to Regulation S-K, Item 601, Section 99, included herein are restated
financial data schedules for the quarterly periods ended March 31, June 30, and
September 30, 1997 and 1996. The financial data schedules are restated in
connection with the findings from the investigations into accounting
irregularities and the resulting restatement of the audited financial4
statements for the years ended December 31, 1997, 1996 and 1995.
[ARTICLE] 5
[MULTIPLIER] 1,000,000
[PERIOD-TYPE] 3-MOS OTHER
[FISCAL-YEAR-END] DEC-31-1997 DEC-31-1996
[PERIOD-START] JAN-01-1997 JAN-01-1996
[PERIOD-END] MAR-31-1997 MAR-31-1996
[CASH] 112 0
[SECURITIES] 0 0
[RECEIVABLES] 1,017 0
[ALLOWANCES] 0 0
[INVENTORY] 0 0
[CURRENT-ASSETS] 2,917 0
[PP&E] 0 0
[DEPRECIATION] 0 0
[TOTAL-ASSETS] 13,267 0
[CURRENT-LIABILITIES] 1,367 0
[BONDS] 1,522 0
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 8 0
[OTHER-SE] 3,716 0
[TOTAL-LIABILITY-AND-EQUITY] 13,267 0
[SALES] 0 0
[TOTAL-REVENUES] 954 661
[CGS] 0 0
[TOTAL-COSTS] 753 556
[OTHER-EXPENSES] 0 0
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 10 4
[INCOME-PRETAX] 191 101
[INCOME-TAX] 77 45
[INCOME-CONTINUING] 114 56
[DISCONTINUED] 3 (1)
[EXTRAORDINARY] 0 0
[CHANGES] (283) 0
[NET-INCOME] (166) 55
[EPS-PRIMARY] (.21) .08
[EPS-DILUTED] (.19) .07
[ARTICLE] 5
[PERIOD-TYPE] 6-MOS OTHER
[FISCAL-YEAR-END] DEC-31-1997 DEC-31-1996
[PERIOD-START] JAN-01-1997 JAN-01-1996
[PERIOD-END] JUN-30-1997 JUN-30-1996
[CASH] 87 0
[SECURITIES] 0 0
[RECEIVABLES] 1,233 0
[ALLOWANCES] 0 0
[INVENTORY] 0 0
[CURRENT-ASSETS] 3,182 0
[PP&E] 0 0
[DEPRECIATION] 0 0
[TOTAL-ASSETS] 13,330 0
[CURRENT-LIABILITIES] 1,665 0
[BONDS] 1,717 0
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 8 0
[OTHER-SE] 3,551 0
[TOTAL-LIABILITY-AND-EQUITY] 13,330 0
[SALES] 0 0
[TOTAL-REVENUES] 1,953 1,436
[CGS] 0 0
[TOTAL-COSTS] 1,506 1,185
[OTHER-EXPENSES] 279 0
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 23 8
[INCOME-PRETAX] 145 243
[INCOME-TAX] 100 99
[INCOME-CONTINUING] 45 144
[DISCONTINUED] (12) (22)
[EXTRAORDINARY] 0 0
[CHANGES] (283) 0
[NET-INCOME] (250) 122
[EPS-PRIMARY] (.31) .17
[EPS-DILUTED] (.30) .16
[ARTICLE] 5
[MULTIPLIER] 1,000,000
[PERIOD-TYPE] 9-MOS OTHER
[FISCAL-YEAR-END] DEC-31-1997 DEC-31-1996
[PERIOD-START] JAN-01-1997 JAN-01-1996
[PERIOD-END] SEP-30-1997 SEP-30-1996
[CASH] 138 0
[SECURITIES] 0 0
[RECEIVABLES] 1,329 0
[ALLOWANCES] 0 0
[INVENTORY] 0 0
[CURRENT-ASSETS] 3,293 0
[PP&E] 0 0
[DEPRECIATION] 0 0
[TOTAL-ASSETS] 14,144 0
[CURRENT-LIABILITIES] 1,273 0
[BONDS] 2,206 0
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 8 0
[OTHER-SE] 3,824 0
[TOTAL-LIABILITY-AND-EQUITY] 14,144 0
[SALES] 0 0
[TOTAL-REVENUES] 3,140 2,390
[CGS] 0 0
[TOTAL-COSTS] 2,340 1,911
[OTHER-EXPENSES] 279 109
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 36 10
[INCOME-PRETAX] 485 361
[INCOME-TAX] 238 151
[INCOME-CONTINUING] 247 210
[DISCONTINUED] (12) (6)
[EXTRAORDINARY] 0 0
[CHANGES] (283) 0
[NET-INCOME] (48) 204
[EPS-PRIMARY] (.06) .28
[EPS-DILUTED] (.06) .26
