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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
COMMISSION FILE NO. 1-10308
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CENDANT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-0918165
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9 WEST 57TH STREET
NEW YORK, NY 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 413-1800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed in Section 13 or 15(d) of the Securities 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 the Registrant's CD common stock was
858,062,904 as of July 31, 2001.
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CENDANT CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three
and six months ended June 30, 2001 and 2000 1
Consolidated Condensed Balance Sheets as of June 30, 2001
and December 31, 2000 2
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2001 and 2000 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks 23
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Forward-looking statements in this Quarterly Report on Form 10-Q are subject to
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements 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. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical acts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements: the effect of economic conditions
and interest rate changes on the economy on a national, regional or
international basis and the impact thereof on our businesses; the effects of
changes in current interest rates, particularly on our real estate franchise and
mortgage businesses; the resolution or outcome of our unresolved pending
litigation relating to the previously announced accounting irregularities and
other related litigation; our ability to develop and implement operational and
financial systems to manage growing operations and to achieve enhanced earnings
or effect cost savings; competition in our existing and potential future lines
of business and the financial resources of, and products available to,
competitors; our ability to integrate and operate successfully acquired and
merged businesses and risks associated with such businesses, including the
planned acquisitions of Galileo International, Inc. and Cheap Tickets, Inc. and
the acquisitions of Avis Group Holdings, Inc. and Fairfield Resorts, Inc., the
compatibility of the operating systems of the combining companies, and the
degree to which our existing administrative and back-office functions and costs
and those of the acquired companies are complementary or redundant; our ability
to obtain financing on acceptable terms to finance our growth strategy and to
operate within the limitations imposed by financing arrangements and rating
agencies; competitive and pricing pressures in the vacation ownership and travel
industries, including the car rental industry; changes in the vehicle
manufacturer repurchase arrangements between vehicle manufacturers and Avis
Group Holdings, Inc. in the event that used vehicle values decrease; and changes
in laws and regulations, including changes in accounting standards and privacy
policy regulation. 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. Most of these factors
are difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUES
Membership and service fees, net $ 1,355 $ 1,044 $ 2,431 $ 2,040
Vehicle-related 1,035 72 1,433 141
Other 13 21 25 84
--------- --------- --------- ---------
Net revenues 2,403 1,137 3,889 2,265
--------- --------- --------- ---------
EXPENSES
Operating 788 361 1,239 728
Vehicle depreciation, lease charges and interest, net 545 -- 725 --
Marketing and reservation 291 228 541 444
General and administrative 192 144 354 277
Non-vehicle depreciation and amortization 121 86 222 171
Other charges (credits):
Restructuring and other unusual charges -- -- 185 106
Litigation settlement and related costs 9 5 19 (33)
Merger-related costs -- -- 8 --
Non-vehicle interest, net 61 22 122 47
--------- --------- --------- ---------
Total expenses 2,007 846 3,415 1,740
--------- --------- --------- ---------
Net gain (loss) on dispositions of businesses -- 4 435 (10)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY IN
HOMESTORE.COM 396 295 909 515
Provision for income taxes 131 98 336 176
Minority interest, net of tax 5 22 18 38
Losses related to equity in Homestore.com, net of tax 18 -- 36 --
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 242 175 519 301
Extraordinary loss, net of tax -- -- -- (2)
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 242 175 519 299
Cumulative effect of accounting change, net of tax -- -- (38) (56)
--------- --------- ---------- ---------
NET INCOME $ 242 $ 175 $ 481 $ 243
========= ========= ========= =========
CD COMMON STOCK INCOME PER SHARE
BASIC
Income before extraordinary loss and cumulative
effect of accounting change $ 0.29 $ 0.25 $ 0.61 $ 0.42
Net income 0.29 0.25 0.57 0.34
DILUTED
Income before extraordinary loss and cumulative
effect of accounting change $ 0.27 $ 0.24 $ 0.58 $ 0.40
Net income 0.27 0.24 0.54 0.33
MOVE.COM COMMON STOCK INCOME (LOSS) PER SHARE
BASIC
Income (loss) before extraordinary loss and
cumulative effect of accounting change $ (0.63) $ (0.67) $ 9.94 $ (0.67)
Net income (loss) (0.63) (0.67) 9.87 (0.67)
DILUTED
Income (loss) before extraordinary loss and
cumulative effect of accounting change $ (0.63) $ (0.67) $ 9.81 $ (0.67)
Net income (loss) (0.63) (0.67) 9.74 (0.67)
See Notes to Consolidated Condensed Financial Statements.
1
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 1,913 $ 944
Receivables, net 1,392 753
Other current assets 1,058 1,031
-------------- -------------
Total current assets 4,363 2,728
Property and equipment, net 1,617 1,345
Stockholder litigation settlement trust 850 350
Deferred income taxes 1,268 1,108
Franchise agreements, net 1,506 1,462
Goodwill, net 5,507 3,176
Other intangibles, net 805 647
Other assets 1,758 1,395
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Total assets exclusive of assets under programs 17,674 12,211
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Assets under management and mortgage programs
Mortgage loans held for sale 829 879
Relocation receivables 332 329
Vehicle-related, net 8,293 --
Timeshare receivables 301 --
Mortgage servicing rights 1,858 1,653
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11,613 2,861
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TOTAL ASSETS $ 29,287 $ 15,072
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 2,749 $ 1,446
Current portion of long-term debt 504 --
Deferred income 1,011 1,020
-------------- -------------
Total current liabilities 4,264 2,466
Long-term debt 4,365 1,948
Stockholder litigation settlement 2,850 2,850
Other liabilities 681 460
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Total liabilities exclusive of liabilities under programs 12,160 7,724
--------------- -------------
Liabilities under management and mortgage programs
Debt 9,993 2,040
Deferred income taxes 1,030 476
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11,023 2,516
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Mandatorily redeemable preferred interest in a subsidiary 375 375
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Mandatorily redeemable preferred securities issued by subsidiary holding solely
senior debentures issued by the Company -- 1,683
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Commitments and contingencies (Note 6)
Stockholders' equity
Preferred stock, $.01 par value - authorized 10 million shares; none issued and
outstanding -- --
CD common stock, $.01 par value - authorized 2 billion shares; issued
1,032,962,456 and 914,655,918 shares 10 9
Move.com common stock, $.01 par value - authorized 500 million shares;
issued and outstanding none and 2,181,586 shares; notional shares issued with
respect to Cendant Group's retained interest 22,500,000 -- --
Additional paid-in capital 6,978 4,540
Retained earnings 2,508 2,027
Accumulated other comprehensive loss (233) (234)
CD treasury stock, at cost, 175,887,540 and 178,949,432 shares (3,534) (3,568)
--------------- -------------
Total stockholders' equity 5,729 2,774
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,287 $ 15,072
============== =============
See Notes to Consolidated Condensed Financial Statements.
2
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net income $ 481 $ 243
Adjustments to arrive at income before extraordinary loss and cumulative
effect of accounting change 38 58
------------- ------------
Income before extraordinary loss and cumulative effect of accounting change 519 301
Adjustments to reconcile income before extraordinary loss and cumulative effect
of accounting change to net cash provided by operating activities:
Non-vehicle depreciation and amortization 222 171
Non-cash portion of other charges, net 31 27
Net (gain) loss on dispositions of businesses (435) 10
Deferred income taxes 230 13
Proceeds from sales of trading securities 110 --
Net change in assets and liabilities, excluding the impact of acquired
businesses:
Receivables (138) 134
Income taxes 21 200
Accounts payable and other current liabilities (95) (293)
Deferred income (40) (36)
Other, net 13 (142)
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NET CASH PROVIDED BY OPERATING ACTIVITIES EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS 438 385
------------- -------------
MANAGEMENT AND MORTGAGE PROGRAMS:
Depreciation and amortization 689 67
Origination of mortgage loans (18,487) (11,184)
Proceeds on sale of and payments from mortgage loans held for sale 18,551 10,903
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753 (214)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,191 171
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INVESTING ACTIVITIES
Property and equipment additions (151) (115)
Funding of stockholder litigation settlement trust (500) -
Proceeds from sales of marketable securities 23 361
Purchases of marketable securities (14) (374)
Net assets acquired (net of cash acquired of $220 million in 2001) and
acquisition-related payments (1,727) (16)
Other, net (31) (62)
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NET CASH USED IN INVESTING ACTIVITIES EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS (2,400) (206)
------------- -------------
MANAGEMENT AND MORTGAGE PROGRAMS:
Investment in vehicles (4,681) --
Payments received on investment in vehicles 3,612 --
Origination of timeshare receivables (155) --
Principal collection of timeshare receivables 162 --
Equity advances on homes under management (3,027) (3,763)
Repayment on advances on homes under management 3,017 4,186
Additions to mortgage servicing rights (334) (384)
Proceeds from sales of mortgage servicing rights 26 65
------------- --------------
(1,380) 104
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NET CASH USED IN INVESTING ACTIVITIES (3,780) (102)
------------- -------------
FINANCING ACTIVITIES
Proceeds from borrowings 2,697 --
Principal payments on borrowings (845) (776)
Issuances of common stock 750 536
Repurchases of common stock (28) (300)
Proceeds from mandatorily redeemable preferred securities issued by subsidiary
holding solely senior debentures issued by the Company -- 91
Proceeds from mandatorily redeemable preferred interest in a subsidiary -- 375
Other, net (60) (3)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES EXCLUSIVE OF MANAGEMENT
AND MORTGAGE PROGRAMS 2,514 (77)
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MANAGEMENT AND MORTGAGE PROGRAMS:
Proceeds from borrowings 8,138 2,009
Principal payments on borrowings (7,165) (2,719)
Net change in short-term borrowings 62 765
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1,035 55
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,549 (22)
------------- -------------
Effect of changes in exchange rates on cash and cash equivalents 9 23
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Net increase in cash and cash equivalents 969 70
Cash and cash equivalents, beginning of period 944 1,164
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,913 $ 1,234
============= =============
See Notes to Consolidated Condensed Financial Statements.
3
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNLESS OTHERWISE NOTED, ALL AMOUNTS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements
include the accounts and transactions of Cendant Corporation and its
subsidiaries (collectively, the "Company" or "Cendant").
In management's opinion, the Consolidated Condensed Financial Statements
contain all normal recurring adjustments necessary for a fair presentation
of interim results reported. The results of operations reported for
interim periods are not necessarily indicative of the results of
operations for the entire year or any subsequent interim period. In
addition, management is required to make estimates and assumptions that
affect the amounts reported and related disclosures. Estimates, by their
nature, are based on judgment and available information. Accordingly,
actual results could differ from those estimates. The Consolidated
Condensed Financial Statements should be read in conjunction with the
Company's Annual Report on Form 10-K/A dated July 2, 2001.
Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2001, the Company adopted the provisions of the Emerging
Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Interests in Securitized
Financial Assets." EITF Issue No. 99-20 modified the accounting for
interest income and impairment of beneficial interests in securitization
transactions, whereby beneficial interests determined to have an
other-than-temporary impairment are required to be written down to fair
value. The adoption of EITF Issue No. 99-20 resulted in the recognition of
a non-cash charge of $46 million ($27 million, after tax) during first
quarter 2001 to account for the cumulative effect of the accounting
change.
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133, as amended and interpreted, established
accounting and reporting standards for derivative instruments and hedging
activities. As required by SFAS No. 133, the Company has recorded all such
derivatives at fair value in the Consolidated Condensed Balance Sheet at
January 1, 2001. The adoption of SFAS No. 133 resulted in the recognition
of a non-cash charge of $16 million ($11 million, after tax) in the
Consolidated Condensed Statement of Income on January 1, 2001 to account
for the cumulative effect of the accounting change relating to derivatives
designated in fair value type hedges prior to adopting SFAS No. 133, to
derivatives not designated as hedges and to certain embedded derivatives.
As provided for in SFAS No. 133, the Company also reclassified certain
financial investments as trading securities at January 1, 2001, which
resulted in a pre-tax net benefit of $10 million recorded in other
revenues within the Consolidated Condensed Statement of Income.
On December 31, 2000, the Company adopted the disclosure requirements of
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities--a replacement of FASB Statement No.
125." During second quarter 2001, the Company adopted the remaining
provisions of this standard. SFAS No. 140 revised the criteria for
accounting for securitizations, other financial-asset transfers and
collateral and introduced new disclosures, but otherwise carried forward
most of the provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" without
amendment. The impact of adopting the remaining provisions of this
standard was not material to the Company's financial position or results
of operations.
4
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments as part of its overall strategy to
manage its exposure to market risks associated with fluctuations in
interest rates, foreign currency exchange rates, prices of mortgage loans
held for sale, anticipated mortgage loan closings arising from commitments
issued and changes in the fair value of its mortgage servicing rights. As
a matter of policy, the Company does not use derivatives for trading or
speculative purposes.
o All freestanding derivatives are recorded at fair value either
as assets or liabilities.
o Changes in fair value of derivatives not designated as hedging
instruments and of derivatives designated as fair value
hedging instruments are recognized currently in earnings and
included in net revenues in the Consolidated Condensed
Statement of Income.
o Changes in fair value of the hedged item in a fair value hedge
are recorded as an adjustment to the carrying amount of the
hedged item and recognized currently in earnings.
o The effective portion of changes in fair value of derivatives
designated as cash flow hedging instruments is recorded as a
component of other comprehensive income. The ineffective
portion is reported currently in earnings.
o Amounts included in other comprehensive income are
reclassified into earnings in the same period during which the
hedged item affects earnings.
The Company is also party to certain contracts containing embedded
derivatives. As required by SFAS No. 133, certain embedded derivatives
were bifurcated from their host contracts and are recorded at fair value
in the Consolidated Condensed Balance Sheet. The total fair value of the
Company's embedded derivatives and changes in fair value were not material
to the Company's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001. Additionally, this
statement further clarifies the criteria for recognition of intangible
assets separately from goodwill for all business combinations completed
after June 30, 2001, as well as requires additional disclosures for those
business combinations.
SFAS No. 142 requires that goodwill and certain other intangible assets
acquired after June 30, 2001 no longer be amortized. Beginning on January
1, 2002, amortization of existing goodwill and certain other intangible
assets will no longer be permitted and the Company will be required to
assess these assets for impairment annually, or more frequently if
circumstances indicate a potential impairment. Furthermore, this statement
provides specific guidance for testing goodwill and certain other
intangible assets for impairment. Transition-related impairment losses, if
any, which result from the initial assessment of goodwill and certain
other intangible assets would be recognized by the Company as a cumulative
effect of accounting change on January 1, 2002. The Company is currently
evaluating the impact of adopting this standard on its financial position
and results of operations.
During the six months ended June 30, 2001 and 2000, the Company recorded
amortization expense of $76 million and $55 million, respectively, related
to goodwill and certain other intangible assets that will no longer be
amortized upon adoption of SFAS No. 142. In addition, during the six
months ended June 30, 2001, the Company recorded amortization expense of
$23 million related to the difference between the value of the Company's
investment in Homestore.com, Inc. ("Homestore") and the underlying equity
in Homestore that will no longer be amortized. Such amount is net of the
amortization of the Company's deferred gain recorded on the sale of
move.com to Homestore, which would also no longer be amortized.
2. EARNINGS PER SHARE
Earnings per share ("EPS") for periods after March 31, 2000, the date of
the original issuance of Move.com common stock, has been calculated using
the two-class method. Income per common share before extraordinary loss
and cumulative effect of accounting change for each class of common stock
was computed as follows:
5
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2001 2000 2001 2000
---------- ---------- --------- ---------
CD COMMON STOCK
Income before extraordinary loss and cumulative effect
of accounting change, including Cendant Group's
retained interest in Move.com Group $ 243 $ 177 $ 502 $ 303
Convertible debt interest, net of tax 3 3 6 5
Adjustment to Cendant Group's retained interest in
Move.com Group(a) -- -- (3) --
---------- ---------- ---------- ---------
Income before extraordinary loss and cumulative effect
of accounting change for diluted EPS $ 246 $ 180 $ 505 $ 308
=========== ========== ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 851 722 820 720
Stock options, warrants and non-vested shares 36 22 30 27
Convertible debt 18 18 18 18
---------- ---------- --------- ---------
Diluted 905 762 868 765
========== ========== ========= =========
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2001 2000 2001 2000
----------- ---------- ---------- ---------
MOVE.COM COMMON STOCK
Income (loss) before extraordinary loss and cumulative
effect of accounting change, excluding Cendant Group's
retained interest in Move.com Group $ (1) $ (2) $ 17 $ (2)
Adjustment to Cendant Group's retained interest in
Move.com Group(a) -- -- 3 --
----------- ---------- ---------- ---------
Income (loss) before extraordinary loss and cumulative
effect of accounting change for diluted EPS $ (1) $ (2) $ 20 $ (2)
=========== ========== ========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1 4 2 4
Stock options -- -- -- --
----------- ---------- ---------- ---------
Diluted 1 4 2 4
=========== ========== ========== =========
----------
(a) Represents the change in Cendant Group's retained interest in
Move.com Group due to the dilutive impact of Move.com common stock
options.
Basic and diluted losses per share of CD common stock from the cumulative
effect of an accounting change were both $0.04 for the six months ended
June 30, 2001, and $0.08 and $0.07, respectively, for the six months ended
June 30, 2000.
6
The following table summarizes the Company's outstanding common stock
equivalents which were antidilutive and therefore excluded from the
computation of diluted EPS:
JUNE 30,
---------------------
2001 2000
--------- ---------
CD COMMON STOCK
Options(a) 94 105
Warrants(b) 2 31
FELINE PRIDES -- 61
MOVE.COM COMMON STOCK
Options(c) -- 6
Warrants(d) -- 2
- ----------
(a) The weighted average exercise prices for antidilutive options at
June 30, 2001 and 2000 were $22.81 and $22.71, respectively.
(b) The weighted average exercise prices for antidilutive warrants at
June 30, 2001 and 2000 were $21.31 and $22.91, respectively.
(c) The weighted average exercise price for antidilutive options at June
30, 2000 was $18.22.
(d) The weighted average exercise price for antidilutive warrants at
June 30, 2000 was $96.12.
3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
ACQUISITIONS
AVIS GROUP HOLDINGS, INC. On March 1, 2001, the Company acquired all of
the outstanding shares of Avis Group Holdings, Inc. ("Avis") for
approximately $994 million. The acquisition was accounted for using the
purchase method of accounting; accordingly, assets acquired and
liabilities assumed were recorded on the Company's Consolidated Condensed
Balance Sheet at March 1, 2001 based upon their estimated fair values at
the date of acquisition. The results of operations of Avis have been
included in the Consolidated Condensed Statement of Income since the date
of acquisition.
The excess of the purchase price over the estimated fair value of the
underlying net assets acquired was allocated to goodwill and is being
amortized over 40 years on a straight-line basis until the adoption of
SFAS No. 142. The allocation of the excess purchase price is based upon
preliminary estimates and assumptions and is subject to revision when
appraisals have been finalized. Accordingly, revisions to the allocation,
which may be significant, will be recorded by the Company as further
adjustments to the purchase price allocation. The preliminary allocation
of the purchase price is summarized as follows:
AMOUNT
---------
Cash consideration $ 937
Fair value of converted options 17
Transaction costs and expenses 40
---------
Total purchase price 994
Book value of Cendant's existing net investment in Avis 409
---------
Cendant's basis in Avis 1,403
Historical value of liabilities assumed in excess of assets acquired 207
Fair value adjustments 108
---------
Excess purchase price over assets acquired and liabilities assumed $ 1,718
=========
7
Pro forma net revenues, income before extraordinary loss and cumulative
effect of accounting change, net income and the related per share data
would have been as follows had the acquisition of Avis occurred on January
1, for each period presented:
SIX MONTHS ENDED
JUNE 30,
2001 2000
---------- --------
Net revenues $ 4,496 $ 4,116
Income before extraordinary loss and cumulative effect
of accounting change 495 357
Net income 449 299
CD common stock income per share:
Basic
Income before extraordinary loss and cumulative
effect of accounting change $ 0.58 $ 0.50
Net income 0.53 0.42
Diluted
Income before extraordinary loss and cumulative
effect of accounting change $ 0.55 $ 0.47
Net income 0.50 0.39
These pro forma results do not give effect to any synergies expected to
result from the acquisition of Avis and are not necessarily indicative of
what actually would have occurred if the acquisition had been consummated
on January 1, of each period, nor are they necessarily indicative of
future consolidated results.
FAIRFIELD RESORTS, INC. On April 2, 2001, the Company acquired all of the
outstanding shares of Fairfield Resorts, Inc., formerly Fairfield
Communities, Inc. ("Fairfield"), one of the largest vacation ownership
companies in the United States, for approximately $760 million, including
$20 million of transaction costs and expenses and $46 million related to
the conversion of Fairfield employee stock options into CD common stock
options. The results of operations of Fairfield have been included in the
Consolidated Condensed Statement of Income since the date of acquisition.
This acquisition was not significant on a pro forma basis.
The Company is in the process of integrating the operations of Avis and
Fairfield and expects to incur transition costs relating to such
integrations. Transition costs may result from integrating operating
systems, relocating employees, closing facilities, reducing duplicative
efforts and exiting and consolidating certain other activities. These
costs will be recorded on the Company's Consolidated Condensed Balance
Sheet as adjustments to the purchase price or on the Company's
Consolidated Condensed Statement of Income as expenses, as appropriate.
GALILEO INTERNATIONAL, INC. On June 18, 2001, the Company announced that
it had entered into a definitive agreement to acquire all of the
outstanding common stock of Galileo International, Inc. ("Galileo"), a
leading provider of electronic global distribution services for the travel
industry, at an expected value of $33 per share, or approximately $3.1
billion, including estimated transaction costs and expenses and the
conversion of Galileo employee stock options into CD common stock options.
As part of the planned acquisition, the Company will also assume
approximately $600 million of Galileo debt. The final acquisition price
will be paid in a combination of CD common stock and cash. The number of
shares of CD common stock to be paid to Galileo stockholders will
fluctuate, between 116 million and 137 million shares, within a collar of
$17 to $20 per share of CD common stock. The remainder of the purchase
price will be paid in cash and may fluctuate if the average price per
share of CD common stock during a stipulated period is above or below the
collar. The transaction is subject to customary regulatory approvals and
the approval of Galileo's stockholders. Although no assurances can be
given, the Company expects the transaction to close in the third quarter
of 2001. As a result of the issuance of SFAS No. 142, goodwill and certain
other intangible assets arising from the transaction upon consummation
will no longer be amortized.
CHEAP TICKETS, INC. On August 13, 2001, the Company announced that it had
entered into a definitive agreement to acquire all of the outstanding
common stock of Cheap Tickets, Inc. ("Cheap Tickets"), a leading provider
of discount leisure travel products, at a price of $16.50 per share, or
approximately $425 million in cash. The transaction is subject to
customary regulatory approvals and the approval of Cheap Tickets'
stockholders. Although no assurances can be given, the Company expects the
transaction to close in the fall of 2001.
DISPOSITIONS
On February 16, 2001, the Company completed the sale of its real estate
Internet portal, move.com, along with certain ancillary businesses, to
Homestore in exchange for approximately 21 million shares of Homestore
common stock then valued at $718 million. The operations of these
businesses were not material to the Company's financial position, results
of operations or cash flows. The Company recorded a gain
8
of $548 million on the sale of these businesses, of which $436 million
($262 million, after tax) was recognized at the time of closing. The
Company deferred $112 million of the gain, which represents the portion
that was equivalent to its common equity ownership percentage in Homestore
at the time of closing. The deferred gain is being recognized into income
over five years as a component of equity in Homestore.com within the
Consolidated Condensed Statement of Income. The difference between the
value of the Company's investment in Homestore and the underlying equity
in the net assets of Homestore was $431 million, which is also being
amortized over five years as a component of equity in Homestore.com within
the Consolidated Condensed Statement of Income until the adoption of SFAS
No. 142. During the six months ended June 30, 2001, such amount was
reduced by $64 million due to the contribution of approximately 2 million
shares of Homestore to Travel Portal, Inc. ("Travel Portal"), a company
that was created to pursue the development of an online travel business
for the benefit of certain current and future franchisees, and the
distribution of approximately 2 million shares of Homestore to former
Move.com common stockholders in exchange for formerly held shares of
Move.com common stock.
4. OTHER CHARGES (CREDITS)
RESTRUCTURING AND OTHER UNUSUAL CHARGES
During first quarter 2001, the Company incurred unusual charges totaling
$185 million. Such charges primarily consisted of (i) $95 million to fund
an irrevocable contribution to an independent technology trust responsible
for providing technology initiatives for the benefit of certain current
and future franchisees and (ii) $85 million incurred in connection with
the creation of Travel Portal.
MERGER-RELATED COSTS
During first quarter 2001, the Company incurred charges of $8 million
related to the acquisition and integration of Avis.
LITIGATION SETTLEMENT AND RELATED COSTS
During the six months ended June 30, 2001, the Company recorded charges of
$33 million for litigation settlement and related costs in connection with
previously discovered accounting irregularities in the former business
units of CUC International, Inc. and resulting investigations into such
matters. Such charges were partially offset by a non-cash credit of $14
million to reflect an adjustment to the PRIDES class action litigation
settlement charge recorded by the Company in 1998.
5. DEBT
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS
SENIOR CONVERTIBLE NOTES. During first quarter 2001, the Company issued
approximately $1.5 billion aggregate principal amount at maturity of
zero-coupon senior convertible notes for aggregate gross proceeds of
approximately $900 million. The notes mature in 2021 and were issued at a
price representing a yield-to-maturity of 2.5%. The Company will not make
periodic payments of interest on the notes, but may be required to make
nominal cash payments in specified circumstances. Each $1,000 principal
amount at maturity may be convertible, subject to satisfaction of specific
contingencies, into 33.4 shares of CD common stock.
During second quarter 2001, the Company issued zero-coupon zero-yield
senior convertible notes for gross proceeds of $1.0 billion. The notes
mature in 2021. The Company may be required to repurchase these notes on
May 4, 2002. The Company is not required to pay interest on the notes
unless an interest adjustment becomes payable, which may occur in
specified circumstances commencing in 2004. Each $1,000 principal amount
at maturity may be convertible, subject to satisfaction of specific
contingencies, into approximately 39 shares of CD common stock. A portion
of these notes, as well as the Company's 3% convertible subordinated
notes, was classified as long-term debt at June 30, 2001 based on the
Company's intent and ability to refinance such borrowings on a long-term
basis.
TERM LOAN. During first quarter 2001, the Company made a principal payment
of $250 million to extinguish outstanding borrowings under its then
existing term loan facility and entered into a new $650 million agreement
with terms similar to its other revolving credit facilities. The new term
loan amortizes in three equal installments on August 22, 2002, May 22,
2003 and February 22, 2004. Borrowings under this facility bear interest
at LIBOR plus a margin of 125 basis points.
9
CREDIT FACILITIES. Coincident with the acquisition of Avis, the Company
assumed and guaranteed a $450 million six-year revolving credit facility
maturing in June 2005. Borrowings under this facility bear interest at
LIBOR plus a margin of approximately 175 basis points. The Company is
required to pay a per annum facility fee of 37.5 basis points on this
facility. The Company maintains additional commited audit facilities
totaling $2.5 billion under two syndicated revolving credit agreements.
RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
MEDIUM-TERM NOTES. During first quarter 2001, PHH Corporation ("PHH"), a
wholly-owned subsidiary of the Company, issued $650 million of medium-term
notes under an existing shelf registration statement. These notes bear
interest at a rate of 8 1/8% per annum and mature in February 2003.
ASSET-BACKED NOTES. During first quarter 2001, the Company's Avis car
rental subsidiary issued $750 million of floating rate asset-backed notes
secured by rental vehicles owned by such subsidiary. The notes bear
interest at a rate of LIBOR plus 20 basis points per annum and mature in
April 2004.
During second quarter 2001, the Company's Avis car rental subsidiary also
registered $500 million of auction rate asset-backed notes secured by
rental vehicles owned by such subsidiary. These notes bear interest at a
rate of LIBOR plus or minus an applicable margin determined from time to
time through an auction. As of June 30, 2001, approximately $190 million
was issued under this registration statement.
SHORT-TERM BORROWINGS. During second quarter 2001, the Company borrowed
$325 million, which the Company repaid on July 2, 2001.
SECURITIZATION AGREEMENT. Coincident with the acquisition of Fairfield on
April 2, 2001, an unaffiliated bankruptcy remote special purpose antity,
Fairfield Receivables Corporation, committed to purchase for cash, at the
Company's option, up to $500 million of the Company's timeshare
receivables. The Company will retain a subordinated residual interest and
the related servicing rights and obligations in the transferred timeshare
receivables. At June 30, 2001, the Company was servicing approximately
$298 million of timeshare receivables transferred to Fairfield Receivables
Corporation.
CREDIT FACILITIES. During first quarter 2001, PHH renewed its $750 million
syndicated revolving credit facility, which was due in 2001. The new
facility bears interest at LIBOR plus an applicable margin, as defined in
the agreement, and terminates on February 21, 2002. PHH is required to pay
a per annum utilization fee of .25% if usage under the facility exceeds
25% of aggregate commitments. Under the new facility, any loans
outstanding as of February 21, 2002 may be converted into a term loan with
a final maturity of February 21, 2003. In addition to this new facility,
PHH maintains a $750 million syndicated commited revolving credit facility
and two other commited facilities totaling $275 million.
6. COMMITMENTS AND CONTINGENCIES
In June 1999, the Company disposed of certain businesses. The dispositions
were structured as a tax-free reorganization and, accordingly, no tax
provision was recorded on a majority of the gain. However, pursuant to a
recent interpretive ruling, the Internal Revenue Service ("IRS") has taken
the position that similarly structured transactions do not qualify as
tax-free reorganizations under the Internal Revenue Code Section
368(a)(1)(A). If the transaction is not considered a tax-free
reorganization, the resultant incremental liability could range between
$10 million and $170 million depending upon certain factors, including
utilization of tax attributes. Notwithstanding the IRS interpretive
ruling, the Company believes that, based upon analysis of current tax law,
its position would prevail, if challenged.
The Company is involved in litigation asserting claims associated with the
accounting irregularities discovered in former CUC business units outside
of the principal common stockholder class action litigation. The Company
does not believe that it is feasible to predict or determine the final
outcome or resolution of these unresolved proceedings. An adverse outcome
from such unresolved proceedings could be material with respect to
earnings in any given reporting period. However, the Company does not
believe that the impact of such unresolved proceedings should result in a
material liability to the Company in relation to its consolidated
financial position or liquidity.
The Company is involved in pending litigation in the usual course of
business. In the opinion of management, such other litigation will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
7. STOCKHOLDERS' EQUITY
ISSUANCES OF CD COMMON STOCK
During first quarter 2001, the Company settled the purchase contracts
underlying its Feline PRIDES. Accordingly, the Company issued
approximately 61 million shares of its CD common stock in satisfaction of
its
10
obligation to deliver common stock to beneficial owners of the PRIDES and
received in exchange, the trust preferred securities forming a part of the
PRIDES.
During first quarter 2001, the Company also issued 46 million shares of
its CD common stock at $13.20 per share for aggregate proceeds of
approximately $607 million.
REPURCHASES OF MOVE.COM COMMON STOCK
During first quarter 2001, the Company repurchased 319,591 shares of
Move.com common stock held by NRT Incorporated in exchange for $10 million
in cash.
During second quarter 2001, the Company repurchased 1,598,030 shares of
Move.com common stock held by Liberty Digital, Inc. in exchange for
1,164,048 shares of Homestore common stock (valued at approximately $31
million) and approximately $19 million in cash.
During second quarter 2001, the Company also repurchased all the remaining
outstanding shares of Move.com common stock in exchange for 566,054 shares
of Homestore common stock (valued at approximately $15 million).
COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- -----------
Net income $ 242 $ 175 $ 481 $ 243
Other comprehensive income (loss):
Currency translation adjustments 1 (67) (73) (88)
Unrealized gains (losses) on marketable securities,
net of tax:
Unrealized gains (losses) arising during period 4 (31) 36 (43)
Reclassification adjustment for losses realized
in net income -- -- 45 --
Unrealized losses on cash flow hedges, net of tax (4) -- (7) --
---------- ---------- ---------- -----------
Total comprehensive income $ 243 $ 77 $ 482 $ 112
========== ========== ========== ===========
The after-tax components of accumulated other comprehensive loss for the
six months ended June 30, 2001 are as follows:
UNREALIZED UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) LOSSES ON OTHER
TRANSLATION ON MARKETABLE CASH FLOW COMPREHENSIVE
ADJUSTMENTS SECURITIES HEDGES INCOME/(LOSS)
-------------- --------------- ------------------ -------------
Balance, January 1, 2001 $ (165) $ (69) $ -- $ (234)
Current period change (73) 81 (7) 1
-------------- --------------- ------------------ -------------
Balance, June 30, 2001 $ (238) $ 12 $ (7) $ (233)
============== =============== ================== =============
8. DERIVATIVES
Consistent with its risk management policies, the Company manages foreign
currency, interest rate and gasoline price risks using derivative
instruments.
11
FOREIGN CURRENCY RISK
The Company uses foreign currency forward contracts to manage its exposure
to changes in foreign currency exchange rates associated with its foreign
currency denominated receivables and forecasted royalties, forecasted
earnings of foreign subsidiaries and forecasted foreign currency
denominated acquisitions. The Company primarily hedges its foreign
currency exposure to the British pound, Canadian dollar and Euro. The
majority of the forward contracts do not qualify for hedge accounting
treatment under SFAS No. 133. The fluctuations in the value of these
foreign currency forwards do, however, effectively offset the impact of
changes in the value of the underlying risk that they are intended to
economically hedge. Forward contracts that are used to hedge certain
forecasted royalty receipts up to 12 months are designated as and qualify
as cash flow hedges. The impact of those foreign currency forwards is not
material to the Company's results of operations or financial position at
June 30, 2001.
INTEREST RATE RISK
The Company's mortgage-related assets, its retained interests in certain
qualifying special purpose entities and the debt used to finance much of
the Company's operations are exposed to interest rate fluctuations. The
Company uses various hedging strategies and derivative financial
instruments to create a desired mix of fixed and floating rate assets and
liabilities. Derivative instruments currently used in managing the
Company's interest rate risks include swaps and instruments with option
features. A combination of fair value hedges, cash flow hedges and
financial instruments that do not qualify for hedge accounting treatment
under SFAS No. 133 are used to manage the Company's portfolio of interest
rate sensitive assets and liabilities.
The Company uses fair value hedges to manage its mortgage servicing
rights, mortgage loans held for sale and certain fixed rate medium-term
notes. During the three and six months ended June 30, 2001, the Company
recorded losses of $19 million and $23 million, respectively, to reflect
the ineffective portion of its fair value hedges. Such amounts are
included in net revenues within the Consolidated Condensed Statement of
Income. The component of the derivative instruments' gain that was
excluded from the Company's assessment of hedge effectiveness was $20
million for the three and six months ended June 30, 2001.
The Company uses cash flow hedges to manage the interest expense incurred
on its floating rate debt and on a portion of its principal common
stockholder litigation settlement liability. Ineffectiveness resulting
from these cash flow hedging relationships during the three and six months
ended June 30, 2001 was not material to the Company's results of
operations. Derivative gains and losses included in other comprehensive
income are reclassified into earnings when interest payments or other
liability-related accruals impact earnings. During the three and six
months ended June 30, 2001, the amount of gains or losses reclassified
from other comprehensive income to earnings was not material to the
Company's results of operations. Over the next 12 months, derivative
losses of approximately $7 million are expected to be reclassified into
earnings. Certain of the Company's forecasted cash flows are hedged up to
three years into the future.
GASOLINE PRICE RISK
The Company uses gasoline puts to hedge its exposure to gasoline prices
affecting businesses within its Vehicle Services segment. The impact of
those put option contracts is not material to the Company's results of
operations or financial position at June 30, 2001.
9. SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation and amortization and
minority interest calculation. For this purpose, Adjusted EBITDA is
defined as earnings before non-vehicle interest, income taxes,
non-vehicle depreciation and amortization, minority interest and equity in
Homestore.com, adjusted to exclude certain items which are of a
non-recurring or unusual nature and are not measured in assessing segment
performance or are not segment specific.
12
THREE MONTHS ENDED JUNE 30,
2001 2000
------------------------------ ----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
----------- ---------------- ------------ --------------
Real Estate Services $ 474 $ 231 $ 377 $ 193
Hospitality 473 159 257 103
Vehicle Services 1,112 142 135 67
Financial Services 332 70 321 83
----------- --------------- ------------ --------------
Total Reportable Segments 2,391 602 1,090 446
Corporate and Other(a) 12 (15) 47 (42)
----------- ---------------- ------------ --------------
Total Company $ 2,403 $ 587 $ 1,137 $ 404
=========== =============== ============ ==============
SIX MONTHS ENDED JUNE 30,
2001 2000
----------------------------- ----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
----------- --------------- ------------ --------------
Real Estate Services $ 813 $ 363 $ 666 $ 308
Hospitality 737 263 499 195
Vehicle Services 1,566 234 272 139
Financial Services 722 201 702 216
----------- --------------- ------------ --------------
Total Reportable Segments 3,838 1,061 2,139 858
Corporate and Other(a) 51 (31) 126 (42)
----------- ---------------- ------------ --------------
Total Company $ 3,889 $ 1,030 $ 2,265 $ 816
=========== =============== ============ ==============
- ----------
(a) Included in Corporate and Other are the results of operations of the
Company's non-strategic businesses, unallocated corporate overhead and the
elimination of transactions between segments.
Total assets for the Company's Vehicle Services segment were $13.7 billion
and $2.7 billion as of June 30, 2001 and December 31, 2000, respectively.
Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes, minority interest and equity in Homestore.com.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- --------- ---------- -----------
Adjusted EBITDA $ 587 $ 404 $ 1,030 $ 816
Non-vehicle depreciation and amortization (121) (86) (222) (171)
Other (charges) credits:
Restructuring and other unusual -- -- (185) (106)
Litigation settlement and related (9) (5) (19) 33
Merger-related -- -- (8) -
Non-vehicle interest, net (61) (22) (122) (47)
Net gain (loss) on dispositions of businesses -- 4 435 (10)
---------- ---------- ---------- -----------
Income before income taxes, minority interest and
equity in Homestore.com $ 396 $ 295 $ 909 $ 515
========== ========== ========== ===========
10. SUBSEQUENT EVENTS
ISSUANCE OF UPPER DECS. On July 27, 2001, the Company completed a public
offering of 15 million Upper DECS, each consisting of both a senior note
and a forward purchase contract, aggregating $750 million principal
amount. The senior notes have a term of five years and initially bear
interest at an annual rate of 6.75%. The forward purchase contracts
require the holder to purchase a minimum of 1.7593 shares and a maximum of
2.3223 shares of CD common stock, based upon the average closing price of
CD common stock during a stipulated period, in August 2004. The forward
purchase contracts also require distributions at an annual rate of 1.00%
through August 2004, at which time the forward purchase contracts will be
settled. The interest rate on the senior notes will be reset based upon a
remarketing in either May or August 2004. On August 8, 2001, the
underwriters exercised an option to purchase an additional 2.25 million
Upper DECS, aggregating $112.5 million principal amount, to cover
over-allotments.
REGISTRATION OF DEBT AND EQUITY SECURITIES. On July 25, 2001, the Company
filed a registration statement, which provides for an aggregate public
offering of up to $3.0 billion of debt or equity securities.
SECURITIZATION AGREEMENT. On August 6, 2001, the Company sold $213 million
of vacation ownership interval loans to a bankruptcy remote special
purpose entity. The Company retains a subordinated residual interest and
the related servicing obligations in the loans.
OFFERING OF NOTES. On August 13, 2001, the Company sold $850 million
aggregate principal amount of 6.875% notes to qualified institutional
buyers for net proceeds of $843 million. The notes mature in August 2006.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated
Condensed Financial Statements and accompanying Notes thereto included elsewhere
herein. Unless otherwise noted, all dollar amounts are in millions.
RESULTS OF CONSOLIDATED OPERATIONS - 2001 VS. 2000
On March 1, 2001, we acquired all of the outstanding shares of Avis Group
Holdings, Inc. for approximately $994 million, including $40 million of
transaction costs and expenses and $17 million related to the conversion of Avis
employee stock options into CD common stock options. Avis is one of the world's
leading service and information providers for comprehensive automotive
transportation and vehicle management solutions.
On April 2, 2001, we acquired all of the outstanding shares of Fairfield
Resorts, Inc., (formerly Fairfield Communities, Inc.) for approximately $760
million, including $20 million of transaction costs and expenses and $46 million
related to the conversion of Fairfield employee stock options into CD common
stock options. Fairfield is one of the largest vacation ownership companies in
the United States.
The consolidated results of operations of Avis and Fairfield have been included
in our consolidated results of operations since their respective dates of
acquisition.
Strong contributions from many of our businesses and the addition of the
operations of Avis and Fairfield produced revenue growth of $1.3 billion, or
111%, and $1.6 billion, or 72%, for the three and six months ended June 30,
2001, respectively. Our expenses increased $1.2 billion, or 137%, and $1.7
billion, or 96%, for the three and six months ended June 30, 2001, respectively,
primarily as a result of the acquisitions of Avis and Fairfield. Our non-vehicle
interest expense increased primarily as a result of interest expense accrued on
our stockholder litigation settlement liability.
Also during first quarter 2001, we sold our real estate Internet portal,
move.com, along with certain ancillary businesses, to Homestore.com, Inc. in
exchange for approximately 21 million shares of Homestore common stock then
valued at $718 million. We recorded a gain of $548 million on the sale of these
businesses, of which $436 million ($262 million, after tax) was recognized at
the time of closing. We deferred $112 million of the gain, which represents the
portion that was equivalent to our common equity ownership percentage in
Homestore at the time of closing.
Our overall effective tax rate was 33% for the three months ended June 30, 2001
and 2000 and 37% and 34% for the six months ended June 30, 2001 and 2000,
respectively. The higher tax rate for the six months ended June 30, 2001 was
primarily due to higher state income taxes provided on the gain on the
disposition of businesses discussed above.
As a result of the above-mentioned items, income before extraordinary loss and
cumulative effect of accounting change increased $67 million, or 38%, and $218
million, or 72%, in the three and six months ended June 30, 2001, respectively.
RESULTS OF REPORTABLE SEGMENTS
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-vehicle interest,
income taxes, non-vehicle depreciation and amortization, minority interest and
equity in Homestore.com, adjusted to exclude certain items which are of a
non-recurring or unusual nature and are not measured in assessing segment
performance or are not segment specific. Our management believes such
discussions are the most informative representation of how management evaluates
performance. However, our presentation of Adjusted EBITDA may not be comparable
with similar measures used by other companies.
14
THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000
REVENUES ADJUSTED EBITDA
----------------------------------------- -------------------------------------
% %
2001 2000 CHANGE 2001 2000 CHANGE
----------- ----------- ----------- ---------- ---------- ----------
Real Estate Services $ 474 $ 377 26% $ 231 $ 193 20%
Hospitality 473 257 84 159 103 54
Vehicle Services 1,112 135 * 142 67 *
Financial Services 332 321 3 70 83 (16)
----------- ----------- ---------- ----------
Total Reportable Segments 2,391 1,090 602 446
Corporate and Other(a) 12 47 * (15)(b) (42)(b) *
----------- ---------- ---------- ----------
Total Company $ 2,403 $ 1,137 $ 587 $ 404
=========== =========== ========== ==========
- ----------
* Not meaningful.
(a) Included in Corporate and Other are the results of operations of our
non-strategic businesses, unallocated corporate overhead and the
elimination of transactions between segments.
(b) Excludes charges of $9 million and $5 million for litigation settlement
and related costs for the three months ended June 30, 2001 and 2000,
respectively. The 2000 charge was partially offset by $4 million of gains
related to the dispositions of businesses.
REAL ESTATE SERVICES
Revenues and EBITDA increased $97 million (26%) and $38 million (20%),
respectively. The increase in operating results was primarily driven by
substantial growth in mortgage loan production, due to increased refinancing
activity and purchase volume during second quarter 2001. Increases in relocation
services and higher royalties from our Century 21(R), Coldwell Banker(R), and
ERA(R) franchise brands also contributed to the favorable operating results.
Collectively, mortgage loans sold increased $5.2 billion (109%) to $9.9 billion,
generating incremental revenues of $103 million, or an increase of 139%. Closed
mortgage loans increased $5.9 billion (100%) to $11.8 billion. This growth
consisted of a $4.3 billion increase (approximately eleven fold) in refinancings
and a $1.6 billion increase (29%) in purchase mortgage closings. Beginning in
January 2001, Merrill Lynch outsourced its mortgage originations and servicing
operations to us, whereby new Merrill Lynch business accounted for 14% of our
mortgage closings in second quarter 2001. A significant portion of mortgages
closed in any quarter will generate revenues in future periods as such loans are
packaged and sold (revenues are recognized upon the sale of the loan, typically
45-60 days after closing). Partially offsetting record production revenues was a
$22 million decline in loan net servicing revenue. The average servicing
portfolio grew $28 billion (49%) as a result of the high volume of mortgage loan
originations and Merrill Lynch's outsourcing of its mortgage origination
operations. However, accelerated servicing amortization expenses during second
quarter 2001, due primarily to refinancing activity, more than offset the
increase in recurring servicing fees from the portfolio growth. Additionally,
operating expenses within this segment increased to support the higher volume of
mortgage originations and related servicing activities.
Service based fees from relocation activities also contributed to the increase
in revenues and EBITDA. Relocation referral fees increased $6 million due to
increased market penetration.
Also contributing to revenue and EBITDA growth in second quarter 2001 were
franchisee fees (royalties and initial fees) from our Century 21(R), Coldwell
Banker(R) and ERA(R) franchise brands. Franchise fees increased $12 million
(8%), despite only moderate industry-wide growth, and a year-over-year industry
decline in California. Contributing to the increase in royalties was a 2%
increase in home sales volume, which was supported by increased unit growth from
franchise sales and acquisitions by NRT Incorporated, our largest franchisee.
Partially offsetting the revenue and EBITDA increases was a $10 million gain
recognized in second quarter 2000 on the sale of a portion of our preferred
stock investment in NRT.
HOSPITALITY
Revenues and EBITDA increased $216 million (84%) and $56 million (54%),
respectively. While Fairfield produced the bulk of the increase in operating
results, our pre-existing timeshare exchange operations also contributed to this
growth. Fairfield contributed revenues and EBITDA of $197 million and $50
million, respectively, which is substantially greater than their operating
results in second quarter 2000 as an independent company. Additionally, in
January 2001, we acquired Holiday Cottages Group Limited, the leading UK brand
in the holiday cottages rental sector. Excluding the acquisitions of Fairfield
and Holiday Cottages, revenues and EBITDA increased $12 million (5%) and $4
million (4%), respectively. Such growth was substantially a result of an $11
million (13%)
15
increase in timeshare subscription and transaction revenues primarily due to
increases in members and exchange transactions. Timeshare staffing costs
increased to support volume growth and meet anticipated service levels.
VEHICLE SERVICES
Revenues and EBITDA increased $977 million and $75 million, respectively,
substantially due to the acquisition of Avis. The operations of Avis are
comprised of the car rental business and the fleet management business, which
provides integrated fleet management services to corporate customers including
vehicle leasing, advisory services, fuel and maintenance cards, other expense
management programs and productivity enhancement. The acquisition contributed
incremental revenue and EBITDA of $967 million and $65 million, respectively.
Additionally, our National Car Parks subsidiary contributed incremental revenue
of $10 million in second quarter 2001. Prior to the acquisition, revenues and
EBITDA consisted principally of earnings from our equity investment in Avis,
royalties received from Avis and the operations of our National Car Parks
subsidiary.
FINANCIAL SERVICES
Revenues increased $11 million (3%), while EBITDA decreased $13 million (16%).
Jackson Hewitt, our tax preparation franchise business, contributed incremental
revenues of $4 million, principally comprised of higher royalties due to an
increase in tax return volume. Such increase was recognized with no
corresponding increase in expenses due to significant operating leverage within
Jackson Hewitt. The decline in EBITDA was entirely due to a reduced contribution
from our individual membership business, which had been incurring increased
marketing expenses to attract new members. Direct marketing expenses increased
$9 million. Also, a decrease in membership expirations during second quarter
2001 (revenue is generally recognized upon expiration of the membership) was
partially mitigated by a favorable mix of products and programs and a reduction
in operating expenses, principally commissions, which directly related to
servicing fewer members. During fourth quarter 2000, we re-acquired and
integrated Netmarket Group, an online membership business, which contributed $15
million to revenues and $4 million to EBITDA in second quarter 2001. Also during
second quarter 2000, $8 million of fees were recognized from the sale of certain
referral agreements with car dealers, which contributed to a reduction in
revenues and EBITDA.
On July 2, 2001, we announced that we had entered into a number of agreements,
including a forty-year outsourcing agreement, with Trilegiant Corporation, a
newly formed company owned by the former management of our Cendant Membership
Services and Cendant Incentives subsidiaries. Under the agreements, we will
continue to recognize revenue and collect membership fees and are obligated to
provide membership benefits to existing members, including all renewals, of our
individual membership business. Trilegiant will provide fulfillment services to
these members in exchange for a servicing fee. Trilegiant will license and/or
lease from us the assets of our individual membership business to service
existing members and obtain new members for which Trilegiant will retain the
economic benefits and service obligations. Beginning in the third quarter of
2002, we will receive from Trilegiant a royalty from membership fees generated
by their new membership joins. The royalty received will range from a rate of 5%
to 16% of Trilegiant membership revenue.
CORPORATE AND OTHER
Revenues decreased $35 million, while Adjusted EBITDA increased $27 million. In
February 2001, we sold our real estate Internet portal, move.com, along with
certain other ancillary businesses. Such businesses collectively accounted for a
$25 million decline in revenues and a $28 million improvement in Adjusted EBITDA
which reflected our investment in the development and marketing of the portal
during second quarter 2000. In addition, as a result of the Avis acquisition,
revenues from providing electronic reservation processing services to Avis
decreased $14 million with no impact to Adjusted EBITDA.
16
SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000
REVENUES ADJUSTED EBITDA
----------------------------------------- -------------------------------------
% %
2001 2000 CHANGE 2001 2000(e) CHANGE
----------- ----------- ----------- ---------- ---------- ----------
Real Estate Services $ 813 $ 666 22% $ 363(b) $ 308 18%
Hospitality 737 499 48 263 195(f) 35
Vehicle Services 1,566 272 * 234(c) 139 *
Financial Services 722 702 3 201 216 (7)
----------- ----------- ---------- ----------
Total Reportable Segments 3,838 2,139 1,061 858
Corporate and Other(a) 51 126 * (31)(d) (42)(g) *
----------- ----------- ---------- ----------
Total Company $ 3,889 $ 2,265 $ 1,030 $ 816
=========== =========== ========== ==========
- ----------
* Not meaningful.
(a) Included in Corporate and Other are the results of operations of our
non-strategic businesses, unallocated corporate overhead and the
elimination of transactions between segments.
(b) Excludes a charge of $95 million to fund an irrevocable contribution to an
independent technology trust responsible for providing technology
initiatives for the benefit of certain current and future franchisees.
(c) Excludes a charge of $4 million related to the acquisition and integration
of Avis.
(d) Excludes (i) a net gain of $435 million related to the dispositions of
businesses and (ii) a credit of $14 million to reflect an adjustment to
the PRIDES class action litigation settlement charge recorded by the
Company in 1998. Such amounts were partially offset by charges of (i) $85
million incurred in connection with the creation of Travel Portal, Inc., a
company that was created to pursue the development of an online travel
business for the benefit of certain current and future franchisees, (ii)
$33 million for litigation settlement and related costs, (iii) $7 million
related to a non-cash contribution to the Cendant Charitable Foundation
and (iv) $4 million related to the acquisition and integration of Avis.
(e) Excludes a charge of $106 million in connection with restructuring and
other initiatives ($2 million, $63 million, $31 million and $10 million
within Real Estate Services, Hospitality, Financial Services and Corporate
and Other, respectively).
(f) Excludes $4 million of losses related to the dispositions of businesses.
(g) Excludes a non-cash credit of $41 million in connection with a change to
the original estimate of the number of Rights to be issued in connection
with the PRIDES settlement resulting from unclaimed and uncontested
Rights. Such credit was partially offset by (i) $6 million of losses
related to the dispositions of businesses and (ii) $8 million of
litigation settlement and related costs.
REAL ESTATE SERVICES
Revenues and Adjusted EBITDA increased $147 million (22%) and $55 million (18%),
respectively. The increase in operating results was primarily driven by
substantial growth in mortgage loan production, due to increased refinancing
activity and purchase volume during the first half of 2001. Increases in
relocation services and higher royalties from our Century 21(R), Coldwell
Banker(R), and ERA(R) franchise brands also contributed to the favorable
operating results.
Collectively, mortgage loans sold increased $7.4 billion (87%) to $15.8 billion,
generating incremental revenues of $136 million, or an increase of 107%. Closed
mortgage loans increased $9.7 billion (99%) to $19.4 billion. This growth
consisted of a $6.8 billion increase (approximately ten-fold) in refinancings
and a $2.9 billion increase (32%) in purchase mortgage closings. Beginning in
January 2001, Merrill Lynch outsourced its mortgage originations and servicing
operations to us. New Merrill Lynch business accounted for 14% of our mortgage
closings in first half 2001. A significant portion of mortgages closed in any
quarter will generate revenues in future periods as such loans are packaged and
sold (revenues are recognized upon the sale of the loan, typically 45-60 days
after closing). Partially offsetting record production revenues was a $14
million decline in loan net servicing revenue. The average servicing portfolio
grew $29 billion (52%) as a result of the high volume of mortgage loan
originations and Merrill Lynch's outsourcing of its mortgage origination
operations to us. However, accelerated servicing amortization expenses during
the first half of 2001, due primarily to refinancing activity, more than offset
the increase in recurring servicing fees from the portfolio growth.
Additionally, operating expenses within this segment increased to support the
higher volume of mortgage originations and related servicing activities.
Service based fees from relocation activities also contributed to the increase
in revenues and Adjusted EBITDA. Relocation referral fees increased $11 million
and net interest income from relocation operations was $8 million favorable due
to the maintenance of lower debt levels.
Also contributing to revenue and Adjusted EBITDA growth in the first half of
2001 were royalties from our real estate franchise brands. Royalties increased
$7 million (3%), principally due to an increase in the average price of homes
17
sold. Controllable expenses increased principally to support the higher volume
of mortgage originations and related service activities. Partially offsetting
the revenue and Adjusted EBITDA increases was a $10 million gain recognized in
second quarter 2000 on the sale of a portion of our preferred stock investment
in NRT.
HOSPITALITY
Revenues and Adjusted EBITDA increased $238 million (48%) and $68 million (35%),
respectively. While Fairfield produced the bulk of the increase in operating
results, our pre-existing timeshare exchange operations also contributed to this
growth. Fairfield contributed revenues and Adjusted EBITDA of $197 million and
$50 million, respectively. The additional growth was due to the acquisition of
Holiday Cottages and a $21 million (12%) increase in timeshare subscription and
transaction revenues primarily due to increases in members and exchange
transactions. Timeshare staffing costs marginally increased to support volume
growth and meet anticipated service levels.
VEHICLE SERVICES
Revenues and Adjusted EBITDA increased $1.3 billion and $95 million,
respectively, substantially due to the acquisition of Avis. Assuming the
acquisition of Avis had occurred on January 1, for each of the periods
presented, revenues and Adjusted EBITDA would have been $2.2 billion and $227
million, respectively, for the six months ended June 30, 2001, and $2.1 billion
and $318 million, respectively, for the six months ended June 30, 2000. Revenues
would have increased by $50 million (2%) and Adjusted EBITDA would have
decreased by $91 million (29%) due to the substantial increase in operating
costs.
FINANCIAL SERVICES
Revenues increased $20 million (3%), while EBITDA decreased $15 million (7%).
Jackson Hewitt contributed incremental revenues of $15 million, principally
comprised of higher royalties due to a 32% increase in tax return volume. Such
increase was recognized with relatively no corresponding increase in expenses
due to significant operating leverage within Jackson Hewitt. The decline in
EBITDA was substantially due to a reduced contribution from our individual
membership business, which had been incurring increased marketing expenses to
attract new members. Direct marketing expenses increased $10 million. Also, a
decrease in membership expirations (revenue is generally recognized upon
expiration of the membership) was partially mitigated by a favorable mix of
products and programs with marketing partners and a reduction in operating
expenses, principally commissions, which directly related to servicing fewer
members. During fourth quarter 2000, we re-acquired and integrated Netmarket
Group, which contributed $31 million to revenues and $7 million to EBITDA in the
first half of 2001. Revenues and EBITDA in 2000 included $8 million of fees
recognized from the sale of certain referral agreements with car dealers. EBITDA
in 2000 also included $5 million of costs that were incurred to consolidate
certain of our domestic insurance, wholesale businesses.
CORPORATE AND OTHER Revenues decreased $75 million while Adjusted EBITDA
increased $11 million. In February 2001, we sold our real estate Internet
portal, move.com, along with certain other ancillary businesses. Such businesses
collectively accounted for a decline in revenues of $32 million and an
improvement in Adjusted EBITDA of $45 million, which reflected our investment in
the development and marketing of the portal during the first half of 2000.
Revenues and Adjusted EBITDA were negatively impacted by $30 million less income
from financial investments. In addition, as a result of the Avis acquisition,
revenues from providing electronic reservation processing services to Avis
decreased $9 million with no Adjusted EBITDA impact. Adjusted EBITDA in the
first half of 2001 benefited from the absence of $11 million of costs incurred
to pursue Internet initiatives during the first half of 2000.
18
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Within our car rental, vehicle management, relocation, mortgage services and
timeshare development businesses, we purchase assets or finance the purchase of
assets on behalf of our clients. Assets generated in this process are classified
as assets under management and mortgage programs. The fees generated from these
clients are used, in part, to repay the interest and principal associated with
the financing of these assets. Accordingly, the cash inflows or outflows
relating to the principal repayment or funding of such assets are classified as
activities of our management and mortgage programs. We seek to offset the
interest rate exposures inherent in our assets under management and mortgage
programs by matching such assets with financial liabilities that have similar
term and interest rate characteristics. As a result, we minimize the interest
rate risk associated with managing these assets and create greater certainty
around the financial income that they produce. Funding for our assets under
management and mortgage programs is provided by both unsecured corporate
borrowings and securitized financing arrangements, which are classified as
liabilities under management and mortgage programs.
FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2001 2000 CHANGE
----------- --------------- ---------
Total assets exclusive of assets under programs $ 17,674 $ 12,211 $ 5,463
Assets under programs 11,613 2,861 8,752
Total liabilities exclusive of liabilities under programs $ 12,160 $ 7,724 $ 4,436
Liabilities under programs 11,023 2,516 8,507
Mandatorily redeemable securities 375 2,058 (1,683)
Stockholders' equity 5,729 2,774 2,955
Total assets exclusive of assets under programs increased primarily due to an
increase in goodwill resulting from the acquisitions of Avis and Fairfield,
various other increases in assets also due to the acquisitions and cash proceeds
provided by financing activities. Assets under programs increased primarily due
to vehicles acquired in the acquisition of Avis.
Total liabilities exclusive of liabilities under programs increased primarily
due to $2.7 billion of debt issued during 2001, approximately $900 million of
debt assumed in the acquisition of Avis and various other increases in
liabilities also due to the acquisitions of Avis and Fairfield. Liabilities
under programs increased primarily due to approximately $6.8 billion of debt
assumed in the acquisition of Avis and $1.9 billion of debt issued during 2001.
Mandatorily redeemable securities decreased due to the exchange of these
securities in connection with the settlement of the purchase contracts
underlying the Feline PRIDES during first quarter 2001, which resulted in the
issuance of approximately 61 million shares of CD common stock.
Stockholders' equity increased primarily due to the above-mentioned issuance of
approximately 61 million shares of CD common stock, the issuance during first
quarter 2001 of 46 million shares of CD common stock at $13.20 per share for
aggregate proceeds of approximately $607 million and net income of $481 million
during 2001.
LIQUIDITY AND CAPITAL RESOURCES
Based upon cash flows provided by our operations and access to liquidity through
various other sources, including public debt and equity markets and financial
institutions, we have sufficient liquidity to fund our current business plans
and obligations.
CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
----------------------------------------
2001 2000 CHANGE
---------- ---------- -----------
Cash provided by (used in):
Operating activities $ 1,191 $ 171 $ 1,020
Investing activities (3,780) (102) (3,678)
Financing activities 3,549 (22) 3,571
Effects of exchange rate changes on cash and cash equivalents 9 23 (14)
---------- ---------- -----------
Net change in cash and cash equivalents $ 969 $ 70 $ 899
========== ========== ===========
Cash flows from operating activities increased primarily due to the impact of
the Avis acquisition.
Cash flows used in investing activities increased primarily due to (i) the
utilization of cash to fund the acquisitions of Avis and Fairfield, (ii) a net
outflow of approximately $1.1 billion to acquire vehicles used in our Avis
business and (iii) the funding of $500 million to the stockholder litigation
settlement trust during 2001.
Cash flows from financing activities resulted in an inflow of $3.5 billion in
2001 compared to an outflow of $22 million in 2000 primarily due to proceeds of
$3.4 billion received from the issuances of debt and CD common stock during
2001.
19
CAPITAL EXPENDITURES
Capital expenditures during 2001 amounted to $151 million and were utilized to
support operational growth, enhance marketing opportunities and develop
operating efficiencies through technological improvements. We anticipate a
capital expenditure investment during 2001 ranging from $300 million to $350
million. Such amount represents an increase from 2000 primarily due to the
acquisitions of Avis and Fairfield.
DEBT FINANCING
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS
Our total long-term debt increased $2.9 billion to $4.9 billion at June 30,
2001. Such increase was primarily attributable to the assumption of Avis debt of
approximately $900 million and additional debt issuances of $2.7 billion.
During first quarter 2001, we issued $1.5 billion aggregate principal amount at
maturity of zero-coupon senior convertible notes for aggregate gross proceeds of
approximately $900 million. We used $250 million of such proceeds to extinguish
outstanding borrowings under our then-existing term loan facility. The remaining
proceeds were used for general corporate purposes. These notes mature in 2021
and were issued at a price representing a yield-to-maturity of 2.5%. We will not
make periodic payments of interest on the notes, but may be required to make
nominal cash payments in specified circumstances. Each $1,000 principal amount
at maturity may be convertible, subject to satisfaction of specific
contingencies, into 33.4 shares of CD common stock. The notes will not be
redeemable by us prior to February 13, 2004, but will be redeemable thereafter
at the issue price of $608.41 per note plus accrued discount through the
redemption date. In addition, holders of the notes may require us to repurchase
the notes on February 13, 2004, 2009 or 2014. In such circumstance, we may pay
the purchase price in cash, shares of our CD common stock, or any combination
thereof.
During first quarter 2001, we also entered into a $650 million term loan
agreement with terms similar to our other revolving credit facilities. This term
loan amortizes in three equal installments on August 22, 2002, May 22, 2003 and
February 22, 2004. Borrowings under this facility bear interest at LIBOR plus a
margin of 125 basis points. A portion of this term loan was used to finance the
acquisition of Avis.
During second quarter 2001, we issued zero-coupon zero-yield senior convertible
notes for gross proceeds of $1.0 billion. We expect to utilize these proceeds
for general corporate purposes and to reduce certain borrowings. These notes
mature in 2021. We are not required to pay interest on these notes unless an
interest adjustment becomes payable, which may occur in specified circumstances
commencing in 2004. Each $1,000 principal amount at maturity may be convertible,
subject to satisfaction of specific contingencies, into approximately 39 shares
of CD common stock.
On July 27, 2001, we completed a public offering of 15 million Upper DECS, each
consisting of both a senior note and a forward purchase contract, aggregating
$750 million principal amount. The senior notes have a term of five years and
initially bear interest at an annual rate of 6.75%. The forward purchase
contracts require the holder to purchase a minimum of 1.7593 shares and a
maximum of 2.3223 shares of CD common stock, based upon the average closing
price of CD common stock during a stipulated period, in August 2004. The forward
purchase contracts also require distributions at an annual rate of 1.00% through
August 2004, at which time the forward purchase contracts will be settled. The
interest rate on the senior notes will be reset based upon a remarketing in
either May or August 2004. On August 8, 2001, the underwriters exercised an
option to purchase an additional 2.25 million Upper DECS,
20
aggregating $112.5 million principal amount, to cover over-allotments. We expect
to utilize the proceeds for general corporate purposes.
Coincident with the acquisition of Avis, we also assumed and guaranteed a $450
million six-year revolving credit facility maturing in June 2005. Borrowings
under this facility bear interest at LIBOR plus a margin of approximately 175
basis points. We are required to pay a per annum facility fee of 37.5 basis
points on this facility. Letters of credit of $82 million were issued under this
facility as of June 30, 2001. At June 30, 2001, we had approximately $312
million of availability under this facility and, in addition, we had
approximately $1.3 billion available under existing credit facilities.
On July 25, 2001, we filed a registration statement, which provides for an
aggregate public offering of up to $3.0 billion of debt or equity securities.
On August 13, 2001, we sold $850 million aggregate principal amount of 6.875%
notes to qualified institutional buyers for net proceeds of $843 million. The
notes mature in August 2006.
RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Debt related to our management and mortgage programs increased $8.0 billion to
$10.0 billion at June 30, 2001. Such increase was primarily attributable to the
assumption of Avis debt (principally comprising $3.7 billion of securitized term
notes, $1.6 billion of securitized interest bearing notes and $957 million of
securitized commercial paper) and additional debt issuances aggregating $1.9
billion during 2001. During first quarter 2001, unsecured medium-term notes of
$650 million were issued under an existing shelf registration statement filed by
our PHH subsidiary. We currently have approximately $2.4 billion available for
issuing medium-term notes under PHH's shelf registration statement. The
remaining $1.25 billion of debt issuances during 2001 consisted of $750 million
of securitized rental car asset-backed notes, $325 million of short-term
borrowings and $190 million of auction rate securitized rental car asset-backed
notes.
Coincident with the acquisition of Fairfield on April 2, 2001, an unaffiliated
bankruptcy remote special purpose entity, Fairfield Receivables Corporation,
committed to purchase for cash, at our option, up to $500 million of our
timeshare receivables. We will retain a subordinated residual interest and the
related servicing rights and obligations in the transferred timeshare
receivables. At June 30, 2001, we were servicing approximately $298 million of
timeshare receivables transferred to Fairfield Receivables Corporation.
On August 6, 2001, we sold $213 million of vacation ownership interval loans to
a bankruptcy remote special purpose entity. We retain a subordinated residual
interest and the related servicing obligations in the loans.
STRATEGIC BUSINESS INITIATIVES
On August 13, 2001, we announced that we had entered into a definitive agreement
to acquire all of the outstanding common stock of Cheap Tickets, Inc., a leading
provider of discount leisure travel products, at a price of $16.50 per share, or
approximately $425 million in cash. The transaction is subject to customary
regulatory approvals and the approval of Cheap Tickets' stockholders. Although
no assurances can be given, we expect the transaction to close in the fall of
2001.
On June 18, 2001, we announced that we had entered into a definitive agreement
to acquire all of the outstanding common stock of Galileo International, Inc., a
leading provider of electronic global distribution services for the travel
industry, at an expected value of $33 per share, or approximately $3.1 billion,
including estimated transaction costs and expenses and the conversion of Galileo
employee stock options into CD common stock options. As part of the planned
acquisition, we will also assume approximately $600 million of Galileo debt. The
final acquisition price will be paid in a combination of CD common stock and
cash. The number of shares of CD common stock to be paid to Galileo stockholders
will fluctuate, between 116 million and 137 million shares, within a collar of
$17 to $20 per share of CD common stock. The remainder of the purchase price
will be paid in cash and may fluctuate if the average price per share of CD
common stock during a stipulated period is above or below the collar. We
anticipate funding the cash portion of the final acquisition price from
available cash, lines of credit or additional debt issuances. The transaction is
subject to customary regulatory approvals and the approval of Galileo's
stockholders. Although no assurances can be given, we expect the transaction to
close in the third quarter of 2001.
We continually explore and conduct discussions with regard to acquisitions and
other strategic corporate transactions in our industries and in other franchise,
franchisable or service businesses in addition to transactions previously
announced. As part of our regular on-going evaluation of acquisition
opportunities, we currently are engaged in a number of separate, unrelated
preliminary discussions concerning possible acquisitions. The purchase price for
the possible acquisitions may be paid in cash, through the issuance of CD common
stock or other of our securities, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other things,
initiate and complete satisfactorily our due diligence investigations; negotiate
the financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and, if necessary, secure financing. No
assurance can be given with respect to the timing, likelihood or business effect
of any possible transaction. In the past, we have been involved in both
relatively small acquisitions and acquisitions which have been significant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets."
21
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001. Additionally, this
statement further clarifies the criteria for recognition of intangible assets
separately from goodwill for all business combinations completed after June 30,
2001, as well as requires additional disclosures for those business
combinations.
SFAS No. 142 requires that goodwill and certain other intangible assets acquired
after June 30, 2001 no longer be amortized. Beginning on January 1, 2002,
amortization of existing goodwill and certain other intangible assets will no
longer be permitted and we will be required to assess these assets for
impairment annually, or more frequently if circumstances indicate a potential
impairment. Furthermore, this statement provides specific guidance for testing
goodwill and certain other intangible assets for impairment. Transition-related
impairment losses, if any, which result from the initial assessment of goodwill
and certain other intangible assets would be recognized as a cumulative effect
of accounting change on January 1, 2002. We are currently evaluating the impact
of adopting this standard on our financial position and results of operations.
During the six months ended June 30, 2001 and 2000, we recorded amortization
expense of $76 million and $55 million, respectively, related to goodwill and
certain other intangible assets that will no longer be amortized upon adoption
of SFAS No. 142. In addition, during the six months ended June 30, 2001, we
recorded amortization expense of $23 million related to the difference between
the value of our investment in Homestore and the underlying equity in Homestore
that will no longer be amortized. Such amount is net of the amortization of our
deferred gain recorded on the sale of move.com to Homestore, which would also no
longer be amortized.
The estimated impact for 2002 with respect to goodwill and certain other
intangible assets that will no longer be subject to amortization is expected to
reduce amortization expense by $164 million, based upon existing goodwill and
other intangible assets as of June 30, 2001. In addition, the estimated impact
for 2002 with respect to the difference between the value of our investment in
Homestore and the underlying equity in the net assets of Homestore that will no
longer be subject to amortization is expected to reduce amortization expense by
$53 million. Such amount is net of the amortization of our deferred gain
recorded on the sale of move.com to Homestore that will no longer be amortized.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As previously discussed in our 2000 Annual Report on Form 10-K/A, we assess our
market risk based on changes in interest and foreign currency exchange rates
utilizing a sensitivity analysis. The sensitivity analysis measures the
potential loss in earnings, fair values, and cash flows based on a hypothetical
10% change (increase and decrease) in our market risk sensitive positions. We
used June 30, 2001 market rates to perform a sensitivity analysis separately for
each of our market risk exposures. The estimates assume instantaneous, parallel
shifts in interest rate yield curves and exchange rates. We have determined,
through such analyses, that the impact of a 10% change in interest and foreign
currency exchange rates and prices on our earnings, fair values and cash flows
would not be material.
23
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an Annual Meeting of Stockholders on May 22, 2001, pursuant to a Notice
of Annual Meeting of Stockholders and Proxy Statement dated March 30, 2001, a
copy of which has been filed previously with the Securities and Exchange
Commission, at which our stockholders approved the election of four directors
for a term of three years, the ratification for the appointment of Deloitte &
Touche LLP as the auditors of the financial statements for fiscal year 2001, and
the approval of an amendment to the Amended and Restated 1997 Stock Option Plan.
Proposal 1: To elect Four directors for a three year term.
RESULTS:
In Favor Withheld
-------- --------
Myra J. Biblowit 750,308,812 12,534,023
The Rt. Hon. Brian Mulroney P.C., 750,423,029 12,419,806
Robert W. Pittman 747,088,445 15,754,390
Sheli Z. Rosenberg 750,576,244 12,266,591
Proposal 2: To ratify and approve the appointment of Deloitte & Touche LLP as
our Independent Auditors for the year ending December 31, 2001.
RESULTS:
For Against Abstain
--- ------- -------
731,996,442 27,976,192 2,870,201
Proposal 3: To approve an amendment to the Amended and Restated 1997 Stock
Option Plan.
RESULTS:
For Against Abstain
--- ------- -------
546,206,750 211,431,521 5,204,564
ITEM 5. OTHER INFORMATION
See Exhibit 99.1 attached hereto regarding available pro forma financial data
giving effect to the acquisition of Avis Groups Holdings, Inc. on March 1, 2001
for the six months ended June 30, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Exhibit Index
(b) REPORTS ON FORM 8-K
On April 3, 2001, we filed a current report on Form 8-K to report under Item 5
the completion of the acquisition of Fairfield Communities, Inc. on April 2,
2001.
On April 19, 2001, we filed a current report on Form 8-K to make available under
Item 5 pro forma financial information giving effect to the acquisition of Avis
Group Holdings, Inc. on March 1, 2001.
On April 19, 2001, we filed a current report on Form 8-K to report under Item 5
our first quarter 2001 financial results.
On May 2, 2001, we filed a current report on Form 8-K to report under Item 5 the
sale of zero-coupon, zero-yield senior convertible notes and an increase in our
2001 projected adjusted earnings per share from continuing operations.
On May 4, 2001, we filed a current report on Form 8-K to report under Item 5 our
Consolidated Condensed Statements of Cash Flows and our Consolidated Schedule of
Free Cash Flow for the three and twelve month period ending March 31, 2001 and
2000.
On May 11, 2001, we filed a current report on Form 8-K to report under Item 5
the issuance of debt securities.
On May 25, 2001, we filed a current report on Form 8-K to report under Items 5
and 7 pro forma financial information giving effect to the acquisition of Avis
Group Holdings, Inc. on March 1, 2001.
On June 15, 2001, we filed a current report on Form 8-K to report under Item 5
the entry into the First Supplemental Indenture relating to our zero-coupon
senior convertible notes.
On June 18, 2001, we filed a current report on Form 8-K to report under Item 5
the proposed acquisition of Galileo International, Inc.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CENDANT CORPORATION
/s/ KEVIN M. SHEEHAN
--------------------------
Kevin M. Sheehan
Senior Executive Vice President and
Chief Financial Officer
/s/ TOBIA IPPOLITO
--------------------------
Tobia Ippolito
Executive Vice President and
Chief Accounting Officer
Date: August 14, 2001
25
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the Company's 10-Q/A
for the quarterly period ended March 31, 2000, dated July 28, 2000).
3.2 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's 10-Q/A for the quarterly
period ended March 31, 2000, dated July 28, 2000)
4.1 Indenture, dated as of May 4, 2001, between Cendant Corporation and
The Bank of New York as trustee (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed May
11, 2001).
4.2 First Supplemental Indenture, dated as of June 13, 2001, between
Cendant Corporation and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed June 15, 2001).
10.1 Agreement and Plan of Merger, dated as of June 15, 2001, by and
between the Company, Galaxy Acquisition Corp. and Galileo
International, Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4 filed on July 6, 2001).
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges.
99.1 Pro Forma Financial Information (unaudited)
EXHIBIT 12
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
--------- ---------
EARNINGS BEFORE FIXED CHARGES:
Income before income taxes, minority interest and
equity in Homestore.com $ 909 $ 515
Plus: Fixed charges 457 226
Less: Equity income (loss) in unconsolidated affiliates (4) 6
Minority interest 28 60
--------- ---------
Earnings available to cover fixed charges $ 1,342 $ 675
========= =========
FIXED CHARGES(1):
Interest, including amortization of deferred
financing costs $ 400 $ 136
Minority interest 28 60
Interest portion of rental payment 29 30
--------- ---------
Total fixed charges $ 457 $ 226
========= =========
RATIO OF EARNINGS TO FIXED CHARGES $ 2.94x(2) $ 2.99x(3)
========= =========
- ----------
(1) Fixed charges consist of interest expense on all indebtedness (including
amortization of deferred financing costs and capitalized interest) and the
portion of operating lease rental expense that is representative of the
interest factor.
(2) Income before income taxes, minority interest and equity in Homestore.com
includes a net gain on the dispositions of businesses of $435 million,
partially offset by other charges of $212 million. Excluding such amounts,
the ratio of earnings to fixed charges is 2.45x.
(3) Income before income taxes, minority interest and equity in Homestore.com
includes net restructuring charges of $106 million and a net loss on the
dispositions of businesses of $10 million, partially offset by
litigation-related credits of $33 million. Excluding such amounts, the
ratio of earnings to fixed charges is 3.35x.
EXHIBIT 99.1
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following Unaudited Pro Forma Condensed Combined Statement of Operations for
the six months ended June 30, 2001 gives effect to the Company's March 1, 2001
acquisition (the "Acquisition") of Avis Group Holdings, Inc. ("Avis"), which has
been accounted for under the purchase method of accounting.
The Unaudited Pro Forma Condensed Combined Statement of Operations assumes the
Acquisition occurred on January 1, 2001. The unaudited pro forma financial
information is based on the historical consolidated financial statements of the
Company and Avis under the assumptions and adjustments set forth in the
accompanying explanatory notes.
Since Avis was consolidated with the Company as of March 1, 2001, the results of
operations of Avis between January 1, 2001 and February 28, 2001 were combined
with the Company's results of operations to report the combined pro forma
results of operations for the six month period ended June 30, 2001. All
intercompany transactions were eliminated on a pro forma basis. Historically,
Avis paid the Company for services the Company provided related to call centers
and information technology and for the use of the Company's trademarks.
As a result of the Acquisition, the Company made payments totaling approximately
$994 million, including payments of $937 million to Avis stockholders, direct
expenses of $40 million related to the transaction and the net cash obligation
of $17 million related to Avis stock options settled prior to consummation. The
purchase price also included the fair value of CD common stock options exchanged
with certain fully-vested Avis stock options. The Unaudited Pro Forma Condensed
Combined Statement of Operations reflects interest expense resulting from a
portion of the purchase price being funded by the issuance of $600 million in
debt, with the remaining amount provided by cash.
The unaudited pro forma financial information excludes any benefits that might
result from the Acquisition due to synergies that may be derived or from the
elimination of duplicate efforts.
The Company's management believes that the assumptions used provide a reasonable
basis on which to present the unaudited pro forma financial information. The
Company has completed other acquisitions and dispositions which are not
significant and, accordingly, have not been included in the accompanying
unaudited pro forma financial information. The unaudited pro forma financial
information may not be indicative of the results of operations that would have
occurred if the Acquisition had been in effect on the dates indicated or which
might be obtained in the future.
The unaudited pro forma financial information should be read in conjunction with
the historical consolidated financial statements and accompanying notes for the
Company and Avis.
CENDANT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
HISTORICAL AVIS PURCHASE COMBINED
CENDANT JAN 1- FEB 28, 2001 ADJUSTMENTS PRO FORMA
---------- ------------------- ----------- ---------
REVENUES
Membership and service fees, net $ 2,431 $ 27 $ (34)(a) $ 2,424
Vehicle-related 1,433 594 -- 2,027
Other 25 20 -- (b) 45
---------- ------------------- ----------- ---------
Net revenues 3,889 641 (34) 4,496
EXPENSES
Operating 1,239 174 (34)(a) 1,379
Vehicle depreciation, lease charges and interest, net 725 350 -- 1,075
Selling, general and administrative 895 115 -- 1,010
Non-vehicle depreciation and amortization 222 23 2 (d) 247
Other charges, net 212 - -- 212
Non-vehicle interest, net 122 12 1 (c) 135
---------- ------------------- ----------- ---------
Total expenses 3,415 674 (31) 4,058
Net gain on dispositions of businesses 435 -- -- 435
---------- ------------------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST
AND EQUITY IN HOMESTORE.COM 909 (33) (3) 873
Provision (benefit) for income taxes 336 (10) (2)(e) 324
Minority interest, net of tax 18 -- -- 18
Losses related to equity in Homestore.com, net of tax 36 -- -- 36
---------- ------------------- ----------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 519 $ (23) $ (1) $ 495
========== ================= =========== =========
CD COMMON STOCK INCOME PER SHARE
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Basic $ 0.61 $ 0.58
Diluted 0.58 0.55
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 820 820
Diluted 868 868
MOVE.COM COMMON STOCK INCOME PER SHARE
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Basic $ 9.94 $ 9.94
Diluted 9.81 9.81
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2 2
Diluted 2 2
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS.
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
(a) Represents the elimination of amounts paid by Avis to the Company for
services provided by the Company related to call centers and information
technology and for the use of trademarks.
(b) Represents the elimination of the Company's earnings attributable to its
investment in Avis for which the combined effect is zero.
(c) Represents interest expense on debt issued to finance the acquisition of
Avis ($7), net of amortization of the fair value adjustment on acquired
debt ($4) and the reversal of Avis' amortization of debt-related costs
($2).
(d) Represents the amortization of goodwill generated on the excess of fair
value over the net assets acquired on a straight-line basis over 40 years,
net of the reversal of Avis' amortization of pre-acquisition goodwill and
other identifiable intangibles resulting from the allocation of purchase
price on a straight-line basis over 20 years.
(e) Represents the income tax effect of the purchase adjustments and other pro
forma adjustments at an estimated statutory rate of 38.5% (not including
adjustments for non-deductible goodwill).
*******
