===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
COMMISSION FILE NO. 1-10308
------------
CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0918165
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive (Zip Code)
office)
(973) 428-9700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if applicable)
------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the Registrant's classes of
common stock was 857,983,796 shares of Common Stock outstanding as of
August 11, 1998.
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CENDANT CORPORATION AND SUBSIDIARIES
INDEX
- -------------------------------------------------------------------------------
PART 1 - FINANCIAL INFORMATION
PAGE NO.
Item 1 - Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997
Consolidated Statements of Income - Three and Six
Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements, include, but are not limited to: the
outcome of the investigation of the Audit Committee of the Company's Board of
Directors into the accounting irregularities; the outcome of pending or future
litigation relating to such accounting irregularities; uncertainty as to the
Company's future profitability; the Company's ability to develop and implement
operational and financial systems to manage rapidly growing operations;
competition in the Company's existing and potential future lines of business;
the Company's ability to integrate and operate successfully acquired businesses
and the risks associated with such businesses; the Company's ability to obtain
financing on acceptable terms to finance the Company's growth strategy and for
the Company to operate within the limitations imposed by financing
arrangements; uncertainty as to the future profitability of acquired
businesses, and other factors. Other factors and assumptions not identified
above were also involved in the derivation of these forward-looking statements,
and the failure
2
of such other assumptions to be realized as well as other factors may also
cause actual results to differ materially from those projected. The Company
assumes no obligation to update these forward-looking statements to reflect
actual results, changes in assumptions or changes in other factors affecting
such forward-looking statements.
3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(As restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,549.7 $ -
Receivables, net 1,148.7 1,193.0
Other current assets 1,017.5 714.1
Net assets of discontinued operations 522.3 285.0
----------- -----------
TOTAL CURRENT ASSETS 4,238.2 2,192.1
----------- -----------
Deferred membership acquisition costs 448.0 370.5
Franchise agreements, net 974.9 890.3
Goodwill, net 4,130.9 2,206.4
Other intangibles, net 1,041.6 847.3
Other assets 1,899.2 986.4
----------- -----------
TOTAL ASSETS EXCLUSIVE OF ASSETS UNDER PROGRAMS 12,732.8 7,493.0
----------- -----------
ASSETS UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Net investment in leases and leased vehicles 3,918.9 3,659.1
Relocation receivables 590.6 775.3
Mortgage loans held for sale 2,754.0 1,636.3
Mortgage servicing rights 480.5 373.0
----------- -----------
7,744.0 6,443.7
----------- -----------
TOTAL ASSETS $ 20,476.8 $ 13,936.7
=========== ===========
See accompanying notes to consolidated financial statements.
4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(As restated)
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other current liabilities $ 1,970.5 $ 1,539.8
Term loan-current portion 1,850.0 --
----------- -----------
TOTAL CURRENT LIABILITIES 3,820.5 1,539.8
----------- -----------
Deferred income 631.4 861.5
Long-term debt 2,185.4 1,246.0
Other noncurrent liabilities 367.3 173.2
----------- -----------
TOTAL LIABILITIES EXCLUSIVE OF LIABILITIES UNDER PROGRAMS 7,004.6 3,820.5
----------- -----------
LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Debt 6,830.0 5,602.6
----------- -----------
Deferred income taxes 264.8 295.7
----------- -----------
Mandatorily redeemable preferred securities issued by subsidiaries 1,426.5 --
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value - authorized
10 million shares; none issued and outstanding -- --
Common stock, $.01 par value - authorized
2 billion shares; issued 857,986,368
and 838,333,800 shares, respectively 8.7 8.4
Additional paid-in capital 3,411.5 3,080.8
Retained earnings 1,658.5 1,244.7
Accumulated other comprehensive loss (53.4) (38.2)
Restricted stock, deferred compensation -- (3.4)
Treasury stock, at cost 6,750,546 shares (74.4) (74.4)
----------- -----------
Total shareholders' equity 4,950.9 4,217.9
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,476.8 $ 13,936.7
=========== ===========
See accompanying notes to consolidated financial statements.
5
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(As restated) (As restated)
REVENUES
Service fees and membership, net $ 1,261.2 $ 921.3 $ 2,318.3 $ 1,808.5
Fleet leasing (net of depreciation and interest
costs of $318.1, $298.2, $629.7 and $584.3,
respectively) 19.1 15.9 39.0 30.1
Other 26.0 86.8 103.9 143.2
---------- ---------- ---------- ----------
NET REVENUES 1,306.3 1,024.0 2,461.2 1,981.8
---------- ---------- ---------- ----------
EXPENSES
Operating 459.9 303.8 788.7 621.7
Marketing and reservation 271.4 261.7 526.2 493.8
General and administrative 129.4 140.2 270.4 293.7
Merger-related costs and other
unusual charges (credits) (42.0) 299.6 (42.0) 299.6
Depreciation and amortization 84.6 58.5 149.3 115.6
Costs associated with accounting errors 32.2 -- 32.2 --
Interest, net 23.6 12.8 42.8 22.8
---------- ---------- ---------- ----------
TOTAL EXPENSES 959.1 1,076.6 1,767.6 1,847.2
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes and minority interest 347.2 (52.6) 693.6 134.6
Provision for income taxes 117.8 35.3 243.8 122.1
Minority interest, net 14.9 -- 19.8 --
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 214.5 (87.9) 430.0 12.5
---------- ---------- ---------- ----------
Loss from discontinued operations
net of income taxes (Note 6) (3.6) (4.4) (16.2) (1.5)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 210.9 $ (92.3) $ 413.8 $ 11.0
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE:
BASIC
Income (loss) from continuing operations $ .24 $ (.11) $ .51 $ .02
Income (loss) from discontinued operations .00 .00 (.02) (.01)
---------- ---------- ---------- ----------
Net income (loss) $ .24 $ (.11) $ .49 $ .01
========== ========== ========== ==========
DILUTED
Income (loss) from continuing operations $ .24 $ (.11) $ .48 $ .02
Income (loss) from discontinued operations .00 .00 (.02) (.01)
---------- ---------- ---------- ----------
Net income (loss) $ .24 $ (.11) $ .46 $ .01
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
--------- ---------
(As restated)
OPERATING ACTIVITIES
Net cash provided by (used in) operations, exclusive of
management and mortgage programs $ 459.7 $ (136.5)
Merger-related charges (credits) (42.0) 299.6
Merger-related payments (126.3) (132.5)
Discontinued operations (35.7) (10.4)
Management and mortgage programs:
Depreciation and amortization under management and mortgage programs 610.7 531.6
Mortgage loans held for sale (1,117.7) 427.7
--------- ---------
(507.0) 959.3
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (251.3) 979.5
--------- ---------
INVESTING ACTIVITIES
Property and equipment additions (169.3) (50.1)
Loans and investments (107.2) (16.3)
Net change in marketable securities 12.9 (729.2)
Net assets acquired, exclusive of cash acquired
and acquisition-related payments (2,669.9) (331.6)
Investing activities of discontinued operations (201.6) (27.1)
Other, net 51.4 (7.0)
--------- ---------
(3,083.7) (1,161.3)
--------- ---------
Management and mortgage programs:
Investment in leases and leased vehicles (1,337.3) (1,243.4)
Payments received on investment in leases and leased vehicles 475.2 437.2
Proceeds from sales and transfers of leases and leased vehicles to third parties 27.3 63.5
Equity advances on homes under management (3,293.4) (2,136.7)
Repayment of advances on homes under management 3,483.1 2,203.7
Additions to originated mortgage servicing rights (220.4) (86.0)
Proceeds from sales of mortgage servicing rights 53.6 29.1
--------- ---------
(811.9) (732.6)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (3,895.6) (1,893.9)
--------- ---------
See accompanying notes to consolidated financial statements.
7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
--------- ---------
(As restated)
FINANCING ACTIVITIES
Proceeds from borrowings $ 3,307.0 $ 424.9
Principal payments on borrowings (420.5) (39.1)
Issuance of convertible debt - 542.6
Issuance of common stock 152.0 66.8
Purchases of common stock - (171.3)
Proceeds from mandatorily redeemable preferred securities
issued by subsidiaries, net 1,447.0 -
Other, net - 15.3
--------- ---------
4,485.5 839.2
--------- ---------
Management and mortgage programs:
Proceeds from debt issuance or borrowings 1,659.5 859.2
Principal payments on borrowings (1,125.5) (1,111.6)
Net change in short-term borrowings 693.4 (54.9)
--------- ---------
1,227.4 (307.3)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,712.9 531.9
--------- ---------
Effect of changes in exchange rates on cash and cash equivalents (16.3) 19.7
--------- ---------
Net increase in cash and cash equivalents 1,549.7 (362.8)
Cash and cash equivalents, beginning of period - 477.8
--------- ---------
Cash and cash equivalents, end of period $ 1,549.7 $ 115.0
========= =========
See accompanying notes to consolidated financial statements
8
CENDANT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Cendant Corporation, together with its subsidiaries and its joint ventures
(the "Company"), is a leading global provider of consumer and business
services. The Company was created through the merger (the "Cendant
Merger") of HFS Incorporated ("HFS") and CUC International Inc. ("CUC") in
December 1997. The Company provides all the services formerly provided by
each of HFS and CUC, including travel services, real estate services and
membership-based consumer services.
The consolidated balance sheet of the Company as of June 30, 1998 and
December 31, 1997 and the consolidated statements of income for the three
and six months ended June 30, 1998 and 1997 and the consolidated
statements of cash flows for the six months ended June 30, 1998 and 1997
are unaudited. The accompanying consolidated financial statements include
the accounts and transactions of the Company and all wholly-owned
subsidiaries. All material intercompany balances and transactions have
been eliminated in consolidation. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
On April 15, 1998, as a result of the discovery of accounting
irregularities in the former CUC business units, which are part of the
Company's Alliance Marketing segment (formerly the Membership segment),
the Audit Committee of the Company's Board of Directors initiated an
investigation into such matters. The Audit Committee's investigation has
since been completed and, as a result of its findings, the Company has
restated its previously reported financial results for 1997, 1996 and
1995. The 1998 and 1997 financial information set forth herein
incorporates all relevant information obtained from the investigation, and
reflects the correction of accounting policies which were changed as a
result of the findings. As a result of the accounting irregularities and
errors which were discovered during the investigation, the Company will
file audited restated financial statements for the years ended December
31, 1995 through 1997 on an amended Form 10-K/A and will file unaudited
restated quarterly financial statements for the three months ended March
31, 1998 and 1997 on an amended Form 10-Q/A. In addition, the Company will
file restated financial data schedules for each of the quarterly periods
in 1997 and 1996. The Company expects to file such restated financial
statements and financial information with the Securities and Exchange
Commission ("SEC") in late August 1998. The Company has provided a
condensed reconciliation of the financial statement amounts, which were
reported in prior filings to the restated amounts which are included in
the financial statements presented in this Form 10-Q (See Note 2). The
Company believes that the balance sheet at December 31, 1997 as presented
in the accompanying consolidated financial statements, will not differ
materially from the audited December 31, 1997 balance sheet, which will be
included in the amended Form 10-K/A.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Impact of New Accounting Pronouncements for accounting pronouncements not
yet adopted.
9
2. RESTATEMENT
On August 13, 1998, the Company reported that the Audit Committee's
investigation into the accounting irregularities and errors in the CUC
businesses was complete. The accompanying restated financial statements
incorporate all relevant information obtained in the investigation and reflect
the correction of accounting policies which were changed as a result of the
findings. The Company has identified and recorded all corrections arising from
the findings of the investigation and the process of restating the Company's
consolidated financial statements. The corrections are the result of accounting
irregularities, the misapplication of accounting policies, and the application
of accounting policies previously applied which were not in accordance with
generally accepted accounting principles. Provided below is a summary of the
impact of such corrections and a reconciliation of the financial results from
amounts previously reported to the restated financial statement amounts, as
presented in this quarterly report on Form 10-Q. A more detailed explanation of
the adjustments, which comprise the aforementioned adjustment categories and a
detailed reconciliation of the effects that such adjustments had on the annual
financial statements from 1995 through 1997, will be provided when the Company
files, in late August 1998, its restated audited financial statements on an
amended Form 10-K/A.
STATEMENT OF OPERATIONS DATA:
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------------
AS
PREVIOUSLY ACCOUNTING ERRORS RECLASS DISCONTINUED AS
(In millions) REPORTED AND IRREGULARITIES OPERATIONS RESTATED
------------- --------------------- -------------------- --------
Net revenue $ 1,436.6 $ (122.9) $ (158.7) $ 1,155.0
Total expenses 1,068.1 (80.6) (178.9) 808.6
------------- --------------------- -------------------- ----------
Income from continuing
operations before
income taxes 368.5 (42.3) 20.2 346.4
Provision for income
taxes 134.1 (15.7) 7.7 126.1
Minority interest, net 4.9 - - 4.9
------------- --------------------- --------------------- ----------
Income from continuing
operations 229.5 (26.6) 12.5 215.4
Loss from discontinued
operations - - (12.5) (12.5)
------------- --------------------- --------------------- ----------
Net income (loss) $ 229.5 $ (26.6) $ - $ 202.9
============= ===================== ===================== ==========
Earnings Per Share
Basic
Income from
continuing
operations $ 0.27 $ 0.26
Income (loss)
from discontinued
operations - (0.02)
------------- ----------
Net income $ 0.27 $ 0.24
============= ==========
Diluted
Income from
continuing
operations $ 0.26 $ 0.24
Income (loss)
from discontinued
operations - (0.01)
------------- ----------
Net income $ 0.26 $ 0.23
============= ==========
10
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------------------------------------------
ADJUSTMENTS
AS -------------------------------------------------
PREVIOUSLY ACCOUNTING ERRORS RECLASS DISCONTINUED AS
(In millions) REPORTED AND IRREGULARITIES OPERATIONS RESTATED
------------- --------------------- -------------------- --------
Net revenue $ 1,164.1 $ (96.4) $ (109.9) $ 957.8
Total expenses 886.0 (12.4) (102.7) 770.9
------------- --------------------- -------------------- ----------
Income (loss) from
continuing
operations before
income taxes 278.1 (84.0) (7.2) 186.9
Provision for income
taxes 112.3 (21.5) (4.3) 86.5
------------- --------------------- --------------------- ----------
Income (loss) from
continuing operations 165.8 (62.5) (2.9) 100.4
Income from discontinued
operations - - 2.9 2.9
------------- --------------------- --------------------- ----------
Net income (loss) $ 165.8 $ (62.5) $ - $ 103.3
============= ===================== ===================== ==========
Earnings Per Share
Basic
Income from
continuing
operations $ 0.21 $ 0.13
Income from
discontinued
operations - -
------------- ----------
Net income $ 0.21 $ 0.13
============= ==========
Diluted
Income from
continuing
operations $ 0.19 $ 0.12
Income from
discontinued
operations - -
------------- ----------
Net income $ 0.19 $ 0.12
============= ==========
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------------------------
ADJUSTMENTS
AS -------------------------------------------------
PREVIOUSLY ACCOUNTING ERRORS RECLASS DISCONTINUED AS
(In millions) REPORTED AND IRREGULARITIES OPERATIONS RESTATED
------------- --------------------- -------------------- --------
Net revenue $ 2,458.7 $ (267.3) $ (209.6) $ 1,981.8
Total expenses 2,125.8 (69.1) (209.5) 1,847.2
------------- --------------------- -------------------- ----------
Income (loss) from
continuing
operations before
income taxes 332.9 (198.2) (0.1) 134.6
Provision for income
taxes 180.5 (56.8) (1.6) 122.1
------------- --------------------- --------------------- ----------
Income (loss) from
continuing operations 152.4 (141.4) 1.5 12.5
Loss from discontinued
operations - - (1.5) (1.5)
------------- --------------------- --------------------- ----------
Net income (loss) $ 152.4 $ (141.4) $ - $ 11.0
============= ===================== ===================== ==========
Earnings Per Share
Basic
Income from
continuing
operations $ 0.19 $ 0.02
Loss from
discontinued
operations - (0.01)
------------- ----------
Net income $ 0.19 $ 0.01
============= ==========
Diluted
Income (loss)
from continuing
operations $ 0.18 $ 0.02
Income (loss)
from discontinued
operations - (0.01)
------------- ----------
Net income $ 0.18 $ 0.01
============= ==========
BALANCE SHEET DATA: AT DECEMBER 31, 1997
---------------------------------------------
ADJUSTMENTS
AS --------------
PREVIOUSLY ERRORS AND ACCOUNTING AS
(In millions) REPORTED IRREGULARITIES RESTATED
------------- -------------- --------
Total assets $ 14,851.2 $ (914.5) $13,936.7
Total liabilities 10,373.7 (654.9) 9,718.8
------------- ----------- ---------
Shareholders' equity $ 4,477.5 $ (259.6) $ 4,217.9
============= =========== =========
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed based solely on the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects all potential dilution of common stock and is calculated as
follows:
11
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(In millions, except per share amounts) 1998 1997 1998 1997
----------- ----------- ---------- -----------
Income (loss) from continuing operations $ 214.5 $ (87.9) $ 430.0 $ 12.5
Convertible debt interest 3.2 - 8.0 -
----------- ----------- ---------- -----------
Income (loss) from continuing operations,
as adjusted $ 217.7 $ (87.9) $ 438.0 $ 12.5
=========== =========== ========== ===========
Weighted average shares - basic 850.8 804.2 844.8 803.2
Potential dilution of common stock:
Stock options 29.1 - 38.1 -
Convertible debt 21.0 - 24.9 -
----------- ----------- ---------- -----------
Weighted average shares - diluted 900.9 804.2 907.8 803.2
=========== =========== ========== ===========
Basic EPS - continuing operations $ .24 $ (.11) $ .52 $ .02
=========== =========== ========== ===========
Diluted EPS - continuing operations $ .24 $ (.11) $ .48 $ .02
=========== =========== ========== ===========
4. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" effective January 1, 1998. The statement
establishes standards for reporting and display of an alternative income
measurement and its components in the financial statements.
Components of comprehensive income (loss) are summarized as follows:
SIX MONTHS ENDED
JUNE 30,
---------------------
(In millions) 1998 1997
-------- --------
Net income $ 413.8 $ 11.0
-------- --------
Other comprehensive income (loss), net of tax:
Currency translation adjustment (20.2) (73.7)
Unrealized loss on marketable securities:
Unrealized holding gains arising during the period (1.3) -
Reclassification adjustment for gains included
in earnings - (4.3)
-------- --------
Other comprehensive loss (21.5) (78.0)
-------- --------
Comprehensive income (loss) $ 392.3 $ (67.0)
======== ========
The components of accumulated other comprehensive
(loss) are as follows:
JUNE 30, DECEMBER 31,
(In millions) 1998 1997
-------- ------------
Unrealized loss on marketable securities, net of tax $ (1.1) $ -
Cumulative currency translation adjustment (52.3) (38.2)
-------- --------
$ (53.4) $ (38.2)
======== ========
12
5. BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. Excess purchase price over
fair value of the underlying net assets acquired is allocated to goodwill.
Goodwill is amortized on a straight-line basis over the estimated benefit
periods, ranging from 7 to 40 years. The operating results of such
acquired companies are included in the Company's consolidated statements
of income since the respective dates of acquisition.
The following table reflects the fair values of assets acquired and
liabilities assumed in connection with the Company's acquisitions
consummated and other acquisition-related payments made during the six
months ended June 30, 1998.
(In millions)
Total consideration:
Cash paid (net of $52.3 million of cash acquired) $ 2,669.9
-----------
Assets acquired 1,152.4
Liabilities assumed 496.2
-----------
Fair value of identifiable net assets acquired 656.2
-----------
Goodwill $ 2,013.7
===========
National Parking Corporation. On April 27, 1998, the Company completed the
acquisition of National Parking Corporation Limited ("NPC") for $1.6
billion in cash, which included the repayment of approximately $227
million of outstanding NPC debt. NPC is comprised of two substantial
operating subsidiaries in National Car Parks ("NCP") and Green Flag. NCP
is the largest private (non-municipal) single car park operator in the
United Kingdom ("UK") with approximately 500 locations. Green Flag is the
third largest roadside assistance group in the UK and offers a wide-range
of emergency support and rescue services to approximately 3.5 million
members.
Harpur Group. On January 20, 1998, the Company completed the acquisition
of The Harpur Group Ltd. ("Harpur"), a leading fuel card and vehicle
management company in the UK, from privately held H-G Holdings,
Inc. for approximately $186.0 million in cash plus future contingent
payments of up to $20.0 million over the next two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480.0
million in cash. Jackson Hewitt operates the second largest tax
preparation service franchise system in the United States. The Jackson
Hewitt franchise system specializes in computerized preparation of
federal and state individual income tax returns.
Other 1998 Acquisitions and Acquisition-Related Payments. The Company
acquired certain other entities for an aggregate purchase price of $348.5
million in cash during the six-month period ended June 30, 1998.
Additionally, the Company made a $100 million cash payment to the seller
of Resort Condominiums International, Inc. in satisfaction of a contingent
purchase liability.
Pro forma Information. The following table reflects the unaudited
operating results from continuing operations of the Company for the six
months ended June 30, 1998 and 1997 on a pro forma basis, which gives
effect to the acquisitions of NPC and Jackson Hewitt, accounted for under
the purchase method of
13
accounting. The remaining acquisitions completed during 1998 were not
material to the operating results of the Company and therefore are not
included in the pro forma operating results. The pro forma results are not
necessarily indicative of the operating results that would have occurred
had the NPC and Jackson Hewitt transactions been consummated on January 1,
1997 nor are they intended to be indicative results that may occur in the
future. The underlying pro forma information includes the amortization
expense associated with the assets acquired, the Company's financing
arrangements, certain purchase accounting adjustments and the related
income tax effects.
(In millions, except per share amounts) SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
-------- --------
Net revenue from continuing operations $2,646.4 $2,290.8
Income (loss) from continuing operations 423.1 (11.4)
Net income (loss) 406.9 (12.9)
Per Share Information (diluted):
Income (loss) from continuing operations .47 (.01)
Net income (loss) .45 (.02)
6. DISCONTINUED OPERATIONS
On August 12, 1998, the Company announced that its Executive Committee of
the Board of Directors committed to discontinue the Company's consumer
software and classified advertising businesses by disposing of
wholly-owned subsidiaries Cendant Software Corporation ("Software") and
Hebdo Mag International, Inc. ("Hebdo Mag"), respectively. The Company
disclosed that it has entered into a definitive agreement to sell Hebdo
Mag to its former 50% owners for 7.1 million shares of Company common
stock and approximately $410 million in cash. The transaction is expected
to generate a gain of more than $250 million upon anticipated consummation
date in the fourth quarter of 1998 subject to certain conditions,
including regulatory approval and financing by the purchaser. The Company
also disclosed that it has engaged investment bankers to analyze various
strategic alternatives in regard to the disposition of Software within one
year of the measurement date. The Company anticipates that the disposition
of Software will result in a significant gain.
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
SOFTWARE
---------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(In millions) 1998 1997 1998 1997
---------- ---------- ---------- ----------
Net revenue $ 130.5 $ 50.8 $ 226.3 $ 115.1
---------- ---------- ---------- ----------
Loss from operations before
income taxes (8.7) (11.0) (36.1) (10.1)
Benefit from income taxes 2.4 4.1 12.8 2.3
---------- ---------- ---------- ----------
Net loss $ (6.3) $ (6.9) $ (23.3) $ (7.8)
========== ========== ========== ==========
14
CLASSIFIED ADVERTISING
---------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net revenue $ 74.4 $ 48.9 $ 137.2 $ 94.5
---------- ---------- ---------- ----------
Income before income taxes
and minority interest 13.8 4.0 20.9 10.2
Provision for income taxes 4.7 1.5 7.4 3.9
Minority interest 6.4 - 6.4 -
---------- ---------- ---------- ----------
Net income $ 2.7 $ 2.5 $ 7.1 $ 6.3
========== ========== ========== ==========
BALANCE SHEET DATA:
SOFTWARE CLASSIFIED ADVERTISING
------------------------------- -------------------------------
AT JUNE 30, AT DECEMBER 31, AT JUNE 30, AT DECEMBER 31,
(In millions) 1998 1997 1998 1997
----------- --------------- ----------- ---------------
Current assets $ 147.2 $ 197.6 $ 77.4 $ 58.6
Goodwill 120.8 44.1 255.4 169.8
Other assets 74.5 45.7 37.9 33.3
Total liabilities 57.3 102.2 133.6 161.9
----------- --------------- ----------- ---------------
Net assets of discontinued operations $ 285.2 $ 185.2 $ 237.1 $ 99.8
=========== =============== =========== ===============
7. MERGER RELATED COSTS AND OTHER UNUSUAL CHARGES
The Company incurred merger-related costs and other unusual charges in
1997 of $786.0 million associated with and/or coincident to the Cendant
Merger, the October 1997 merger with Hebdo Mag (collectively, the
"Cendant Merger Charge"), the April 1997 merger (the "PHH Merger") with
PHH Corporation ("PHH") and the January 1997 merger (the "Spark Merger")
with Spark Services, Inc. ("Spark"). The remaining merger-related
reserves at December 31, 1997 and utilization of such reserves for the
six months ended June 30, 1998, is summarized by category of expenditure
as follows:
RESERVES CASH ASSET CREDITS RESERVES
(In millions) AT 12/31/97 PAYMENTS WRITE-OFFS TO INCOME AT 6/30/98
----------- ------------ ----------- ------------ -----------
Professional fees $ 46.8 $ (37.1) $ - $ (7.2) $ 2.5
Personnel related 156.1 (60.8) (3.5) (13.9) 77.9
Business terminations 30.9 (11.9) (7.5) (1.6) 9.9
Facility related and other 83.6 (16.5) (0.7) (19.3) 47.1
----------- ------------ ----------- ------------ -----------
Total $ 317.4 $ (126.3) $ (11.7) $ (42.0) $ 137.4
=========== ============ ============ ============ ===========
15
The remaining reserves at December 31, 1997 and utilization of such
reserves for the six months ended June 30, 1998 is summarized by merger as
follows ($ millions):
RESERVES CASH ASSET CREDITS RESERVES
AT 12/31/97 PAYMENTS WRITE-OFFS TO INCOME AT 6/30/98
----------- ----------- ----------- ----------- -----------
Cendant Merger $ 228.9 $ (95.4) $ (.9) $ (26.5) $ 106.1
PHH Merger 86.3 (30.9) (10.8) (15.5) 29.1
Spark Merger 2.2 - - - 2.2
----------- ----------- ----------- ----------- -----------
Total $ 317.4 $ (126.3) $ (11.7) $ (42.0) $ 137.4
=========== =========== =========== =========== ===========
Cendant Merger. Remaining costs are primarily comprised of $63.7 million
of severance and other personnel related payments. Approximately 70% of
remaining personnel liabilities will be paid or otherwise extinguished by
December 31, 1998 through the closing and consolidation of nine European
call centers. Approximately $23.6 million of outstanding facility related
exit costs will be paid or otherwise extinguished upon closure of European
call centers and other office consolidations, which will be substantially
complete in 1998. The majority of the remaining $18.8 million of
obligations will substantially be concluded upon successful contract
termination negotiations. The credits to income results from a change in
estimate of the liability incurred.
PHH Merger. The remaining $29.1 million primarily consists of $14.3
million of severance payments to former employees who elected installment
payments through 2001 instead of a lump-sum payment upon termination. The
balance is substantially comprised of contract and lease termination
payments as well as write-off of related assets to be abandoned in 1998.
The credits to income results from a change in estimate of the liability
incurred.
Spark Merger. The remaining $2.2 million liability represents installments
due in connection with a terminated contract through April 1999.
8. FINANCING TRANSACTIONS
Term Loan Facility. On May 29, 1998, the Company entered into a 364-day
term loan agreement with a syndicate of financial institutions which
provided for borrowings of $3.25 billion (the "Term Loan Facility"). The
Term Loan Facility bears interest at LIBOR plus an applicable LIBOR
spread, as defined. Upon the execution of the Term Loan Facility,
temporary credit agreements, which provided for $1.0 billion of
borrowings, were terminated. The Term Loan Facility contains certain
restrictive covenants, which are substantially similar to and consistent
with the covenants in effect for the Company's existing revolving credit
agreements. At June 30, 1998, $1.4 billion of borrowings under the Term
Loan Facility were classified as long-term based upon the Company's
ability and intent to refinance such borrowings on a long-term basis. The
Company used $2 billion of the proceeds from the Term Loan Facility to
refinance the outstanding borrowings under its revolving credit facilities
and intends to use the remainder for the acquisition of American Bankers
Insurance Group, Inc. and RAC Motoring Services (See Note 10) and for
general corporate purposes.
Issuance Of Mandatorily Redeemable Preferred Securities. On March 2,
1998, the Company issued 29.9 million FELINE PRIDES and 2.3 million trust
preferred securities and received approximately $1.4 billion in gross
proceeds therefrom. The FELINE PRIDES consist of 27.6 million Income
PRIDES and 2.3 million Growth PRIDES, each with a face amount of $50 per
PRIDE. The Income PRIDES consist of trust preferred securities and stock
purchase contracts under which the holders will purchase common stock from
the Company in February 2001. The Growth PRIDES consist of stock purchase
contracts under which the holders will purchase common stock from the
Company in February 2001 and zero coupon U.S. Treasury securities. The
trust preferred securities will bear interest, in the form of preferred
stock dividends, at the annual rate of 6.45 percent. Such preferred stock
dividends are presented as minority interest, net of tax in the
consolidated statements of income. The forward purchase contract forming a
part of the Income PRIDES will pay 1.05 percent annually in the form of a
contract adjustment payment. The forward purchase contract forming a part
of the Growth PRIDES will pay 1.3 percent annually in the form of a
contract adjustment payment. The forward purchase contracts call for the
holder to purchase the minimum of 1.0395 shares and a maximum of 1.3514
shares of Company common stock per PRIDES security, depending upon the
average of the closing price per share of Company common stock for a 20
consecutive day period ending in mid-February of 2001.
Redemption of 4-3/4% Notes. On May 4, 1998, the Company redeemed all of
its outstanding ($144.5 million principal amount) 4-3/4% Convertible
Senior Notes at a price of 103.393% of the principal amount together with
interest accrued to the redemption date. Prior to May 4, 1998, holders of
such notes exchanged $90.5 million of the 4-3/4% Notes for 2.5 million
shares of Company common stock.
Redemption of 6-1/2% Notes. On April 8, 1998, the Company exercised its
option to call its 6-1/2% Convertible Subordinated Notes (the "6-1/2%
Notes") for redemption on May 11, 1998, in accordance with the provisions
of the indenture relating to the 6-1/2% Notes. Prior to the redemption
date, all of the outstanding 6-1/2% Notes were converted into 2.1 million
shares of Company common stock.
16
9. INVESTMENT IN AVIS RENT A CAR, INC.
The Company's equity interest in Avis Rent A Car, Inc. ("Avis ") was
reduced from 27.5% to 20.4% as a result of a public offering by Avis of
its common stock in March 1998 in which the Company sold a portion of its
investment in Avis. The Company recognized a pre-tax gain of approximately
$17.0 million as a result of the sale, which is included in other revenue
in the consolidated statement of income.
10. PENDING ACQUISITIONS
AMERICAN BANKERS INSURANCE GROUP, INC.
On March 23, 1998, the Company entered into a definitive agreement to
acquire American Bankers Insurance Group, Inc. ("American Bankers") for
$67 per share in cash and stock, for aggregate consideration of
approximately $3.1 billion. The Company intends to purchase 23.5 million
shares of American Bankers at $67 per share through its pending cash
tender offer, to be followed by a merger in which the Company will deliver
Cendant shares with a value of $67 for each remaining share of American
Bankers common stock outstanding. The Company has received anti-trust
clearance to acquire American Bankers. The tender offer is subject to the
receipt of tenders representing at least 51 percent of the common shares
of American Bankers as well as customary closing conditions. The
transaction is expected to be completed following the restatement of the
Company's financial statements, receipt of and approval by American
Bankers' shareholders and receipt of required regulatory approvals, which
require restated financial statements. American Bankers provides
affordable, specialty insurance products and services through financial
institutions, retailers and other entities offering consumer financing.
In connection with the Company's proposal to acquire American Bankers, the
Company has a bank commitment to provide a $650 million, 364-day revolving
credit facility which will bear interest, at the option of the Company, at
rates based on prime rates, as defined, or LIBOR plus an applicable
variable margin.
ACQUISITION OF RAC MOTORING SERVICES
On May 21, 1998, the Company announced that it has reached a definitive
agreement with the Board of Directors of Royal Automobile Club Limited
("RACL") to acquire their RAC Motoring Services subsidiary for
approximately $735 million in cash. The sale of RAC Motoring Services has
subsequently been
17
approved by its shareholders. Closing is subject to certain conditions,
including regulatory approval and is anticipated to occur in the autumn of
1998. RAC Motoring Services is the second-largest roadside assistance
company in the UK and also owns the UK's largest driving school company.
11. COMPANY INVESTIGATION AND LITIGATION
On April 15, 1998, as a result of the discovery of accounting
irregularities in the former CUC business units, which are part of the
Company's Alliance Marketing segment (formerly the Membership segment),
the Audit Committee of the Company's Board of Directors initiated an
investigation into such matters. The Audit Committee's investigation has
since been completed and, as a result of its findings, the Company has
restated its financial results for the years 1995 through 1997 and the
quarterly periods previously reported during 1996 and 1997 and the first
quarter of 1998. The Company expects to file the following financial
statements and other information with the Securities and Exchange
Commission ("SEC") in late August 1998:(i) audited restated financial
statements for the years ended December 31, 1995 through 1997 on an
amended Form 10-K/A; (ii) unaudited restated financial statements for the
quarterly periods ended March 31, 1998 and 1997 on an amended form 10-Q/A;
and (iii) restated financial data schedules for each of the quarterly
periods in 1997 and 1996.
Since the Company's announcement of the discovery of such accounting
irregularities on April 15, 1998, and prior to the date hereof, sixty-nine
purported class action lawsuits and one individual lawsuit have been filed
against the Company and certain current and former officers and directors
of the Company, asserting claims under the federal securities law (the
"Federal Securities Actions"). Some of the actions also name as defendants
Merrill Lynch & Co. and, in one case, Chase Securities, Inc., underwriters
for the Company's PRIDES securities offering; two others also name Ernst &
Young LLP, the Company's former independent accountants. Sixty-two of the
Federal Securities Actions were filed in the United States District Court
for the District of New Jersey, six were filed in the United States
District Court for the District of Connecticut (including the individual
action), one was filed in the United States District Court for the Eastern
District of Pennsylvania, and one has been filed in New Jersey Superior
Court. The Federal Securities Actions filed in the District of Connecticut
and Eastern District of Pennsylvania have been transferred to the District
of New Jersey. On June 10, 1998, the Company moved to dismiss or stay the
class action filed in New Jersey Superior Court on the ground that, among
other things, it is duplicative of the consolidated federal actions; a
decision on that motion is pending.
Certain of the Federal Securities Actions purport to be brought on behalf
of purchasers of the Company's common stock and/or options on common stock
during various periods, most commonly from May 28, 1997 through April 15,
1998 (although the alleged class periods begin as early as March 21, 1995
and end as late as July 15, 1998). Others claim to be brought on behalf of
persons who exchanged common stock of HFS for the Company's common stock
coincident with the Cendant Merger. Some plaintiffs purport to represent
both of these types of investors. In addition, eight actions pending in
the District of New Jersey and one action pending in New Jersey Superior
Court purport to be brought, either in their entirety or in part, on
behalf of purchasers of the Company's PRIDES securities offering. The
complaints in the Federal Securities Actions allege, among other things,
that as a result of accounting irregularities, the Company's previously
issued financial statements were materially false and misleading and that
the defendants knew or should have known that these financial statements
caused and the Company's common stock prices to rise artificially. The
Federal Securities Actions variously allege violations of Section 10(b) of
the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule
10b-5 promulgated thereunder, Section 14(a) of the Exchange Act and SEC
Rule 14a-9 promulgated thereunder, Section 20(a) of the Exchange Act, and
Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the
"Securities Act"). Certain actions also allege violation of common law.
The individual action also alleges violations of Section 18(a) of the
Exchange Act and the Florida securities law. The class action complaints
seek damages in unspecified amounts. The individual action seeks damages
in the amount of approximately $9 million plus interest and expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
order consolidating the 50 Federal Securities Actions that had at that
time been filed in the United States District Court for the District of
New Jersey, under the caption
18
In re: Cendant Corporation Litigation, Master File No. 98-1664 (WHW).
Pursuant to the Order, all related actions subsequently filed in the
District of New Jersey are also to be consolidated under that caption. On
August 4, 1998, United States District Judge William H. Walls selected
lead plaintiffs for the consolidated actions. He also ordered that
applications seeking appointment as lead counsel to represent the lead
plaintiffs are to be filed with the Court by September 17, 1998.
In addition, on April 27, 1998 a shareholder derivative action, Deutch v.
Silverman, et al., No. 98-1998 (WHW), was filed in the United States
District Court for The District of New Jersey against certain of the
Company's current and former directors and officers; The Bear Stearns
Companies, Inc., Bear Stearns & Co., Inc. and, as a nominal party, the
Company. The complaint alleges that certain individual officers and
directors of the Company breached their fiduciary duties by selling shares
of the Company's stock while in possession of non-public material
information concerning accounting irregularities. The complaint also
alleges various other breaches of fiduciary duty, mismanagement,
negligence and corporate waste and seeks damages on behalf of the Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of
Delaware. The Corwin Action is purportedly brought on behalf of a class of
all shareholders of HFS who exchanged their HFS shares for Company shares
in connection with the Cendant Merger, and names as defendants HFS and
twelve individuals who were directors of HFS. The complaint in the Corwin
Action alleges that the defendants breached their fiduciary duties of
loyalty, good faith, care and candor in connection with the Cendant
Merger, in that they failed to properly investigate the operations and
financial statements of the Company before approving the Cendant Merger at
an allegedly inadequate price. The Corwin Action seeks, among other
things, recision of the Cendant Merger and compensation for all losses and
damages suffered in connection therewith.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss
with respect to these matters, management believes that an adverse outcome
with respect to such proceedings could have a material adverse impact on
the financial condition, results of operations and cash flows of the
Company.
The staff of the Securities and Exchange Commission (the "SEC") and the
United States Attorney for the District
19
of New Jersey are conducting investigations relating to the matters
referenced above. The SEC staff has advised the Company that its inquiry
should not be construed as an indication by the SEC or its staff that any
violations of law have occurred.
12. INVESTIGATION RELATED COSTS
Costs associated with accounting errors are comprised of professional
fees, public relations costs and include $4.2 million of incremental debt
service due to the exclusion from traditional financing sources during the
period which the Company's financial statements were not effective.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
In December 1997, Cendant Corporation (the "Company") was created through the
merger (the "Cendant Merger") of HFS Incorporated ("HFS") and CUC International
Inc. ("CUC"). The Company is one of the foremost consumer and business services
companies in the world. The combination of HFS and CUC provides each of the
Company's businesses new access to consumer contacts through the Company's
expanded customer base, while providing such businesses with the
direct marketing expertise necessary to successfully
cross-market within its existing business units.
The Company provides fee-based services to consumers within the Travel, Real
Estate and Alliance Marketing business segments. The Company generally does not
own the assets or share the risks associated with the underlying businesses of
its customers. In the Travel Services segment, the Company is the world's
largest franchisor of lodging facilities and rental car facilities, the leading
provider of vacation timeshare exchange services and a leading provider of
international fleet management services. In the Real Estate Services segment,
the Company is both the world's largest franchisor of residential real estate
brokerage offices and provider of corporate relocation services and is a
leading mortgage lender in the United States. In the Alliance Marketing
segment, the Company is a leading provider of membership consumer services and
products.
On April 15, 1998, as a result of the discovery of accounting irregularities in
former CUC business units, the Audit Committee of the Company's Board of
Directors ("Audit Committee") initiated an investigation into such matters. The
Audit Committee recently completed its investigation into such matters. The
Company has restated its financial results for the years 1995 through 1997 and
the quarterly periods during 1996 through March 1998 in August 1998. The
financial information contained herein has been restated to incorporate all
relevant information obtained from the aforementioned investigation.
21
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 VS THREE MONTHS ENDED
JUNE 30, 1997
1998 1997 VAR
---- ---- ---
(In millions, except per share amounts)
Revenue $1,306.3 $1,024.0 28%
Operating expenses 945.3 764.2 24%
Interest 23.6 12.8 84%
Merger related and other unusual
charges (credits) (42.0) 299.6
Investigation related costs 32.2 -
--------- ---------
Income from continuing operations(1) 347.2 (52.6)
--------- ---------
(1) Before income taxes and minority interest.
Income from continuing operations increased $399.8 million. The increase was
attributable in part to $282.3 million (28%) increases in revenue which
exceeded $181.1 million (24%) increases in operating expenses. Approximately
$24.8 million of the above net increase was attributable to acquired 1998
operations while internal growth in the travel and real estate segments
contributed 31% and 69% increases in operating income, respectively. The
absence of merger related and unusual charges ("Unusual Charges") in the second
quarter of 1998 contributed $341.6 million of incremental pre-tax income. The
Company completed merger transactions with PHH Corporation ("PHH") and Spark
Services, Inc. ("Spark") in 1997 and incurred approximately $300 million of
Unusual Charges. Unusual Charges relate to costs from the consolidation of
several corporate relocation businesses including the world's two largest,
professional fees, the termination of corporate office functions and exiting
immaterial non-core businesses. The Company continues to evaluate its remaining
restructuring liabilities. The Company recorded a $42.0 million credit
associated with Unusual Charges representing the difference between estimated
and incurred exit costs including severance, lease buy-outs and professional
fees associated with the merger.
The above increases in income from continuing operations were partially
offset by $10.8 million (84%) and $32.2 million increase in interest
expense and costs associated with resolving accounting errors discovered in
the financial statements of the former CUC business units, respectively.
The increase in interest expense was primarily attributable to borrowings
under revolving credit facilities to finance more than $2.6 billion of
Company acquisitions including the $1.6 billion acquisition of National
Parking Corporation on April 27, 1998.
The Company continues to execute strategies to optimize its effective tax
rate. The execution of such tax minimization strategies, the favorable impact
of lower tax rates in international jurisdictions and lower non-deductible
amortization expense as a percentage of pre-tax income have contributed
to a decrease in the Company's effective tax rate to 36% in 1998.
SEGMENT DISCUSSION
In addition to the above analysis of consolidated financial results, the
following is an analysis of the operating performance of the segments and
business units of the Company excluding Unusual Charges. The following segment
analysis of results of operations discusses operating income (profits excluding
interest, taxes, minority interest expense, Unusual Charges and investigation
costs).
TRAVEL SERVICES SEGMENT
The Company operates business units that provide a wide spectrum of services
necessary to domestic and international travelers. The Company is the world's
largest franchisor of nationally recognized hotel brands and car rental
operations (Avis), which are responsible for 16% of all hotel rooms sold and
25% of all cars rented in the United States, respectively. Royalty revenue is
received from franchisees under contracts that generally range from 10 to 50
years in duration. The Company is the world's largest provider of timeshare
exchange services (RCI) to timeshare owners under one to three year membership
programs which require both exchange fees for swapping vacation weeks and
recurring and renewal membership fees. Travelers that may or may not
participate in the above cross-marketed services frequently receive Value-Added
Tax ("VAT") refunds from international countries through Global Refund,
the largest VAT refund facilitator worldwide. Travel Services operating units
also provide fleet management and leasing.
The Company acquired National Parking Corporation ("NPC") on April 27, 1998.
NPC owns National Car Park ("NCP"), the largest private (non-municipal) single
car park operator in the United Kingdom ("UK") with approximately 500
locations. NPC also owns Green Flag, the third largest roadside assistance
group in the UK, which offers a wide-range of emergency support and rescue
services to approximately 3.5 million members.
(In millions) THREE MONTHS ENDED JUNE 30,
-----------------------------------------
OPERATING INCOME 1998 1997 VARIANCE
---------------- ----------- ----------- ---------
Net revenue $ 475.2 $ 319.7 49%
Operating expenses 313.8 204.2 54%
----------- -----------
Operating income $ 161.4 $ 115.5 40%
======-==== ===========
Operating income increased $45.9 million (40%) as a result of double-digit
percentage point growth in business units comprising 98% of combined Travel
Segment operating income. Revenue increased $155.5 million (49%) while expenses
increased $109.6 million (54%). On a comparable basis, excluding the 1998
acquisitions of NPC and Harpur, operating income increased $23.8 million (21%)
while operating margins increased from 36% to 39%.
Lodging operating income increased $12.5 million (28%) due to a $9.1 million
(8%) increase in revenue and a $3.4 million (5%) decrease in expenses. The
revenue increase is primarily due to a $6.0 million increase in franchise fees,
including a $2.6 million (6%) increase in royalties and $3.6 million increase
in initial fees from sales of master license agreements in Europe. The royalty
increase resulted from a 2% increase in franchisee growth and a 2% increase in
revenue per available room ("REVPAR") at franchised hotels. Expenses are
22
relatively fixed within the lodging business and therefore, operating margins
increased as a result of the corresponding revenue growth. In addition,
expenses within the lodging business unit decreased due to a reduction of
corporate overhead allocated to the lodging business segment as the Company
leveraged its corporate infrastructure among more businesses. Timeshare
operating income increased $5.1 million (28%) due to an $8.7 million (10%)
increase in revenue net of $3.6 million (5%) increased expenses. The revenue
increase is primarily due to a $3.8 million (9%) increase in exchange revenue
and a $2.4 million (8%) increase in subscription revenue. The exchange revenue
increase is the result of a 7% increase in pricing, while the increase in
subscription revenue is the result of a 7% increase in membership growth. Car
rental operating income increased $6.4 million (31%) on a $9.5 million (25%)
increase in revenue. The operating income increase primarily resulted from a
$4.1 million increase in international license fees and a $1.2 million (5%)
increase in royalty. Royalty revenue increased as a result of a 3% increase in
pricing and a 4% increase in rental days. Fleet excluding incremental results
from the Company's January 1998 acquisition of Harpur contributed a $3.5
million (14%) increase in operating income due primarily to a $4.5 million
(13%) increase in leasing revenue and a $3.8 million (11%) increase in service
revenue. The increase in vehicle leasing is due to a 7% increase in number of
leases and a 6% increase in pricing. The increase in servicing revenue is due
to an 11% increase in the number of service cards and a 7% increase in pricing.
Including Harpur, Fleet operating income increased $7.8 million (31%). Harpur
contributed $4.3 million of operating income, which included $8.2 million of
revenue and $3.9 million of operating expenses. NPC contributed $17.7 million
of operating income in 1998 for the two months of Company ownership, which
included $112.5 million of revenue and $94.8 million of operating expenses.
REAL ESTATE SERVICES SEGMENT
The Company operates business units that provide a range of services related to
home sales, principally in the United States. The Company is the world's
largest franchisor of real estate brokerage offices through its CENTURY 21,
Coldwell Banker(R) and ERA(R) franchise brands, which were involved in more
than 25% of homes sold in the United States in 1997. Similar to the Travel
Services Segment franchise business, the Company receives royalty revenue from
approximately 11,500 franchise brokerage offices under contracts with terms
ranging from 5 to 50 years. The Company operates the world's largest provider
of corporate employee relocation services and receives fees for providing
services such as selling relocating employees' homes (without recourse to the
Company), assisting the relocating employee in finding a home or providing an
array of services such as moving household goods, expense reporting and others.
The Company also operates the largest in-bound mortgage telemarketing operation
in the United States. Cendant Mortgage Corporation ("Mortgage") generates
origination profits from the sale of mortgage notes, generally within 45 days
of origination but retains recurring servicing revenue streams over the life of
the mortgage. In addition, the Company is a distributor of welcome packages to
new homeowners, which provide discounts from local merchants. Each Real Estate
Services business provides customer referrals from other Real Estate Services
businesses as well as a database for prospective Alliance Marketing
Segment cross selling.
(In millions) THREE MONTHS ENDED JUNE 30,
--------------------------------------
OPERATING INCOME 1998 1997 VARIANCE
---------------- --------- --------- --------
Net revenue $ 354.9 $ 246.8 44%
Operating expenses 197.4 153.5 29%
--------- ---------
Operating income $ 157.5 $ 93.3 69%
========= =========
23
Operating income increased $64.2 million (69%) as a result of increases in the
Real Estate franchise and Mortgage business units. Revenue increased $108.1
million (44%) while expenses increased only $43.9 million (29%). Real Estate
franchise operating income grew $42.1 million (89%) primarily as a result of a
$34.2 million increase in royalty revenue and a $10.6 million increase in
preferred alliance revenue (revenue generated from preferred alliance partners
seeking access to franchisees and franchise customers), while expenses
increased only $5.8 million. The increase in royalty revenue was due to a 24%
increase in home sale volume and a 17% increase in the average price of homes
sold in the United States. Expenses remained relatively flat due to their fixed
nature increasing the operating margin within the Real Estate franchise
business by 11 percentage points. Operating income at the Mortgage business
unit increased $23.9 million (128%) driven primarily by a $4.1 billion (165%)
increase in mortgage originations. The increase in mortgage
originations generated $50.1 million of additional production revenue while
mortgage related expenses (primarily production related) increased only $27.5
million. Operating income at the Relocation business unit decreased $2.2
million (9%) primarily as a result of $6.5 million of increased information
technology systems support and facility costs, which reduced the operating
margin by 3 percentage points. The Company committed to a $40 million, two-year
capital expenditure program to combine the PHH and Coldwell
Banker Corporation operating and customer delivery systems following the April
1997 merger of HFS and PHH.
ALLIANCE MARKETING SEGMENT
The Company derives its Alliance Marketing revenue principally from membership
product fees, insurance premiums and product sales. The Alliance Marketing
segment is divided into three divisions: individual membership ("Individual
Membership); insurance/ wholesale ("Insurance/Wholesale"); and lifestyle
("Lifestyle"). Individual Membership, with more than 33 million memberships,
provides customers with access to a variety of products and services in such
areas as retail shopping, travel, auto, dining and home improvement.
Insurance/Wholesale, with nearly 31 million customers, markets and administers
insurance products, primarily accidental death insurance, and also provides
products and services such as checking account enhancement packages, financial
products and discount programs to customers of various financial institutions.
Lifestyle, with over 11 million customers, provides customers with unique
products and services that are designed to enhance a customer's purchasing
power.
Alliance Marketing growth is generated primarily from direct marketing to
consumers or by reaching consumers through businesses such as banks, credit
card and travel companies that provide access to new members and customers as a
service enhancement to their customers. Commencing with the Cendant Merger,
alliance marketing businesses have unfettered access to the Company's Travel
Segment businesses that account for 1 of 6 U.S. hotel rooms sold, 1 of 4 cars
rented in the U.S. and more than 70% of timeshare resort vacation exchanges
worldwide. Membership businesses also have access to Real Estate Services
segment businesses that participate in more than 25% of U.S. home sales, more
than 50% of corporate employee relocations and homebuyers underlying nearly $25
billion of annual mortgage originations.
(In millions) THREE MONTHS ENDED JUNE 30,
-------------------------------------
OPERATING INCOME 1998 1997 VARIANCE
---------------- ---------- ---------- --------
Net revenue $ 411.6 $ 355.9 16%
Operating expenses 373.0 336.5 11%
---------- ----------
Operating income $ 38.6 $ 19.4 99%
========== ==========
Operating income increased $19.2 million (99%) to $38.6 million due to a $55.7
million revenue increase (16%) being partially offset by an increase of $36.5
million (11%) operating expenses.
Individual Membership operating income increased $15.4 million driven by a
$38.9 million (23%) increase in revenues resulting from a 5.2 million increase
in total memberships coupled with an increase in average membership fees. This
revenue growth was partially offset by a $23.5 million (14%) increase in
marketing and other expenses related to acquiring and servicing the increased
membership base. Included in the Individual Membership division for the second
quarter was $4.3 million of operating income related to the acquisition of
Credentials Services International, Inc., in April 1998. Insurance/ Wholesale
operating income increased $6.2 million (21%), as a result of a $9.3 million
(7%) increase in revenues, fueled a two million increase in insurance and
wholesale customers, partially offset by a $3.1 million (3%) increase in
expenses related to marketing and servicing expenses. Lifestyle generated an
operating loss of $12.9 million compared to an operating loss of $15.2 million
for the second quarter of 1997. This division is comprised of five separate
businesses, the largest of which is Entertainment Publications ("EPub"), which
generated an operating loss of $15.1 million, a $4.3 million improvement from
the $19.4 million operating loss generated in the second quarter of 1997. The
Company's EPub business is seasonal whereby over 85% of the revenues are
generated in the second half of the year. During the second quarter EPub
received $8.7 million cost reimbursements for third party sales activities
incurred prior to the second quarter of 1998.
24
OTHER SEGMENT
The Company operates a variety of other businesses in addition to those which
comprise each of the Company's core business segments. Such business operations
and transactions are primarily comprised of (i) franchising the second largest
tax preparation service system in the United States as a result of the
Company's first quarter 1998 acquisition of Jackson Hewitt; (ii) information
technology and reservation system support services provided to the car rental
and hotel industry (the "Wizcom Business"); (iii) casino credit information and
marketing services (the "Casino Marketing Business") and (iv) the equity in
earnings from the Company's investment in the Avis Rent A Car, Inc. ("Avis")
car rental company.
(In millions)
THREE MONTHS ENDED JUNE 30,
--------------------------------------
OPERATING INCOME 1998 1997 VARIANCE
- ---------------- ---------- ---------- --------
Net revenues $ 64.6 $ 101.6 (36%)
Operating expenses 61.1 70.0 (13%)
---------- ----------
Operating income $ 3.5 $ 31.6 (89%)
========== ==========
Operating income decreased $28.1 million (89%) primarily as a result of a $16.6
million reduction in equity in earnings of Avis and $7.9 million of operating
income associated with Interval International, Inc. ("Interval") which was sold
in December 1997. The Company owned 100% of Avis common stock prior to its
October 1997 initial public offering and currently owns 20%.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 VS SIX MONTHS ENDED JUNE
30, 1997
1998 1997 VARIANCE
------ ------ --------
(In millions, except per share amounts)
Revenue $2,461.2 $1,981.8 24%
Operating expenses 1,734.6 1,524.8 14%
Interest, net 42.8 22.8 88%
Merger related and other unusual charges (42.0) 299.6
Investigation related costs 32.2 -
---------- ----------
Income from continuing operations 693.6 134.6
---------- ----------
Income from continuing operations increased $559.0 million. The increase was
attributable in part to $479.4 million (24%) increases in revenue which
exceeded $210.0 million (14%) increases in operating expenses. Approximately
$52.2 million of the above net increase was attributable to acquired 1998
operations while internal growth in the travel and real estate segments
contributed 20% and 87% increases in operating income, respectively. The change
in estimates related to unusual charges results in a credit of $42.0 compared
to an expense of $299.6 in the comparable prior period accounted for $341.6
million of pre-tax income.
The above increases in income from continuing operations were partially offset
by $20.0 million (88%) and $32.2 million increases in interest expense and
costs associated with resolving accounting errors discovered in the financial
statements of the former CUC business units, respectively. The increase in
interest expense was primarily attributable to borrowings under revolving
credit facilities to finance more than $2.6 billion of company acquisitions
including the $1.6 billion acquisition of NPC on April 27, 1998.
The Company continues to execute strategies to optimize its effective tax rate.
The execution of such tax minimization strategies, the favorable impact of
lower tax rates in international jurisdictions and lower non-deductible
amortization expense as a percentage of pre-tax income have contributed to a
decrease in the Company's effective tax rate to 36% in 1998.
Discontinued operations, consisting of the Company's consumer software and
classified advertising businesses generated $16.2 million of pre-tax operating
losses in 1998 compared to $1.5 million of 1997 operating losses, incremental
consumer software losses of $25.9 million reflect a $111.2 million increase in
sales offset by $137.1 million of escalating development and marketing costs.
The classified advertising business contributed a $11.1 million (104%)
increase in operating income due primarily to profits from companies acquired
during an aggressive pre-merger consolidation plan.
SEGMENT DISCUSSION
In addition to the above analysis of consolidated financial results, management
evaluates the operating performance of its segments and business units
excluding Unusual Charges. The following segment analysis of results of
operations discusses operating income (profits excluding interest, taxes,
minority interest expense, Unusual Charges and investigation costs).
TRAVEL SERVICES SEGMENT
(In millions)
SIX MONTHS ENDED JUNE 30,
----------------------------------
OPERATING INCOME 1998 1997 VARIANCE
- ---------------- -------- -------- --------
Net revenues $ 822.9 $ 636.1 29%
Operating expenses 519.0 412.9 26%
-------- --------
Operating income $ 303.9 $ 223.2 36%
======== ========
25
Operating income increased $80.7 million (36%) as a result of double-digit
percentage point growth in business units comprising 98% of combined Travel
Segment operating income. Revenue increased $186.8 million (29%) while expenses
increased only $106.1 million (26%). On a comparable basis, excluding the 1998
acquisitions of NPC and Harpur, operating income increased $55.6 million (25%).
Lodging operating income increased $20.8 million (26%) due to a $14 million
(7%) increase in revenue and a $6.8 million reduction in operating expenses.
The revenue increase is primarily due to a $12.2 million increase in franchise
fees including a $4.7 million (6%) increase in royalty revenue and sales of
master license agreements in Europe. The royalty increase resulted from a 2%
increase in royalty rate and a 2% increase in REVPAR at franchised hotels.
Operating margins increased with the revenue growth as expenses in the lodging
business unit are relatively fixed. In addition, expenses within the lodging
business unit decreased due to a reduction of corporate overhead allocated to
the lodging business unit in 1998, consistent with the changes in the Company's
infrastructure.
Timeshare operating income increased $18.2 million (47%) resulting from an $8.8
million (9%) increase in exchange revenue and a $4.0 million (6%) increase in
membership fees. While the exchange fee increase was driven by a 7% pricing
increase, subscription revenue increased due to a 6% increase in memberships.
Car rental operating income increased $16.4 million (46%) on a $20.1 million
(28%) increase in revenue. The operating income increase primarily resulted
from a $10.5 million increase in franchise fees including $8.6 million
associated with international license fees and a $1.9 million increase in
royalty. Fleet, excluding Harpur, had a $6.0 million (11%) increase in
operating income due to a $4.9 million (7%) increase in vehicle leasing revenue
and a $6.9 million (10%) increase in service card revenues. Including Harpur,
Fleet operating income increased $13.4 million (23%). Harpur contributed $7.4
million of operating income, which included $15.6 million of revenue and $8.2
million of operating expenses.
NPC contributed $17.7 million of operating income during the two months of the
Company's ownership including $112.5 million of revenue and $94.8 million of
operating expenses.
REAL ESTATE SERVICES SEGMENT
(In millions)
SIX MONTHS ENDED JUNE 30,
-------------------------------
OPERATING INCOME 1998 1997 VARIANCE
- ---------------- -------- -------- --------
Net revenue $ 634.0 $ 437.9 45%
Operating expenses 369.6 296.7 25%
-------- --------
Operating income $ 264.4 $ 141.2 87%
======== ========
Operating income increased $123.2 million (87%) primarily driven by increases
in the Real Estate franchise and Mortgage business units. Revenue increased
$196.1 million (45%) while expenses increased only $72.9 million (25%). Real
Estate franchise operating income grew $68.5 million (102%) primarily as a
result of a $57.1 million increase in royalty revenue and a $11.3 million
increase in preferred alliance revenue while expenses increased only $8.3
million. The increase in royalty revenue was due to a 23% increase in home sale
volume and a 16% increase in the average price of homes sold in the United
States. Expenses remained relatively flat due to their fixed nature, increasing
the operating margin within the Real Estate franchise business unit 15
percentage points. Operating income at the Mortgage business unit increased
$46.8 million (149%) driven primarily by a $6.9 billion (163%) increase in
mortgage
26
originations. The increase in mortgage originations generated $84.8
million additional production revenue while mortgage related expenses
(primarily production related) only increased $49.0 million. Operating income
at the Relocation business unit grew $8.3 million (21%) on a revenue increase
of $21.2 million. The revenue increase primarily resulted from increases in
relocation referrals which were offset by a $6.5 million increase in second
quarter information technology system support and facility costs associated
with the consolidation of former PHH and Coldwell Banker operating and customer
delivery systems.
ALLIANCE MARKETING SEGMENT
(In millions)
SIX MONTHS ENDED JUNE 30,
--------------------------------
OPERATING INCOME 1998 1997 VARIANCE
- ---------------- -------- -------- --------
Net revenues $ 802.1 $ 714.0 12%
Operating expenses 724.3 665.0 9%
-------- --------
Operating income $ 77.8 $ 49.0 59%
======== ========
Operating income increased $28.8 million (59%) to $77.8 million increase due
to an $88.1 million revenue increase (12%) being partially offset by an
increase of $59.3 million (9%) increase in operating expenses.
Individual Membership operating income increased $22.1 million driven by a
$58.1 million (17%) increase in revenues resulting from a 5.2 million increase
in total memberships coupled with an increase in average membership fees. This
revenue growth was partially offset by a $26.7 million (8%) increase in
marketing and other expenses related to acquiring and servicing the increased
membership base. Included in Individual Membership for the first six months of
1998 was $4.3 million of operating income related to the acquisition of
Creditials Services International Inc. in April 1998. Insurance/Wholesale
operating income increased $20.8 million, (39%), as a result of $28.6 million
(12%) increase in revenues, due primarily to a 2 million increase in insurance
and wholesale customers, partially offset by a $7.7 million (4%) increase in
expenses related to marketing and servicing expenses. Lifestyle generated an
operating loss of $31.1 million compared to an operating loss of $17.1 million
for the second quarter of 1997. This division is comprised of five separate
businesses, the largest of which is Epub which generated an operating loss of
$37.1 million during the first six months of 1998 compared to an operating loss
of $33.3 million for the first six months of 1997. EPub revenues for this six
month 1998 period totaled $15.5 million, a decline of $10.8 million from the
comparable period in 1997. This decline in revenues is due largely to a change
in the proportion of sales generated from community group distribution channels
(which generate revenues during the 3rd, 4th and 1st quarters) to school
distribution channels (which generate a higher proportion of revenues during
the 3rd and 4th quarters). Additionally, during the first six months of 1998,
EPub received $8.7 million of cost reimbursement for third party sales
activites incurred prior to the second quarter of 1998.
OTHER SEGMENT
(In millions)
SIX MONTHS ENDED JUNE 30,
--------------------------------
OPERATING INCOME 1998 1997 VARIANCE
- ---------------- -------- -------- --------
Net revenues $ 202.2 $ 193.9 4%
Operating expenses 121.7 150.3 (19%)
-------- --------
Operating income $ 80.5 $ 43.6 85%
======== ========
Operating income increased $36.9 million (85%) primarily due to $28.0 million
of earnings generated from the Jackson Hewitt tax service franchise business
acquired in January 1998 and a $17.7 million pre-tax gain on the sale of Avis
common stock in a February 1998 secondary offering. These increases in
operating income were offset by $17.7 million of 1997 operating income
attributable to Interval International, Inc., which was sold in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
ACQUISITION OVERVIEW
The Company continues to seek to expand and strengthen its leadership position
in each of its business segments with strategic acquisitions. As a result, the
Company acquired or agreed to acquire travel-related businesses in the UK and
agreed to acquire American Bankers in early 1998. The Company's acquired
businesses share similar characteristics, foremost of which is that each was
immediately accretive to Company cash flow and earnings. Revenue is generally
generated from service fees and is not dependent on tangible assets or the need
for capital expenditures other than certain technology investments. These
service businesses each generate significant cash flow which is enhanced by the
Company's operating leverage that supports acquired revenue streams without
corresponding increases in operating infrastructure expenses.
27
On August 12, 1998, the Company announced that the Executive Committee of the
Board of Directors committed to a plan to exit the consumer software and
classified advertising business segments by divesting of its interest in its
Cendant Software and Hebdo Mag subsidiaries. The Company believes that these
actions will generate significant gains and proceeds, which will increase
equity and reduce debt.
PENDING AND COMPLETED ACQUISITIONS
American Bankers. On March 23, 1998, the Company entered into a definitive
agreement to acquire American Bankers Insurance Group, Inc. ("American
Bankers") for $67 per share in cash and stock, for aggregate consideration of
approximately $3.1 billion. The Company intends to purchase 23.5 million shares
of American Bankers at $67 per share through its pending cash tender offer, to
be followed by a merger in which the Company will deliver Cendant shares with a
value of $67 for each remaining share of American Bankers common stock
outstanding. The Company has received anti-trust clearance to acquire American
Bankers. The tender offer is subject to the receipt of tenders representing at
least 51 percent of the common shares of American Bankers as well as customary
closing conditions, including regulatory approvals. The transaction is expected
to be completed following the restatement of the Company's financial
statements, receipt of approval of American Bankers' shareholders, and receipt
of regulatory approvals. American Bankers provides affordable, specialty
insurance products and services through financial institutions, retailers and
other entities offering consumer financing.
The Company plans to fund this acquisition with proceeds received from either
its new term loan arrangement, borrowings under other committed facilities,
operating cash flow or a combination of the above. The Company may also fund a
portion of the purchase price with equity or proceeds from the disposition of
its consumer software and classified advertising businesses. The Company may
modify the mix of consideration to increase the cash position depending upon
the value of the Company's common stock pricing, the timing of the dispositions
of certain assets and the impact on significant financial ratios.
Acquisition of RAC Motoring Services. On May 21, 1998, the Company announced
that it has reached a definitive agreement with the Board of Directors of Royal
Automobile Club Limited ("RACL") to acquire their RAC Motoring Services
subsidiary for approximately $735 million in cash. The sale of RAC Motoring
Services has subsequently been approved by its shareholders. Closing is subject
to certain conditions, including regulatory approval and is anticipated to
occur in the autumn of 1998. The Company plans to fund this acquisition with
proceeds from either its new term loan arrangement, borrowings under other
committed facilities, operating cash flow or a combination of the above.
National Parking Corporation. On April 27, 1998, the Company acquired National
Parking Corporation ("NPC") for $1.6 billion in cash, which included the
repayment of approximately $227 million of outstanding NPC debt. NPC is
substantially comprised of two operating subsidiaries. National Car Parks
("NCP") is the largest private (non-municipal) single car park operator in the
UK with approximately 500 locations. Green Flag operates the third largest
roadside assistance group in the UK and offers a wide-range of emergency
support and rescue services to approximately 3.5 million members. The Company
funded the NPC acquisition with borrowings under its revolving credit
facilities
Harpur Group. On January 20, 1998, the Company completed the acquisition of
Harpur, a leading fuel card and vehicle management company in the UK, from
privately held H-G Holdings, Inc. for approximately $186.0 million in cash plus
future contingent payments of up to $20.0 million over the next two years.
28
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition of
Jackson Hewitt for approximately $480.0 million in cash. Jackson Hewitt
operates the second largest tax preparation service franchise system in the
United States. The Jackson Hewitt franchise system specializes in computerized
preparation of federal and state individual income tax returns.
Other Completed 1998 Acquisitions. The Company paid cash to acquire certain
other entities and assets for an aggregate purchase price of $544.5 million in
cash. Additionally during the first quarter of 1998, the Company paid $100.0
million to the seller of RCI in satisfaction of a contingent purchase
liability.
Providian. On December 9, 1997, the Company executed a definitive agreement to
acquire Providian Auto and Home Insurance Company for approximately $219.0
million in cash. Closing is subject to receipt of required regulatory approval
which will require restated financial statements of the Company and other
customary conditions. Providian sells automobile insurance to consumers through
direct response marketing.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
The Company believes that it has excellent liquidity and access to liquidity
through various sources. The Company has also demonstrated its ability to
access equity and public debt markets and financial institutions to generate
capital for strategic acquisitions. The Company is unable to access equity and
public debt markets until the filing of restated financial statements with the
Securities and Exchange Commission. Accordingly, the Company has secured
additional liquidity through other sources including a 364-day, $3.25 billion
term loan facility and committed revolving credit facilities of $2.65 billion.
Revolving credit facilities include a bank commitment to provide a $650
million, 364-day revolving facility, which is available to fund the American
Bankers.
On May 29, 1998, the Company entered into a 364-day term loan facility with a
syndicate of financial institutions which provides for borrowings of up to
$3.25 billion (the "Term Loan Facility"). The Term Loan Facility bears interest
at LIBOR plus the applicable LIBOR spread, as defined. The Company intends to
repay all outstanding borrowings under the Term Loan Facility prior to December
1, 1998. Upon the execution of the Term Loan Facility, temporary credit
agreements, which provided for $1.0 billion of borrowings, were terminated. The
Term Loan Facility contains certain restrictive covenants, which are
substantially similar to and consistent with the covenants in effect for the
Company's existing revolving credit agreements. At June 30, 1998, the Term Loan
Facility was fully utilized. The Company used $2 billion of the proceeds from
the Term Loan Facility to refinance the outstanding borrowings under its
revolving credit facilities and intends to use the remainder for the
acquisition of American Bankers, RAC Motoring Services (See Note 11) and for
general corporate purposes.
The Company's primary credit facility, consists of (i) a $750.0 million, five
year revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $1.25 billion, 364 day revolving credit facility (the "364 Day Revolving
Credit Facility") and collectively with the Five Year Revolving Credit
Facility, (the "Revolving Credit Facilities"). The 364-Day Revolving Credit
Facility will mature on September 30, 1998 but may be extended on an annual
basis for an additional 364 days upon receiving lender approval. The Company
has submitted an extension request to the lenders under the 364 Day Revolving
Credit Facility. The Five-Year Revolving Credit Facility will mature on October
1, 2001. The Revolving Credit Facilities, at the option of the Company, bear
interest based on competitive bids of lenders participating in the facilities,
at prime rates or at LIBOR plus a margin of approximately 22 basis points. The
Company is required to pay a per annum facility fee of .08% and .06% of the
average daily availability of the Five Year Revolving Credit Facility and 364
Day Revolving Credit Facility, respectively. The interest rates and facility
fees are subject to change based upon
29
credit ratings on the Company's senior unsecured long-term debt by nationally
recognized statistical rating companies. The Revolving Credit Facilities
contain certain restrictive covenants including restrictions on indebtedness,
mergers, liquidations and sale and leaseback transactions and requires the
maintenance of certain financial ratios, including a 3:1 minimum interest
coverage ratio and a 3.5:1 maximum coverage ratio, as defined.
Company debt was $4.1 billion at June 30, 1998, which primarily consisted of
$3.25 billion of short-term borrowings under the Company's Term Loan Facility
and $700 million of publicly issued fixed rate debt.
The Company filed an amended shelf registration statement (the "Shelf
Registration Statement") on February 6, 1998 with the Securities and Exchange
Commission for the issuance of up to an aggregate $4.0 billion of debt and
equity securities. Pursuant to the Shelf Registration Statement, the Company
issued 29.9 million FELINE PRIDES and 2.3 million trust preferred securities
on March 2, 1998 and received approximately $1.4 billion in gross proceeds
therefrom. The issuance of the FELINE PRIDES resulted in the utilization of
approximately $3 billion of availability under the Shelf Registration
Statement. The FELINE PRIDES consist of 27.6 million Income PRIDES and 2.3
million Growth PRIDES, each with a face amount of $50 per PRIDE. The Income
PRIDES consist of trust securities and stock purchase contracts under which the
holders will purchase common stock from the Company in February of 2001. The
Growth PRIDES consist of stock purchase contracts under which the holders will
purchase common stock from the Company in February 2001 and zero coupon U.S.
Treasury securities. The trust preferred securities will bear interest at the
annual rate of 6.45 percent, and the forward purchase contract forming a part
of the Income PRIDES will pay 1.05 percent annually in the form of a contract
adjustment payment. The forward purchase contract forming a part of the Growth
PRIDES will pay 1.3 percent annually in the form of a contract adjustment
payment. The forward purchase contracts call for the holder to purchase a
minimum of 1.0395 shares and a maximum of 1.3514 shares of the Company common
stock per PRIDES security, depending upon the average of the closing price per
share of Company common stock for a 20 consecutive trading day period ending in
mid-February of 2001.
The Company filed a shelf registration statement with the Securities and
Exchange Commission which has not yet become effective for the aggregate
issuance of up to $3.0 billion of debt and equity securities.
On May 4, 1998, the Company redeemed all of the outstanding ($144.5 million
principal amount) of 4-3/4% Convertible Senior Notes due 2003 at a price of
103.393% of the principal amount, together with interest accrued to the
redemption date. Prior to May 4, 1998, $90.5 million of such notes were
exchanged for 2.5 million shares of Company common stock.
On April 8, 1998, the Company exercised its option to call its 6-1/2%
Convertible Subordinated Notes (the "6-1/2% Notes") for redemption on May 11,
1998, in accordance with the provisions of the indenture relating to the 6-1/2%
Notes. Prior to the redemption date, all of the outstanding 6-1/2% Notes were
converted into 2.1 million shares of Company common stock.
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH operates their mortgage services, fleet management services and relocation
services businesses as a separate public reporting entity and supports
purchases of leased vehicles and originated mortgages primarily by issuing
commercial paper and medium term notes. Financial covenants related to such
debt are designed to ensure the self-sufficient liquidity status of PHH.
Accordingly, PHH's publicly filed financial statements and underlying publicly
issued debt were not impacted by the accounting irregularities previously
disclosed and
30
PHH continues to issue debt securities in public markets. Such borrowings are
not classified based on contractual maturities, but rather are included in
liabilities under management and mortgage programs rather than long-term debt
since such debt corresponds directly with high quality related assets.
Additionally, PHH continues to pursue opportunities to reduce its borrowing
requirements by securitizing increasing amounts of its high quality assets. In
May 1998, PHH commenced a program to sell originated mortgage loans to an
unaffiliated buyer, at the option of the Company, up to the buyer's asset limit
of $1.5 billion. The buyer may sell or securitize such mortgage loans into the
secondary market, however, servicing rights are retained by the Company.
PHH debt is issued without recourse to the Company. PHH expects to continue to
have broad access to global capital markets by maintaining the quality of its
assets under management. This is achieved by establishing credit standards to
minimize credit risk and the potential for losses. Depending upon asset growth
and financial market conditions, PHH utilizes the United States, European and
Canadian commercial paper markets, as well as other cost-effective short-term
instruments. In addition, PHH will continue to utilize the public and private
debt markets as sources of financing. Augmenting these sources, PHH will
continue to manage outstanding debt with the potential sale or transfer of
managed assets to third parties while retaining fee-related servicing
responsibility. At June 30, 1998, PHH's outstanding debt was comprised of
commercial paper, medium-term notes and other borrowings of $3.2 billion, $3.4
billion and $.2 billion, respectively.
PHH filed a shelf registration statement with the Securities and Exchange
Commission, which became effective March 2, 1998, for the aggregate issuance of
up to $3 billion of debt securities. These securities may be offered from time
to time, together or separately, based on terms to be determined at the time of
sale. The proceeds will be used to finance assets PHH manages for its clients
and for general corporate purposes. As of July 31, 1998, the PHH had issued
$795 million of medium-term notes under this shelf registration statement.
To provide additional financial flexibility, PHH's current policy is to ensure
that minimum committed facilities aggregate 80 percent of the average amount of
outstanding commercial paper. PHH maintains $2.7 billion of syndicated
unsecured credit facilities which is backed by domestic and foreign banks and
are comprised of $1.25 billion of lines of credit maturing in March 1999, which
may be extended upon receiving lender approval, $1.25 billion maturing in the
year 2000 and a $200 million facility maturing in June 1999. In addition, PHH
has approximately $186 million of uncommitted lines of credit with various
financial institutions, which were unused at June 30, 1998. Management closely
evaluates not only the credit of the banks but also the terms of the various
agreements to ensure ongoing availability. The full amount of PHH's committed
facilities at June 30, 1998 was undrawn and available. Management believes that
its current policy provides adequate protection should volatility in the
financial markets limit PHH's access to commercial paper or medium-term notes
funding.
PHH minimizes its exposure to interest rate and liquidity risk by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities.
On July 10, 1998, the Company entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with The First National Bank of Chicago, as trustee,
under the Senior Indenture dated as of June 5, 1997, which formalizes the
policy for PHH of limiting the payment of dividends and the outstanding
principal balance of loans to the Parent Company to 40% of consolidated net
income (as defined in the Supplemental Indenture) for each fiscal year. The
Supplemental Indenture prohibits PHH from paying dividends or making loans to
the Parent Company if upon giving effect to such dividend and/or loan, PHH's
debt to equity ratio exceeds 8 to 1.
31
CREDIT RATINGS
The Company's long-term debt credit ratings from S&P, Duff & Phelps ("Duff")
and Moody's remain at A, A and A3, respectively; however, such ratings are
being reviewed by such agencies with negative implications following the
Company's March 23, 1998 announcements relating to the Company's agreements to
acquire American Bankers and NPC and its April 15, 1998 announcement regarding
accounting irregularities discovered at the former CUC business units. PHH's
present long term and short term debt ratings are A+/A1, A2/P1, A+/F1, A+/D1
with Standard & Poor's (S&P), Moody's Investor Service (Moody's), Fitch IBCA
and Duff & Phelps Credit Rating Co. (Duff), respectively. Presently, the
ratings of both S&P and Moody's related to PHH debt are on watch with negative
implications. While this negative watch period has caused PHH to incur a
marginal increase in its cost of funds, management believes its sources of
liquidity continue to be adequate. (A security rating is not a recommendation
to buy, sell or hold securities and is subject to revision or withdrawal at any
time).
COMPANY INVESTIGATION LITIGATION
On April 15, 1998, as a result of the discovery of accounting irregularities in
the former CUC business units, which are part of the Company's Alliance
Marketing segment (formerly the Membership segment), the Audit Committee of the
Company's Board of Directors initiated an investigation into such matters. The
Audit Committee's investigation has since been completed and, as a result of
its findings, the Company has restated its previously reported financial
results for the years 1995 through 1997 and the quarterly periods during 1996
and 1997 and the first quarter of 1998. The Company expects to file the
following financial statements and other information with the SEC in late
August 1998: (i) audited restated financial statements for the years ended
December 31, 1995 through 1997 on an amended Form 10-K/A; (ii) unaudited
restated financial statements for the quarterly periods ended March 31, 1998
and 1997 on an amended Form 10-Q/A; and (iii) restated financial information
for each of the quarterly periods in 1997 and 1996.
As a result of the aforementioned accounting irregularities, numerous
purported class action lawsuits, a purported derivative lawsuit and an
individual lawsuit have been filed against the Company and, among others, its
predecessor HFS, and certain current and former officers and directors of the
Company and HFS asserting various claims under the federal securities laws
and certain state statutory and common laws. In addition, the staff of the
SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the accounting issues. The SEC staff
has advised the Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred.
While it is not feasible to predict or determine the final outcome of these
proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material adverse impact on the
financial condition, results of operations and cash flows of the Company.
CASH FLOWS
The Company used $251.3 million of cash flows from operations in 1998,
representing a $1,230.8 million decrease from the same period in 1997. The $1.3
billion decrease in operating cash flows reflects unprecedented growth in
mortgage loan origination volume. Rapid growth, which contributed to the 149%
increase in Mortgage Services operating income, also caused a temporary delay
in selling mortgages on the secondary market until July 1998. The Company used
$3.9 billion in cash flows from investing activities, which consisted of $2.7
billion of acquisitions and acquisition-related payments and $811.9 million of
net investment in assets under management and mortgage programs. Cash provided
by financing activities of $5.7 billion primarily reflects the issuance of the
FELINE PRIDES and proceeds of $3.3 billion from borrowings under the term loan
facility.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" effective for annual periods beginning
after December 15, 1997 and interim periods subsequent to the initial year of
application. SFAS No. 131 establishes standards for the way that public
business enterprises report information about their operating segments in their
annual and interim financial statements. It also requires public enterprises to
disclose company-wide information regarding products and services and the
geographic areas in which they operate. The Company will adopt SFAS No.
131 in 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pension and Other Postretirement Benefits" effective for period beginning after
December 15, 1997. The Company will adopt SFAS No. 132 effective for the 1998
calendar year end.
The aforementioned recently issued accounting pronouncements establish
standards for disclosures only and therefore will have no impact on the
Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective for the periods beginning after
June 15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective for the 2000 calendar year
end. The Company has not yet determined the impact SFAS No. 133 will have on
its financial statements.
YEAR 2000 COMPLIANCE
The Company currently is in the process of indentifying, evaluating and
implementing changes to computer systems and applications necessary to achieve
a year 2000 date conversion with no effect on customers or disruption to
business operations. These actions are necessary to ensure that the systems and
applications will recognize and process data from and after January 1, 2000 and
beyond. Major areas of potential business impact have been identified and are
being reviewed, and initial conversion efforts are underway. However, if such
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have a material impact on the operations of the Company.
The total future cost of compliance associated with identified actions is
anticipated to be approximately $4 million. Variations from anticipated
expenditures and the effect on the Company's future results of operations are
not anticipated to be material in any given year.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In recurring operations, the Company must deal with effects of changes in
interest rates and currency exchange rates. The following discussion presents
an overview of how such changes are managed and a view of their potential
effects.
The Company uses various financial instruments, particularly interest rate and
currency swaps and currency forwards, to manage its respective interest rate
and currency risks. The Company is exclusively an end user of these
instruments, which are commonly referred to as derivatives. The Company does
not engage in trading, market-making or other speculative activities in the
derivatives markets. Established practices require that derivative financial
instruments relate to specific asset, liability or equity transactions or to
currency exposures.
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates and currency
exchange in their financial statements. Although the rules offer alternatives
for presenting this information, none of the alternatives is without
limitations. The following discussion is based on so-called "shock tests,"
which model effects of interest rate and currency shifts on the reporting
company. Shock tests, while probably the most meaningful analysis permitted,
are constrained by several factors, including the necessity to conduct the
analysis based on a single point in time and by their inability to include the
extraordinarily complex market reactions that normally would arise from the
market shifts modeled. While the following results of shock tests for interest
rate and currencies may have some limited use as benchmarks, they should not be
viewed as forecasts.
o One means of assessing exposure in interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical 10% change (decrease) in interest rates
across all maturities (sometimes referred to as a "parallel shift in the
yield curve"). Under this model, it is estimated that, all else constant,
such decrease would not adversely impact the 1998 net earnings of the
Company based on June 30, 1998 positions.
o One means of assessing exposure to changes in currency exchange rates is to
model effects on future earnings using a sensitivity analysis. Six months
ended June 30, 1998 consolidated currency exposures, including financial
instruments designated and effective as hedges, were analyzed to identify
the Company's assets and liabilities denominated in other than their
relevant functional currency. Net unhedged exposures in each currency were
then remeasured assuming a 10% change (decrease) in currency exchange rates
compared with the U.S. dollar. Under this model, it is estimated that, all
else constant, such a decrease would not adversely impact the 1998 net
earnings of the Company based on June 30, 1998 positions.
The categories of primary market risk exposure of the Company are: (i)
long-term U.S. interest rates due to mortgage loan origination commitments and
an investment in mortgage loans held for resale; (ii) short-term interest rates
as they impact vehicle and relocation receivables; and (iii) LIBOR and
commercial paper interest rates due to their impact on variable rate
borrowings.
33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion contained under the heading "Company Investigation
and Litigation" in Note 11 contained in Part 1 - FINANCIAL INFORMATION, Item 1
- - Financial Statements, is incorporated herein by reference in its entirety.
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 17, 1998 reporting in
Item 5 the discovery of accounting irregularities at the former CUC
International Inc. business units, the termination of Cosmo Corigliano and the
submission of resignations by Kirk Shelton and Amy Lipton.
The Company filed a report on Form 8-K dated May 5, 1998 reporting in
Item 2 the acquisition of National Parking Corporation Limited and in Item 5
the Company's first quarter 1998 earnings, the postponement of the Company's
Annual Meeting, the execution of a commitment for a new Term Loan Facility and
the availability of the Company's existing credit facilities.
The Company filed a report on Form 8-K dated May 18, 1998 reporting in
Item 4 the dismissal of Ernst & Young LLP as the independent accountants upon
whom Deloitte & Touche LLP, the Company principal independent accountants,
previously relied in its report on the Company.
The Company filed a report on Form 8-K dated June 4, 1998 reporting in
Item 5 the execution of a new $3.25 billion term loan credit facility.
35
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENDANT CORPORATION
By: /s/ Scott E. Forbes
-----------------------------
Scott E. Forbes
Executive Vice President
Date: August 14, 1998 and Chief Accounting Officer
36
5
1,000
6-MOS 6-MOS 12-MOS
DEC-31-1998 DEC-31-1997 DEC-31-1997
JAN-01-1998 JAN-01-1997 JAN-01-1997
JUN-30-1998 JUN-30-1997 DEC-31-1997
1,549,700 0 0
0 0 0
1,148,700 0 1,193,000
0 0 0
0 0 0
4,238,200 0 2,192,100
0 0 0
0 0 0
20,476,800 0 13,936,700
3,820,500 0 1,539,800
0 0 0
0 0 0
0 0 0
8,700 0 8,400
4,942,200 0 4,209,500
20,476,800 0 13,936,700
0 0 0
2,461,200 1,981,800 0
0 0 0
1,767,600 1,847,200 0
0 0 0
0 0 0
42,800 22,800 0
693,600 134,600 0
243,800 122,100 0
430,000 12,500 0
(16,200) (1,500) 0
0 0 0
0 0 0
413,800 11,000 0
0.49 0.01 0
0.46 0.01 0
