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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2001
COMMISSION FILE NO. 1-10308
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CENDANT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-0918165
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9 WEST 57TH STREET
NEW YORK, NY 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 413-1800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed in Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements, for the past 90 days: Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's CD common stock was
981,491,425 as of October 31, 2001.
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CENDANT CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three
and nine months ended September 30, 2001 and 2000 1
Consolidated Condensed Balance Sheets as of September 30, 2001 and
December 31, 2000 2
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risks 27
PART II Other Information
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2001 2000 2001 2000
------- ------ ------- -------
REVENUES
Membership and service fees, net $ 1,374 $1,129 $ 3,803 $ 3,169
Vehicle-related 1,087 69 2,520 211
Other 20 27 47 110
------- ------ ------- -------
Net revenues 2,481 1,225 6,370 3,490
------- ------ ------- -------
EXPENSES
Operating 862 351 2,101 1,079
Vehicle depreciation, lease charges and interest, net 560 -- 1,285 --
Marketing and reservation 216 233 757 676
General and administrative 240 151 594 429
Non-vehicle depreciation and amortization 125 87 347 258
Other charges (credits):
Restructuring and other unusual charges 77 3 263 109
Litigation settlement and related costs 9 27 28 (6)
Merger-related costs -- -- 8 --
Non-vehicle interest, net 57 38 176 86
------- ------ ------- -------
Total expenses 2,146 890 5,559 2,631
------- ------ ------- -------
Net gain (loss) on dispositions of businesses -- 3 435 (7)
------- ------ ------- -------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY IN
HOMESTORE.COM 335 338 1,246 852
Provision for income taxes 101 101 438 276
Minority interest, net of tax 4 23 22 61
Losses related to equity in Homestore.com, net of tax 20 -- 56 --
------- ------ ------- -------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 210 214 730 515
Extraordinary loss, net of tax -- -- -- (2)
------- ------ ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 210 214 730 513
Cumulative effect of accounting change, net of tax -- -- (38) (56)
------- ------ ------- -------
NET INCOME $ 210 $ 214 $ 692 $ 457
======= ====== ======= =======
CD COMMON STOCK INCOME PER SHARE
BASIC
Income before extraordinary loss and cumulative effect of
accounting change $ 0.25 $ 0.30 $ 0.85 $ 0.72
Net income 0.25 0.30 0.81 0.64
DILUTED
Income before extraordinary loss and cumulative effect of
accounting change $ 0.23 $ 0.29 $ 0.81 $ 0.69
Net income 0.23 0.29 0.77 0.62
MOVE.COM COMMON STOCK INCOME (LOSS) PER SHARE
BASIC
Income (loss) before extraordinary loss and cumulative effect of
accounting change $(0.55) $ 9.94 $ (1.22)
Net income (loss) (0.55) 9.87 (1.22)
DILUTED
Income (loss) before extraordinary loss and cumulative effect of
accounting change $(0.55) $ 9.81 $ (1.22)
Net income (loss) (0.55) 9.74 (1.22)
See Notes to Consolidated Condensed Financial Statements.
1
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 3,201 $ 944
Receivables, net 1,196 753
Stockholder litigation settlement trust 1,100 --
Deferred income taxes 827 174
Other current assets 1,087 857
-------- --------
Total current assets 7,411 2,728
Property and equipment, net 1,654 1,345
Stockholder litigation settlement trust -- 350
Deferred income taxes 347 1,108
Franchise agreements, net 1,653 1,462
Goodwill, net 5,496 3,176
Other intangibles, net 782 647
Other assets 1,992 1,395
-------- --------
Total assets exclusive of assets under programs 19,335 12,211
-------- --------
Assets under management and mortgage programs
Mortgage loans held for sale 826 879
Relocation receivables 339 329
Vehicle-related, net 8,166 --
Timeshare receivables 280 --
Mortgage servicing rights 1,949 1,653
-------- --------
11,560 2,861
-------- --------
TOTAL ASSETS $ 30,895 $ 15,072
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 2,703 $ 1,446
Current portion of long-term debt 221 --
Stockholder litigation settlement 2,850 --
Deferred income 984 1,020
-------- --------
Total current liabilities 6,758 2,466
Long-term debt, excluding Upper DECS 5,521 1,948
Upper DECS 863 --
Stockholder litigation settlement -- 2,850
Other liabilities 702 460
-------- --------
Total liabilities exclusive of liabilities under programs 13,844 7,724
-------- --------
Liabilities under management and mortgage programs
Debt 9,741 2,040
Deferred income taxes 1,030 476
-------- --------
10,771 2,516
-------- --------
Mandatorily redeemable preferred interest in a subsidiary 375 375
-------- --------
Mandatorily redeemable preferred securities issued by subsidiary holding solely
senior debentures issued by the Company -- 1,683
-------- --------
Commitments and contingencies (Note 7)
Stockholders' equity
Preferred stock, $.01 par value - authorized 10 million shares; none issued and
outstanding -- --
CD common stock, $.01 par value - authorized 2 billion shares; issued 1,036,648,526
and 914,655,918 shares 10 9
Move.com common stock, $.01 par value - authorized 500 million shares;
issued and outstanding none and 2,181,586 shares; notional shares issued with
respect to Cendant Group's retained interest none and 22,500,000 -- --
Additional paid-in capital 6,994 4,540
Retained earnings 2,719 2,027
Accumulated other comprehensive loss (230) (234)
CD treasury stock, at cost, 178,934,284 and 178,949,432 shares (3,588) (3,568)
-------- --------
Total stockholders' equity 5,905 2,774
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,895 $ 15,072
======== ========
See Notes to Consolidated Condensed Financial Statements.
2
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income $ 692 $ 457
Adjustments to arrive at income before extraordinary loss and cumulative effect
of accounting change 38 58
-------- --------
Income before extraordinary loss and cumulative effect of accounting change 730 515
Adjustments to reconcile income before extraordinary loss and cumulative effect
of accounting change to net cash provided by operating activities:
Non-vehicle depreciation and amortization 347 258
Non-cash portion of other charges, net 86 3
Net (gain) loss on dispositions of businesses (435) 7
Deferred income taxes 228 12
Proceeds from sales of trading securities 110 --
Net change in assets and liabilities, excluding the impact of acquired businesses:
Receivables (59) 164
Income taxes 54 281
Accounts payable and other current liabilities (90) (307)
Deferred income (70) (69)
Other, net (21) (255)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS 880 609
-------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Depreciation and amortization 1,210 113
Origination of mortgage loans (28,959) (17,980)
Proceeds on sale of and payments from mortgage loans held for sale 29,044 17,839
-------- --------
1,295 (28)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,175 581
-------- --------
INVESTING ACTIVITIES
Property and equipment additions (242) (168)
Funding of stockholder litigation settlement trust (750) --
Proceeds from sales of marketable securities 31 369
Purchases of marketable securities (16) (402)
Net assets acquired (net of cash acquired of $228 million in 2001) and
acquisition-related payments (1,907) (43)
Other, net (152) (23)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS (3,036) (267)
-------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Investment in vehicles (10,519) --
Payments received on investment in vehicles 9,222 --
Origination of timeshare receivables (66) --
Principal collection of timeshare receivables 77 --
Equity advances on homes under management (4,949) (6,025)
Repayment on advances on homes under management 4,937 6,534
Net additions to mortgage servicing rights and related hedges (505) (664)
Proceeds from sales of mortgage servicing rights 45 93
-------- --------
(1,758) (62)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,794) (329)
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings 4,407 6
Principal payments on borrowings (854) (776)
Issuances of common stock 773 551
Repurchases of common stock (74) (306)
Proceeds from mandatorily redeemable preferred securities issued by subsidiary
holding solely senior debentures issued by the Company -- 91
Proceeds from mandatorily redeemable preferred interest in a subsidiary -- 375
Other, net (92) (1)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS 4,160 (60)
-------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Proceeds from borrowings 11,447 3,236
Principal payments on borrowings (10,824) (4,282)
Net change in short-term borrowings 87 875
-------- --------
710 (171)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,870 (231)
-------- --------
Effect of changes in exchange rates on cash and cash equivalents 6 25
-------- --------
Net increase in cash and cash equivalents 2,257 46
Cash and cash equivalents, beginning of period 944 1,164
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,201 $ 1,210
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNLESS OTHERWISE NOTED, ALL AMOUNTS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements
include the accounts and transactions of Cendant Corporation and its
subsidiaries (collectively, the "Company" or "Cendant").
In management's opinion, the Consolidated Condensed Financial Statements
contain all normal recurring adjustments necessary for a fair presentation
of interim results reported. The results of operations reported for
interim periods are not necessarily indicative of the results of
operations for the entire year or any subsequent interim period. In
addition, management is required to make estimates and assumptions that
affect the amounts reported and related disclosures. Estimates, by their
nature, are based on judgment and available information. Accordingly,
actual results could differ from those estimates. The Consolidated
Condensed Financial Statements should be read in conjunction with the
Company's Annual Report on Form 10-K/A dated July 2, 2001.
Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2001, the Company adopted the provisions of the Emerging
Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Interests in Securitized
Financial Assets." EITF Issue No. 99-20 modified the accounting for
interest income and impairment of beneficial interests in securitization
transactions, whereby beneficial interests determined to have an
other-than-temporary impairment are required to be written down to fair
value. The adoption of EITF Issue No. 99-20 resulted in the recognition of
a non-cash charge of $46 million ($27 million, after tax) during first
quarter 2001 to account for the cumulative effect of the accounting
change.
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133, as amended and interpreted, established
accounting and reporting standards for derivative instruments and hedging
activities. As required by SFAS No. 133, the Company has recorded all such
derivatives at fair value in the Consolidated Condensed Balance Sheet at
January 1, 2001. The adoption of SFAS No. 133 resulted in the recognition
of a non-cash charge of $16 million ($11 million, after tax) in the
Consolidated Condensed Statement of Income on January 1, 2001 to account
for the cumulative effect of the accounting change relating to derivatives
designated in fair value type hedges prior to adopting SFAS No. 133, to
derivatives not designated as hedges and to certain embedded derivatives.
As provided for in SFAS No. 133, the Company also reclassified certain
financial investments as trading securities at January 1, 2001, which
resulted in a pre-tax net benefit of $10 million recorded in other
revenues within the Consolidated Condensed Statement of Income.
On December 31, 2000, the Company adopted the disclosure requirements of
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities--a replacement of FASB Statement No.
125." During second quarter 2001, the Company adopted the remaining
provisions of this standard. SFAS No. 140 revised the criteria for
accounting for securitizations, other financial-asset transfers and
collateral and introduced new disclosures, but otherwise carried forward
most of the provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" without
amendment. The impact of adopting the remaining provisions of this
standard was not material to the Company's financial position or results
of operations.
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments as part of its overall strategy to
manage its exposure to market risks associated with fluctuations in
interest rates, foreign currency exchange rates, prices of mortgage loans
held for sale, anticipated mortgage loan closings arising from commitments
issued and changes in the fair value of its
4
mortgage servicing rights. As a matter of policy, the Company does not use
derivatives for trading or speculative purposes.
o All freestanding derivatives are recorded at fair value either
as assets or liabilities.
o Changes in fair value of derivatives not designated as hedging
instruments and of derivatives designated as fair value
hedging instruments are recognized currently in earnings and
included in net revenues in the Consolidated Condensed
Statement of Income.
o Changes in fair value of the hedged item in a fair value hedge
are recorded as an adjustment to the carrying amount of the
hedged item and recognized currently in earnings.
o The effective portion of changes in fair value of derivatives
designated as cash flow hedging instruments is recorded as a
component of other comprehensive income. The ineffective
portion is reported currently in earnings.
o Amounts included in other comprehensive income are
reclassified into earnings in the same period during which the
hedged item affects earnings.
The Company is also party to certain contracts containing embedded
derivatives. As required by SFAS No. 133, certain embedded derivatives
have been bifurcated from their host contracts and are recorded at fair
value in the Consolidated Condensed Balance Sheet. The total fair value of
the Company's embedded derivatives and changes in fair value were not
material to the Company's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and requires
additional disclosures for material business combinations completed after
such date. This standard also addresses financial accounting and reporting
for goodwill and other intangible assets acquired in a business
combination at acquisition. On July 1, 2001, the Company adopted the
provisions relating to acquisitions made subsequent to June 30, 2001, as
required. The provisions regarding the classification of previously
acquired intangible assets will be adopted simultaneously with the
provisions of SFAS No. 142 on January 1, 2002, as required.
SFAS No. 142 addresses financial accounting and reporting for intangible
assets acquired outside of a business combination. The standard also
addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. The Company will be
required to assess goodwill and other intangible assets for impairment
annually, or more frequently if circumstances indicate a potential
impairment. On July 1, 2001, the Company adopted the provisions requiring
that goodwill and certain other intangible assets acquired after June 30,
2001 not be amortized. The Company will adopt the remaining provisions of
this standard on January 1, 2002, as required. Transition-related
impairment losses, if any, resulting from the initial assessment of
goodwill and certain other intangible assets will be recognized by the
Company as a cumulative effect of accounting change as of January 1, 2002.
The Company is currently evaluating the impact of adopting the remaining
provisions on its financial position and results of operations. Based upon
a preliminary assessment of previously acquired goodwill and certain other
intangible assets that will no longer be amortized upon the adoption of
SFAS No. 142, the Company expects that the related reduction to
amortization expense during the nine months ended September 30, 2001 and
2000 would approximate $160 million and $80 million, respectively. Such
amortization expense for the nine months ended September 30, 2001 is net
of the amortization of the Company's deferred gain recorded on the sale of
move.com to Homestore.com, Inc., which would also no longer be accreted
through earnings.
During October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and replaces the accounting and
reporting provisions of APB Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," as it relates to the disposal of a segment of a business.
SFAS No. 144 requires the use of a single accounting model for long-lived
assets to be disposed of by sale, including discontinued operations, by
requiring those long-lived assets to be measured at the lower of carrying
amount or fair value less cost to sell. The impairment recognition and
measurement provisions of SFAS No. 121 were retained for all long-lived
assets to be held and used with the exception of goodwill. The Company
will adopt this standard on January 1, 2002.
5
2. EARNINGS PER SHARE
Earnings per share ("EPS") for periods after March 31, 2000 (the date of
the original issuance of Move.com common stock) and through June 30, 2001
(the last period during which shares of Move.com common stock were
outstanding) has been calculated using the two-class method. Income (loss)
per common share before extraordinary loss and cumulative effect of
accounting change for each class of common stock was computed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
2001 2000 2001 2000
------- ------- -------- -------
CD COMMON STOCK
Income before extraordinary loss and cumulative effect
of accounting change, including Cendant Group's
retained interest in Move.com Group $ 210 $ 216 $ 713 $ 519
Convertible debt interest, net of tax 3 3 8 9
Adjustment to Cendant Group's retained interest in -- -- (3) --
Move.com Group(a) ------- ------- -------- -------
Income before extraordinary loss and cumulative effect
of accounting change for diluted EPS $ 213 $ 219 $ 718 $ 528
======= ======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 857 725 832 722
Stock options, warrants and non-vested shares 37 16 33 23
Convertible debt 18 18 18 18
------- ------- -------- -------
Diluted 912 759 883 763
======= ======= ======== =======
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -----------------------
2000 2001 2000
------------- --------- ---------
MOVE.COM COMMON STOCK
Income (loss) before extraordinary loss and cumulative effect
of accounting change, excluding Cendant Group's
retained interest in Move.com Group $ (2) $ 17 $ (4)
Adjustment to Cendant Group's retained interest in
Move.com Group(a) -- 3 --
--------- --------- ---------
Income (loss) before extraordinary loss and cumulative effect
of accounting change for diluted EPS $ (2) $ 20 $ (4)
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted $ 4 2 4
========= ========= =========
----------
(a) Represents the change in Cendant Group's retained interest in
Move.com Group due to the dilutive impact of Move.com common stock
options.
Basic and diluted loss per share of CD common stock from the cumulative
effect of an accounting change was $0.04 each for the nine months ended
September 30, 2001, and $0.08 and $0.07, respectively, for the nine months
ended September 30, 2000.
6
The following table summarizes the Company's outstanding common stock
equivalents, which were antidilutive and therefore excluded from the
computation of diluted EPS:
SEPTEMBER 30,
---------------
2001 2000
---- ----
CD COMMON STOCK
Options(a) 71 109
Warrants(b) 2 31
Feline PRIDES -- 61
Upper DECS 35 --
MOVE.COM COMMON STOCK
Options(c) 6
Warrants(d) 2
----------
(a) The weighted average exercise prices for antidilutive options at
September 30, 2001 and 2000 were $24.37 and $22.41, respectively.
(b) The weighted average exercise prices for antidilutive warrants at
September 30, 2001 and 2000 were $21.31 and $22.91, respectively.
(c) The weighted average exercise price for antidilutive options at
September 30, 2000 was $18.48.
(d) The weighted average exercise price for antidilutive warrants at
September 30, 2000 was $96.12.
The Company's contingently convertible debt securities issued during 2001,
which provide for the potential issuance of approximately 88 million shares
of CD common stock, were not included in the computation of diluted EPS for
the three and nine months ended September 30, 2001 as the related
contingency provisions were not satisfied during such periods.
3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
ACQUISITIONS
AVIS GROUP HOLDINGS, INC. On March 1, 2001, the Company acquired all of
the outstanding shares of Avis Group Holdings, Inc. ("Avis"), one of the
world's leading service and information providers for comprehensive
automotive transportation and vehicle management solutions, for
approximately $994 million. The results of operations of Avis have been
included in the Consolidated Condensed Statement of Income since the date
of acquisition.
The preliminary allocation of the purchase price is summarized as follows:
AMOUNT
------
Cash consideration $ 937
Fair value of converted options 17
Transaction costs and expenses 40
------
Total purchase price 994
Book value of Cendant's existing net investment in Avis 409
------
Cendant's basis in Avis 1,403
Historical value of liabilities assumed in excess of assets acquired 207
Fair value adjustments 108
------
Excess purchase price over assets acquired and liabilities assumed $1,718
======
7
Pro forma net revenues, income before extraordinary loss and cumulative
effect of accounting change, net income and the related per share data
would have been as follows had the acquisition of Avis occurred on January
1st for each period presented:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
--------- ---------
Net revenues $ 6,977 $ 5,549
Income before extraordinary loss and cumulative effect of accounting change 706 594
Net income 661 536
CD common stock income per share:
BASIC
Income before extraordinary loss and cumulative effect of accounting change $ 0.83 $ 0.83
Net income 0.77 0.75
DILUTED
Income before extraordinary loss and cumulative effect of accounting change $ 0.78 $ 0.80
Net income 0.73 0.72
These pro forma results do not give effect to any synergies expected to
result from the acquisition of Avis and are not necessarily indicative of
what actually would have occurred if the acquisition had been consummated
on January 1st of each period, nor are they necessarily indicative of
future consolidated results.
FAIRFIELD RESORTS, INC. On April 2, 2001, the Company acquired all of the
outstanding shares of Fairfield Resorts, Inc., formerly Fairfield
Communities, Inc. ("Fairfield"), one of the largest vacation ownership
companies in the United States, for approximately $760 million, including
$20 million of transaction costs and expenses and $46 million related to
the conversion of Fairfield employee stock options into CD common stock
options. As part of the acquisition, the Company also assumed
approximately $379 million of Fairfield debt, $125 million of which has
been repaid. The results of operations of Fairfield have been included in
the Consolidated Condensed Statement of Income since the date of
acquisition. This acquisition was not significant on a pro forma basis.
GALILEO INTERNATIONAL, INC. On October 1, 2001, the Company acquired all
of the outstanding shares of Galileo International, Inc. ("Galileo"), a
leading provider of electronic global distribution services for the travel
industry, for approximately $1.9 billion, including approximately $36
million of estimated transaction costs and expenses and approximately $32
million related to the conversion of Galileo employee stock options into
CD common stock options. Approximately $1.5 billion of the merger
consideration was funded through the issuance of approximately 117 million
shares of CD common stock, with the remainder being financed from
available cash. As part of the acquisition, the Company also assumed
approximately $586 million of Galileo debt, $555 million of which has been
repaid.
CHEAP TICKETS, INC. On October 5, 2001, the Company acquired all of the
outstanding common stock of Cheap Tickets, Inc. ("Cheap Tickets"), a
leading provider of discount leisure travel products, for approximately
$313 million (approximately $286 million in cash, net of cash acquired),
including $18 million of estimated transaction costs and expenses and $27
million related to the conversion of Cheap Tickets employee stock options
into CD common stock options.
These acquisitions were accounted for using the purchase method of
accounting; accordingly, assets acquired and liabilities assumed were
recorded in the Company's Consolidated Condensed Balance Sheet as of the
respective acquisition dates based upon their estimated fair values at
such date. The excess of the purchase price over the estimated fair value
of the underlying assets acquired and liabilities assumed was allocated to
goodwill. Goodwill resulting from the acquisitions of Avis and Fairfield
is being amortized over 40 years on a straight-line basis until the
adoption of SFAS No. 142. In accordance with SFAS No. 142, goodwill
resulting from the acquisitions of Galileo and Cheap Tickets will be
tested for impairment rather than amortized each year. The allocations of
the excess purchase price are based upon preliminary estimates and
assumptions and are subject to revision when appraisals have been
finalized. Accordingly, revisions to the allocations, which may be
significant, will be recorded by the Company as further adjustments to the
purchase price allocations.
The Company is in the process of integrating the operations of its
acquired businesses and expects to incur transition costs relating to such
integrations. Transition costs may result from integrating operating
systems, relocating employees, closing facilities, reducing duplicative
efforts and exiting and consolidating certain other
8
activities. These costs will be recorded on the Company's Consolidated
Condensed Balance Sheet as adjustments to the purchase price or on the
Company's Consolidated Condensed Statement of Income as expenses, as
appropriate.
DISPOSITIONS
On February 16, 2001, the Company completed the sale of its real estate
Internet portal, move.com, along with certain ancillary businesses to
Homestore.com, Inc. ("Homestore") in exchange for approximately 21 million
shares of Homestore common stock then valued at $718 million. The
operations of these businesses were not material to the Company's
financial position, results of operations or cash flows. The Company
recorded a gain of $548 million on the sale of these businesses, of which
$436 million ($262 million, after tax) was recognized at the time of
closing. The Company deferred $112 million of the gain, which represents
the portion that was equivalent to its common equity ownership percentage
in Homestore at the time of closing. The deferred gain is being recognized
into income over five years as a component of equity in Homestore.com
within the Consolidated Condensed Statement of Income until the adoption
of SFAS No. 142. During the nine months ended September 30, 2001, the
Company recognized $29 million of this deferred gain. The difference
between the value of the Company's investment in Homestore and the
underlying equity in the net assets of Homestore was $431 million, which
is also being amortized over five years as a component of equity in
Homestore.com within the Consolidated Condensed Statement of Income until
the adoption of SFAS No. 142. Such difference was reduced by $112 million
during the nine months ended September 30, 2001, $48 million of which
represented amortization. The remaining $64 million related to the
contribution of approximately 2 million shares of Homestore to Trip
Network, Inc., formerly Travel Portal, Inc. ("Trip Network"), an
independent company that was created to pursue the development of an
online travel business for the benefit of certain current and future
franchisees, and the distribution of approximately 2 million shares of
Homestore to former Move.com common stockholders in exchange for formerly
held shares of Move.com common stock.
In July 2001, the Company entered into a number of agreements with
Trilegiant Corporation ("Trilegiant"), a newly formed company owned by the
former management of the Company's Cendant Membership Services and Cendant
Incentives subsidiaries. Under these agreements, the Company will continue
to collect membership fees from, and is obligated to provide membership
benefits to, members of its individual membership business that existed as
of the transaction date, including their renewals. Trilegiant will provide
fulfillment services to these members in exchange for a servicing fee and
will license and/or lease from the Company the assets of its individual
membership business to service these members and also to obtain new
members. Trilegiant will retain the economic benefits and service
obligations for those new members who join subsequent to the transaction
date. Beginning in third quarter 2002, the Company will receive a royalty
(initially 5%) from Trilegiant for membership fees generated by their new
members. In connection with the foregoing arrangements, the Company
advanced approximately $130 million to support Trilegiant's marketing
activities and made a $20 million convertible preferred stock investment
in Trilegiant.
4. OTHER CHARGES (CREDITS)
RESTRUCTURING AND OTHER UNUSUAL CHARGES
During the nine months ended September 30, 2001, the Company incurred
unusual charges totaling $263 million. Such charges primarily consisted of
(i) $95 million related to the funding of an irrevocable contribution to
an independent technology trust responsible for providing technology
initiatives for the benefit of certain current and future franchisees,
(ii) $85 million related to the creation of Trip Network and (iii) $77
million related to the September 11th terrorist attacks. The charges
incurred in connection with the September 11th terrorist attacks primarily
resulted from the rationalization of the Avis fleet and related car rental
operations.
As a result of changes in business and in consumer behavior following the
September 11th terrorist attacks, the Company is reviewing its
organizational alignment and its work force at a number of business
locations. The Company will record charges during fourth quarter 2001 in
connection with this initiative. Such charges could total as much as $125
million after tax, of which approximately $35 million could be non-cash.
The Company is also monitoring the valuation of certain assets primarily
relating to its investments in mortgage servicing rights and Homestore.
The value of mortgage servicing rights is subject to early prepayment risk
due to a decrease in interest rates. A general slowdown of the economy
and, more significantly, the impact of the September 11th terrorist
attacks have resulted in continued interest rate cuts. Accordingly, the
Company is reviewing the valuation of its current portfolio of mortgage
servicing rights for possible impairment. Any adjustment to the carrying
value of the portfolio would result in a non-cash charge, which, based
upon the current environment, is not expected to exceed $60 million
after-tax and would not be material relative to the size of the portfolio.
Additionally, the Company is evaluating its investment in Homestore to
determine whether the change in business climate and the subsequent
decrease in Homestore's trading value is other than temporary. Should a
non-cash reduction in the carrying value be required, the result could be
a reduction of up to $260 million after tax. The Company expects to reach
a determination on these issues during fourth quarter 2001.
LITIGATION SETTLEMENT AND RELATED COSTS
During the nine months ended September 30, 2001, the Company recorded
charges of $42 million for litigation settlement and related costs in
connection with previously discovered accounting irregularities in the
former business units of CUC International, Inc. ("CUC") and resulting
investigations into such matters. Such charges were partially offset by a
non-cash credit of $14 million during the first quarter of 2001 to reflect
an adjustment to the PRIDES class action litigation settlement charge
recorded by the Company in 1998.
9
MERGER-RELATED COSTS
During first quarter 2001, the Company incurred charges of $8 million
related to the acquisition and integration of Avis.
5. STOCKHOLDER LITIGATION SETTLEMENT
On August 28, 2001, the United States Court of Appeals for the Third
Circuit approved the Company's proposed $2.85 billion settlement of the
principal common stockholder class action lawsuit, overruled all
objections to the settlement, approved a plan of allocation for the
settlement proceeds and awarded attorneys' fees and expenses to the
plaintiffs. As of September 30, 2001, the Company had previously made
payments totaling $1.1 billion to a fund established for the benefit of
the plaintiffs in this lawsuit. The Company intends to continue making
quarterly payments of $250 million to such fund. The Company expects that
it will be required to fund the remaining balance no earlier than the end
of March 2002, although the precise timing of this obligation depends upon
whether any party seeks review of the Third Circuit's decision in the
United States Supreme Court and the timing of the disposition of any such
proceedings in the Supreme Court. In March 2002, the unfunded portion of
the settlement liability is expected to approximate $1.3 billion. The
Company anticipates funding such amount from a combination of available
cash, operating cash flow and revolving credit facility borrowings.
6. DEBT
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS
Based upon the Company's intent and ability to refinance certain
short-term borrowings on a long-term basis, short-term debt aggregating
$1.6 billion has been reclassified to long-term debt on the Company's
Consolidated Condensed Balance Sheet as of September 30, 2001.
SENIOR CONVERTIBLE NOTES. During first quarter 2001, the Company issued
approximately $1.5 billion aggregate principal amount at maturity of
zero-coupon senior convertible notes for aggregate gross proceeds of
approximately $900 million. The notes mature in 2021 and were issued at a
price representing a yield-to-maturity of 2.5%. The Company will not make
periodic payments of interest on the notes, but may be required to make
nominal cash payments in specified circumstances. Each $1,000 principal
amount at maturity may be convertible, subject to satisfaction of specific
contingencies, into 33.4 shares of CD common stock. The notes will not be
redeemable by the Company prior to February 13, 2004, but will be
redeemable thereafter at the issue price of $608.41 per note plus accrued
discount through the redemption date. In addition, holders of the notes
may require the Company to repurchase the notes on February 13, 2004, 2009
or 2014. In such circumstance, the Company may pay the repurchase price in
cash, shares of our CD common stock, or any combination thereof.
During second quarter 2001, the Company issued zero-coupon zero-yield
senior convertible notes for gross proceeds of $1.0 billion. The notes
mature in 2021. The Company is not required to pay interest on these notes
unless an interest adjustment becomes payable, which may occur in
specified circumstances commencing in 2004. Each $1,000 principal amount
at maturity may be convertible, subject to satisfaction of specific
contingencies, into approximately 39 shares of CD common stock. The notes
will not be redeemable by the Company prior to May 4, 2004, but will be
redeemable thereafter. In addition, holders of the notes may require the
Company to repurchase the notes on May 4, 2002, 2004, 2006, 2008, 2011 and
2016. In such circumstance, the Company may pay the repurchase price in
cash, shares of our CD common stock, or any combination thereof.
TERM LOAN. During first quarter 2001, the Company made a principal payment
of $250 million to extinguish outstanding borrowings under its
then-existing term loan facility and entered into a new $650 million
agreement with terms similar to its other revolving credit facilities. The
new term loan amortizes in three equal installments on August 22, 2002,
May 22, 2003 and February 22, 2004. Borrowings under this facility bear
interest at LIBOR plus a margin of 125 basis points.
UPPER DECS. During third quarter 2001, the Company issued approximately 17
million Upper DECS, each consisting of both a senior note and a forward
purchase contract, aggregating $863 million principal amount. The senior
notes have a term of five years and initially bear interest at an annual
rate of 6.75%. The forward purchase contracts require the holder to
purchase a minimum of 1.7593 shares and a maximum of 2.3223 shares
10
of CD common stock, based upon the average closing price of CD common
stock during a stipulated period, in August 2004. The forward purchase
contracts also require cash distributions from Cendant to each holder at
an annual rate of 1.00% through August 2004 (the date the forward purchase
contracts are required to be settled). The interest rate on the senior
notes will be reset based upon a remarketing in either May or August 2004.
6.875% NOTES. During third quarter 2001, the Company issued $850 million
aggregate principal amount of 6.875% notes to qualified institutional
buyers for net proceeds of $843 million. The notes mature in August 2006.
CREDIT FACILITIES. As of September 30, 2001, the Company had approximately
$1.0 billion available under its existing credit facilities.
RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
MEDIUM-TERM NOTES. During first quarter 2001, PHH Corporation ("PHH"), a
wholly-owned subsidiary of the Company, issued $650 million of unsecured
medium-term notes under an existing shelf registration statement. These
notes bear interest at a rate of 8 1/8% per annum and mature in February
2003.
ASSET-BACKED NOTES. During first quarter 2001, the Company's Avis car
rental subsidiary issued $750 million of floating rate asset-backed notes
secured by rental vehicles owned by such subsidiary. The notes bear
interest at a rate of LIBOR plus 20 basis points per annum and mature in
April 2004.
During second quarter 2001, the Company's Avis car rental subsidiary also
registered $500 million of auction rate asset-backed notes secured by
rental vehicles owned by such subsidiary. These notes bear interest at a
rate of LIBOR plus or minus an applicable margin determined from time to
time through an auction. As of September 30, 2001, approximately $155
million was issued under this registration statement.
SECURITIZATION AGREEMENT. Coincident with the acquisition of Fairfield, an
unaffiliated bankruptcy remote special purpose entity, Fairfield
Receivables Corporation, committed to purchase on a revolving basis for
cash, at the Company's option, up to $500 million of the Company's
timeshare receivables. The Company also maintains non-revolving sales
agreements with various other unaffiliated bankruptcy remote special
purpose entities that allow for the transfer of timeshare receivables. The
Company retains a subordinated residual interest and the related servicing
rights and obligations in all of the transferred timeshare receivables. At
September 30, 2001, the Company was servicing approximately $446 million
of timeshare receivables transferred under all agreements.
CREDIT FACILITIES. During first quarter 2001, PHH renewed its $750 million
syndicated revolving credit facility that was due in 2001. The new
facility bears interest at LIBOR plus an applicable margin, as defined in
the agreement, and terminates on February 21, 2002. PHH is required to pay
a per annum utilization fee of .25% if usage under the facility exceeds
25% of aggregate commitments. Under the new facility, any loans
outstanding as of February 21, 2002 may be converted into a term loan with
a final maturity of February 21, 2003. In addition to this new facility,
PHH maintains a $750 million five-year syndicated committed revolving
credit facility, which matures in February 2005, and two other committed
facilities totaling $275 million with maturity dates in November 2002.
During third quarter 2001, the Company's Avis car rental subsidiary
terminated its $450 million revolving credit facility.
7. COMMITMENTS AND CONTINGENCIES
In June 1999, the Company disposed of certain businesses. The dispositions
were structured as a tax-free reorganization and, accordingly, no tax
provision was recorded on a majority of the gain. However, pursuant to an
interpretive ruling, the Internal Revenue Service ("IRS") has taken the
position that similarly structured transactions do not qualify as tax-free
reorganizations under the Internal Revenue Code Section 368(a)(1)(A). If
the transaction is not considered a tax-free reorganization, the resultant
incremental liability could range between $10 million and $170 million
depending upon certain factors, including utilization of tax attributes.
Notwithstanding the IRS interpretive ruling, the Company believes that,
based upon analysis of current tax law, its position would prevail, if
challenged.
The Company is involved in litigation asserting claims associated with the
accounting irregularities discovered in former CUC business units outside
of the principal common stockholder class action litigation. The Company
does not believe that it is feasible to predict or determine the final
outcome or resolution of these unresolved proceedings. An adverse outcome
from such unresolved proceedings could be material with respect to
earnings in any given period. However, the Company does not believe that
the impact of such unresolved
11
proceedings should result in a material liability to the Company in
relation to its consolidated financial position or liquidity.
The Company is involved in pending litigation in the usual course of
business. In the opinion of management, such other litigation will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
8. STOCKHOLDERS' EQUITY
ISSUANCES OF CD COMMON STOCK
During first quarter 2001, the Company settled the purchase contracts
underlying its Feline PRIDES. Accordingly, the Company issued
approximately 61 million shares of its CD common stock in satisfaction of
its obligation to deliver common stock to beneficial owners of the PRIDES
and received, in exchange, the trust preferred securities forming a part
of the PRIDES.
During first quarter 2001, the Company also issued 46 million shares of
its CD common stock at $13.20 per share for aggregate proceeds of
approximately $607 million.
REPURCHASES OF CD COMMON STOCK
During third quarter 2001, the Company repurchased 2.4 million shares of
CD common stock in exchange for $46 million in cash.
REPURCHASES OF MOVE.COM COMMON STOCK
During first quarter 2001, the Company repurchased 319,591 shares of
Move.com common stock held by NRT Incorporated in exchange for $10 million
in cash.
During second quarter 2001, the Company repurchased 1,598,030 shares of
Move.com common stock held by Liberty Digital, Inc. in exchange for
1,164,048 shares of Homestore common stock (valued at approximately $31
million) and approximately $19 million in cash. In addition, the Company
also repurchased all the remaining outstanding shares of Move.com common
stock in exchange for 566,054 shares of Homestore common stock (valued at
approximately $15 million) during second quarter 2001.
COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income $ 210 $ 214 $ 692 $ 457
Other comprehensive income (loss):
Currency translation adjustments 48 (31) (25) (119)
Unrealized gains (losses) on marketable securities,
net of tax:
Unrealized gains (losses) arising during period (4) -- 32 (43)
Reclassification adjustment for losses realized
in net income -- -- 45 --
Unrealized losses on cash flow hedges, net of tax (41) -- (48) --
------- ------- ------- -------
Total comprehensive income $ 213 $ 183 $ 696 $ 295
======= ======= ======= =======
12
The after-tax components of accumulated other comprehensive loss for the
nine months ended September 30, 2001 are as follows:
UNREALIZED UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) LOSSES ON OTHER
TRANSLATION ON MARKETABLE CASH FLOW COMPREHENSIVE
ADJUSTMENTS SECURITIES HEDGES INCOME/(LOSS)
----------- -------------- ---------- -------------
Balance, January 1, 2001 $ (165) $ (69) $ -- $ (234)
Current period change (25) 77 (48) 4
--------- -------- -------- ---------
Balance, September 30, 2001 $ (190) $ 8 $ (48) $ (230)
========= ======== ======== =========
9. DERIVATIVES
Consistent with its risk management policies, the Company manages foreign
currency and interest rate risks using derivative instruments.
FOREIGN CURRENCY RISK
The Company uses foreign currency forward contracts to manage its exposure
to changes in foreign currency exchange rates associated with its foreign
currency denominated receivables and forecasted royalties, forecasted
earnings of foreign subsidiaries and forecasted foreign currency
denominated acquisitions. The Company primarily hedges its foreign
currency exposure to the British pound, Canadian dollar and Euro. The
majority of forward contracts utilized by the Company do not qualify for
hedge accounting treatment under SFAS No. 133. The fluctuations in the
value of these forward contracts do, however, effectively offset the
impact of changes in the value of the underlying risk that they are
intended to economically hedge. Forward contracts that are used to hedge
certain forecasted royalty receipts up to 12 months are designated and do
qualify as cash flow hedges. The impact of these forward contracts was not
material to the Company's results of operations or financial position at
September 30, 2001.
INTEREST RATE RISK
The Company's mortgage-related assets, its retained interests in certain
qualifying special purpose entities and the debt used to finance much of
the Company's operations are exposed to interest rate fluctuations. The
Company uses various hedging strategies and derivative financial
instruments to create a desired mix of fixed and floating rate assets and
liabilities. Derivative instruments currently used in managing the
Company's interest rate risks include swaps, forward delivery commitments
and instruments with option features. A combination of fair value hedges,
cash flow hedges and financial instruments that do not qualify for hedge
accounting treatment under SFAS No. 133 are used to manage the Company's
portfolio of interest rate sensitive assets and liabilities.
The Company uses fair value hedges to manage its mortgage servicing
rights, mortgage loans held for sale and certain fixed rate debt. During
the three and nine months ended September 30, 2001, the net impact of
these fair value hedges was a loss of $8 million and $11 million,
respectively. These losses are included in net revenues within the
Consolidated Condensed Statements of Income and consist of losses of $24
million and $47 million, respectively, to reflect the ineffective portion
of these fair value hedges, which were partially offset by gains of $16
million and $36 million, respectively, to reflect the amount that was
excluded from the Company's assessment of hedge effectiveness.
The Company uses cash flow hedges to manage the interest expense incurred
on its floating rate debt and on a portion of its principal common
stockholder litigation settlement liability. Ineffectiveness resulting
from these cash flow hedging relationships during the three and nine
months ended September 30, 2001 was not material to the Company's results
of operations. Derivative gains and losses included in other comprehensive
income are reclassified into earnings when interest payments or other
liability-related accruals impact earnings. During the three and nine
months ended September 30, 2001, the amount of gains or losses
reclassified from other comprehensive income to earnings was not material
to the Company's results of operations. Over the next 12 months,
derivative losses of approximately $34 million, after tax are expected to
be reclassified into earnings. These expected future losses are based on
estimated future interest rates and the terms of the Company's cash flow
hedges. Actual results, which could result in a gain or loss, may differ
significantly from the estimated results. The impact of these losses will
effectively fix the interest rate on certain debt instruments as was
intended when the hedging strategies were developed. Certain of the
Company's forecasted cash flows are hedged up to three years into the
future.
13
10. SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation and amortization and
minority interest calculation. For this purpose, Adjusted EBITDA is
defined as earnings before non-vehicle interest, income taxes, non-vehicle
depreciation and amortization, minority interest and equity in
Homestore.com, adjusted to exclude certain items which are of a
non-recurring or unusual nature and are not measured in assessing segment
performance or are not segment specific.
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
2001 2000
----------------------------- ----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
----------- --------------- ------------ --------------
Real Estate Services $ 514 $ 287 $ 419 $ 242
Hospitality 488 152 278 115
Vehicle Services 1,119 127 146 81
Financial Services 338 58 333 86
----------- --------------- ------------ --------------
Total Reportable Segments 2,459 624 1,176 524
Corporate and Other(a) 22 (21) 49 (34)
----------- --------------- ------------ --------------
Total Company $ 2,481 $ 603 $ 1,225 $ 490
=========== =============== ============ ==============
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
2001 2000
----------------------------- ----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
----------- --------------- ------------ --------------
Real Estate Services $ 1,328 $ 650 $ 1,085 $ 550
Hospitality 1,225 416 777 309
Vehicle Services 2,685 361 418 221
Financial Services 1,060 259 1,035 302
----------- --------------- ------------ --------------
Total Reportable Segments 6,298 1,686 3,315 1,382
Corporate and Other(a) 72 (53) 175 (76)
----------- --------------- ------------ --------------
Total Company $ 6,370 $ 1,633 $ 3,490 $ 1,306
=========== =============== ============ ==============
----------
(a) Included in Corporate and Other are the results of operations of the
Company's non-strategic businesses, unallocated corporate overhead
and the elimination of transactions between segments.
Total assets for the Company's Vehicle Services segment were $13.6 billion
and $2.7 billion as of September 30, 2001 and December 31, 2000,
respectively.
Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes, minority interest and equity in Homestore.com.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
Adjusted EBITDA $ 603 $ 490 $ 1,633 $ 1,306
Non-vehicle depreciation and amortization (125) (87) (347) (258)
Other (charges) credits:
Restructuring and other unusual (77) (3) (263) (109)
Litigation settlement and related (9) (27) (28) 6
Merger-related -- -- (8) --
Non-vehicle interest, net (57) (38) (176) (86)
Net gain (loss) on dispositions of businesses -- 3 435 (7)
--------- --------- ---------- ----------
Income before income taxes, minority interest and
equity in Homestore.com $ 335 $ 338 $ 1,246 $ 852
========= ========= ========== ==========
14
11. SUBSEQUENT EVENTS
ACQUISITIONS. As previously discussed in Note 3 herein, on October 1, 2001
and October 5, 2001, the Company consummated the acquisitions of Galileo
and Cheap Tickets, respectively.
CREDIT FACILITY. On October 1, 2001, the Company's $750 million five-year
revolving credit facility matured.
TERM LOAN. On October 5, 2001, the Company converted its then-existing
$650 million term loan into a revolving credit facility and increased such
facility by $500 million to establish a $1.15 billion committed revolving
credit facility. The converted facility matures in February 2004 and now
contains the committed capacity to issue up to $300 million in letters of
credit. Borrowings under this facility bear interest at LIBOR plus a
margin of 82.5 basis points. The Company is required to pay a per annum
facility fee of 17.5 basis points under this facility and a per annum
utilization fee of 25 basis points if usage under this facility exceeds
33% of aggregate commitments. Subsequent to the conversion, on October 9,
2001, the Company repaid the original $650 million term loan from
available cash. The total $1.15 billion commitment under this facility is
presently undrawn and available.
ISSUANCE OF ASSET-BACKED NOTES. On October 23, 2001, a subsidiary of the
Company's fleet management business issued $750 million of floating rate
callable asset backed notes for net proceeds of approximately $747
million. The notes bear interest at one-month LIBOR plus an applicable
spread and were issued in two tranches: $425 million maturing in
September 2006 and $325 million maturing in September 2013. The Company
has the option to prepay these notes in whole on certain dates after March
2003.
----------------
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES THERETO INCLUDED ELSEWHERE
HEREIN. UNLESS OTHERWISE NOTED, ALL DOLLAR AMOUNTS ARE IN MILLIONS.
On March 1, 2001, we acquired all of the outstanding shares of Avis Group
Holdings, Inc., one of the world's leading service and information providers for
comprehensive automotive transportation and vehicle management solutions, for
approximately $994 million, including $40 million of transaction costs and
expenses and $17 million related to the conversion of Avis employee stock
options into CD common stock options.
On April 2, 2001, we acquired all of the outstanding shares of Fairfield
Resorts, Inc., (formerly, Fairfield Communities, Inc.), one of the largest
vacation ownership companies in the United States, for approximately $760
million, including $20 million of transaction costs and expenses and $46 million
related to the conversion of Fairfield employee stock options into CD common
stock options. As part of the acquisition, we also assumed approximately $379
million of Fairfield debt, $125 million of which has been repaid.
We continue to assess the impact of the September 11th terrorist attacks on our
businesses and are currently expecting that our operating cash flows and results
of operations will be negatively impacted by a considerable decline in travel
for the near term (which will primarily affect our Hospitality and Vehicle
Services segments and our newly-created Travel Distribution segment, which was
created through the acquisitions of Galileo International, Inc. on October 1,
2001 and Cheap Tickets, Inc. on October 5, 2001). We also expect the events of
September 11th will contribute to a modest decline in residential real estate
transactions and relocations (which will primarily affect our Real Estate
Services segment). Notwithstanding the effects of the September 11th terrorist
attacks on our operating cash flows, we have sufficient liquidity to fund our
current business plans and obligations through various other sources, including
public debt and equity markets and financial institutions. In addition, we are
reviewing our organizational alignment and our work force at a number of
business locations to increase efficiencies and productivity and to reduce the
cost structures of our businesses. Such review will result in rightsizing,
consolidation, restructuring or other related efforts. We will record charges
during fourth quarter 2001 in connection with these initiatives. Such charges
could total as much as $125 million after tax, of which approximately $35
million could be non-cash, and would be funded through current operations.
We are also monitoring the valuation of certain assets primarily relating to our
investments in mortgage servicing rights and in Homestore.com, Inc. The value of
mortgage servicing rights is subject to early prepayment risk due to a decrease
in interest rates. Accordingly, we are reviewing the valuation of our current
portfolio of mortgage servicing rights for possible impairment. Any adjustment
to the carrying value of the portfolio would result in a non-cash charge, which,
based upon the current environment, is not expected to exceed $60 million
after-tax and would not be material relative to the size of the portfolio. A
general slowdown of the economy and, more significantly, the impact of the
September 11th terrorist attacks have resulted in continued interest rate cuts.
The decline in interest rates, although potentially impacting the value of our
mortgage servicing rights, has contributed to a strong increase in applications
for mortgage refinancings, which we expect will have a positive impact on the
operating results of our mortgage business in subsequent quarters. Additionally,
we are evaluating our investment in Homestore.com to determine whether the
change in business climate and the subsequent decrease in Homestore.com's
trading value is other than temporary. Should a non-cash reduction in the
carrying value be required, the result could be a reduction of up to $260
million after tax. We expect to reach a determination on these issues before
reporting fourth quarter 2001 financial results.
RESULTS OF CONSOLIDATED OPERATIONS -- 2001 VS. 2000
The consolidated results of operations of Avis and Fairfield have been included
in our consolidated results of operations since their respective dates of
acquisition.
Strong contributions from many of our businesses and the addition of the
operations of Avis and Fairfield produced revenue growth of $1.3 billion, or
103%, and $2.9 billion, or 83%, for the three and nine months ended September
30, 2001, respectively. Our expenses increased $1.3 billion, or 141%, and $2.9
billion, or 111%, for the three and nine months ended September 30, 2001,
respectively, primarily as a result of the acquisitions of Avis and Fairfield.
We also incurred unusual charges of $77 million during third quarter 2001 as a
result of the September 11th terrorist attacks, which primarily resulted from
the rationalization of the Avis fleet and related car rental operations.
Our non-vehicle interest expense increased primarily as a result of interest
expense accrued on our stockholder litigation settlement liability.
Also during first quarter 2001, we sold our real estate Internet portal,
move.com, along with certain ancillary businesses, to Homestore.com in exchange
for approximately 21 million shares of Homestore.com common stock then valued at
$718 million. We recorded a gain of $548 million on the sale of these
businesses, of which $436
16
million ($262 million, after tax) was recognized at the time of closing. We
deferred $112 million of the gain, which represents the portion that was
equivalent to our common equity ownership percentage in Homestore.com at the
time of closing. During the nine months ended September 30, 2001, we recognized
$29 million of this deferred gain.
Our overall effective tax rate was 30% for the three months ended September 30,
2001 and 2000 and 35% and 32% for the nine months ended September 30, 2001 and
2000, respectively. The higher tax rate for the nine months ended September 30,
2001 was primarily due to higher state income taxes provided on the gain on
disposition of businesses discussed above.
As a result of the above-mentioned items, income before extraordinary loss and
cumulative effect of accounting change decreased $4 million, or 1.9%, in the
three months ended September 30, 2001 and increased $215 million, or 42%, in the
nine months ended September 30, 2001.
RESULTS OF REPORTABLE SEGMENTS
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-vehicle interest,
income taxes, non-vehicle depreciation and amortization, minority interest and
equity in Homestore.com, adjusted to exclude certain items which are of a
non-recurring or unusual nature and are not measured in assessing segment
performance or are not segment specific. Our management believes such
discussions are the most informative representation of how management evaluates
performance. However, our presentation of Adjusted EBITDA may not be comparable
with similar measures used by other companies.
THREE MONTHS ENDED SEPTEMBER 30, 2001 VS. THREE MONTHS ENDED SEPTEMBER 30, 2000
REVENUES ADJUSTED EBITDA
----------------------------------------- ---------------------------------------
% %
2001 2000 CHANGE 2001(b) 2000 CHANGE
----------- ----------- ----------- ---------- ---------- ----------
Real Estate Services $ 514 $ 419 23% $ 287 $ 242 19%
Hospitality 488 278 76 152 115(d) 32
Vehicle Services 1,119 146 * 127 81 57
Financial Services 338 333 2 58 86 (33)
----------- ----------- ---------- ----------
Total Reportable Segments 2,459 1,176 624 524
Corporate and Other(a) 22 49 * (21)(c) (34)(e) *
----------- ---------- ---------- ----------
Total Company $ 2,481 $ 1,225 $ 603 $ 490
=========== =========== ========== ==========
- ----------
* Not meaningful.
(a) Included in Corporate and Other are the results of operations of our
non-strategic businesses, unallocated corporate overhead and the
elimination of transactions between segments.
(b) Excludes charges of $77 million related to the September 11th terrorist
attacks, which primarily resulted from the rationalization of the Avis
fleet and related car rental operations ($6 million, $60 million and $11
million within Hospitality, Vehicle Services and Corporate and Other,
respectively).
(c) Excludes $9 million of litigation settlement and related costs.
(d) Excludes $8 million of losses related to the dispositions of businesses.
(e) Excludes (i) $27 million for litigation settlement and related costs, (ii)
$24 million of losses related to the dispositions of businesses and (iii)
charges of $3 million incurred in connection with the postponement of the
initial public offering of Move.com common stock. Such charges were
partially offset by a gain of $35 million, which represents the
recognition of a portion of the Company's previously recorded deferred
gain from the sale of its fleet businesses due to the disposition of VMS
Europe by Avis Group Holdings, Inc. in August 2000.
REAL ESTATE SERVICES
Revenues and EBITDA increased $95 million (23%) and $45 million (19%),
respectively. The increase in operating results was primarily driven by
increased franchise fees from our Century 21, Coldwell Banker and ERA real
estate franchise brands and substantial growth in mortgage loan production due
to increased refinancing activity and purchase volume.
Franchise royalties increased $16 million (12%) due to a 7% increase in the
average price of homes sold. In addition, franchise fees increased $15 million
from the conversion of certain Century 21 real estate brokerage offices into
Coldwell Banker offices.
17
Revenues generated from the sale of mortgage loans increased $77 million (72%)
as actual mortgage loans sold increased $3.3 billion (49%) to $10.1 billion.
Closed mortgage loans increased $4.7 billion (72%) to $11.2 billion consisting
of a $3.3 billion increase (approximately nine fold) in refinancings and a $1.4
billion increase (23%) in purchase mortgage closings. Beginning in January 2001,
Merrill Lynch outsourced its mortgage originations and servicing operations to
us, and new Merrill Lynch business accounted for 16% of our mortgage closings in
third quarter 2001. A significant portion of mortgages closed in any quarter
will generate revenues in future periods as such loans are packaged and sold
(revenues are recognized upon the sale of the loan, typically 45-60 days after
closing). Partially offsetting record production revenues was an $18 million
decline in net loan servicing revenue. The average servicing portfolio grew $27
billion (42%) as a result of the high volume of mortgage loan originations and
Merrill Lynch's outsourcing of its mortgage origination operations to us.
However, increased servicing amortization expenses during third quarter 2001,
reflecting higher refinancing activity, more than offset the increase in
recurring servicing fees from the portfolio growth. Additionally, operating
expenses within this segment increased to support the higher volume of mortgage
originations and related servicing activities.
HOSPITALITY
Revenues and Adjusted EBITDA increased $210 million (76%) and $37 million (32%),
respectively. The acquisition of Fairfield in April 2001 contributed revenues
and Adjusted EBITDA of $205 million and $51 million, respectively, which is
substantially greater than Fairfield's operating results in third quarter 2000
as an independent company. Additionally, in January 2001, we acquired Holiday
Cottages Group Limited, the leading UK brand in the holiday cottages rental
sector, which contributed revenues and Adjusted EBITDA of $6 million and $2
million, respectively. The terrorist attacks of September 11th negatively
impacted our lodging, timeshare and travel agency businesses. Accordingly,
timeshare subscription and transaction revenues increased only $7 million (8%)
primarily due to increases in members and exchange transactions, while timeshare
staffing costs increased $11 million to support actual and anticipated volume
growth. In addition, lodging royalties and marketing fund revenues declined $5
million (4%) as room occupancy levels declined. We also experienced lower sales
volumes in our travel agency business, which reported a $3 million revenue
decline. While we expect the events of September 11th to reduce the growth in
our Hospitality segment for the foreseeable future, we expect that the
percentage impact will decline over time, absent any further shocks to the
travel industry.
VEHICLE SERVICES
Revenues and Adjusted EBITDA increased $973 million and $46 million,
respectively, substantially due to our acquisition of Avis in February 2001. The
operations of Avis are comprised of the Avis car rental business and fleet
management programs including integrated vehicle leasing, advisory services,
fuel and maintenance cards and other fleet management services to corporate
customers. Prior to the acquisition, revenues and Adjusted EBITDA consisted
principally of earnings from our equity investment in Avis, royalties received
from Avis and the operations of our National Car Parks subsidiary. The
acquisition contributed incremental revenues and Adjusted EBITDA of
approximately $960 million and $42 million, respectively. However, Avis results
were negatively impacted by reduced demand at airport locations as a result of
the September 11th terrorist attacks, as well as a general decline in commercial
travel throughout third quarter 2001. Our National Car Parks subsidiary
contributed incremental revenue of $11 million. While we expect the events of
September 11th to reduce the growth of our car rental operations for the
foreseeable future, we expect that the percentage impact will decline over time,
absent any further shocks to the travel industry.
FINANCIAL SERVICES
Revenues increased $5 million (2%), while EBITDA decreased $28 million (33%).
Excluding $41 million of transaction-related expenses recorded during third
quarter 2001 in connection with the outsourcing of our individual membership
business to Trilegiant Corporation, EBITDA increased $13 million (15%).
The re-acquisition and integration of Netmarket Group, the online membership
business, during fourth quarter 2000 contributed $16 million to revenues.
Netmarket Group typically generates low margins compared to traditional
membership operations. Contributing to the EBITDA increase was a $22 million
reduction in marketing expenses within our individual membership business
largely due to the outsourcing of marketing activities to Trilegiant. Revenues
and EBITDA were unfavorably impacted by a decrease in membership expirations
(revenue is generally recognized upon expiration of the membership); however, a
favorable mix of products and programs with marketing partners partially
mitigated the impact.
In July 2001, we entered into a number of agreements with Trilegiant, a newly
formed company owned by the former management of our Cendant Membership Services
and Cendant Incentives subsidiaries. Under these agreements, we will continue to
collect membership fees from, and are obligated to provide membership benefits
to, members of our individual membership business that existed as of the
transaction date, including their renewals.
18
Trilegiant will provide fulfillment services to these members in exchange for a
servicing fee and will license and/or lease from us the assets of our individual
membership business to service these members and also to obtain new members.
Trilegiant will retain the economic benefits and service obligations for those
new members who join subsequent to the transaction date. Beginning in third
quarter 2002, we will receive a royalty (initially 5%) from Trilegiant for
membership fees generated by their new members.
CORPORATE AND OTHER
Revenues decreased $27 million, while Adjusted EBITDA increased $13 million. In
February 2001, we sold Move.com Group, our real estate internet portal, and
Welcome Wagon International. Such businesses collectively accounted for a
decline in revenues of $25 million and an improvement to Adjusted EBITDA of $19
million, reflecting our investment in development and marketing of the portal
during third quarter 2000. Adjusted EBITDA also reflects increased unallocated
corporate overhead costs due to infrastructure expansion to support Company
growth.
NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
REVENUES ADJUSTED EBITDA
----------------------------------------- ----------------------------------------
% %
2001 2000 CHANGE 2001(b) 2000(f) CHANGE
----------- ----------- ----------- ---------- ---------- -----------
Real Estate Services $ 1,328 $ 1,085 22% $ 650(c) $ 550 18%
Hospitality 1,225 777 58 416 309(g) 35
Vehicle Services 2,685 418 * 361(d) 221 63
Financial Services 1,060 1,035 2 259 302 (14)
----------- ----------- ---------- ----------
Total Reportable Segments 6,298 3,315 1,686 1,382
Corporate and Other(a) 72 175 * (53)(e) (76)(h) *
----------- ---------- ----------- ----------
Total Company $ 6,370 $ 3,490 $ 1,633 $ 1,306
=========== =========== ========== ==========
- ----------
* Not meaningful.
(a) Included in Corporate and Other are the results of operations of our
non-strategic businesses, unallocated corporate overhead and the
elimination of transactions between segments.
(b) Excludes charges of $77 million related to the September 11th terrorist
attacks, which primarily resulted from the rationalization of the Avis
fleet and related car rental operations ($6 million, $60 million and $11
million within Hospitality, Vehicle Services and Corporate and Other,
respectively).
(c) Excludes a charge of $95 million to fund an irrevocable contribution to an
independent technology trust responsible for providing technology
initiatives for the benefit of certain current and future franchisees.
(d) Excludes charges of $4 million related to the acquisition and integration
of Avis.
(e) Excludes (i) a net gain of $435 million related to the dispositions of
businesses and (ii) a credit of $14 million to reflect an adjustment to
the PRIDES class action litigation settlement charge recorded by the
Company in 1998. Such amounts were partially offset by charges of (i) $85
million related to the creation of Trip Network, Inc., an independent
company that was created to pursue the development of an online travel
business for the benefit of certain current and future franchisees, (ii)
$42 million for litigation settlement and related costs, (iii) $7 million
related to a non-cash contribution to the Cendant Charitable Foundation
and (v) $4 million related to the acquisition and integration of Avis.
(f) Excludes a charge of $109 million in connection with restructuring and
other initiatives ($2 million, $63 million, $31 million and $13 million
within Real Estate Services, Hospitality, Financial Services and Corporate
and Other, respectively).
(g) Excludes $12 million of losses related to the dispositions of businesses.
(h) Excludes (i) a non-cash credit of $41 million in connection with a change
to the original estimate of the number of Rights to be issued in
connection with the PRIDES settlement resulting from unclaimed and
uncontested Rights and, (ii) a gain of $35 million, which represents the
recognition of a portion of the Company's previously recorded deferred
gain from the sale of its fleet businesses due to the disposition of VMS
Europe by Avis Group Holdings, Inc. in August 2000; partially offset by
(i) $30 million of losses related to the disposition of businesses and
(ii) $35 million of litigation settlement and related costs.
REAL ESTATE SERVICES
Revenues and Adjusted EBITDA increased $243 million (22%) and $100 million
(18%), respectively. The increase in operating results was primarily driven by
substantial growth in mortgage loan production due to increased refinancing
activity and purchase volume. Increases in relocation services and higher
franchise fees from our Century 21, Coldwell Banker, and ERA franchise brands
also contributed to the favorable operating results.
Collectively, mortgage loans sold increased $10.7 billion (70%) to $25.9
billion, generating incremental revenues of $214 million, a 91% year-over-year
increase. Closed mortgage loans increased $14.4 billion (88%) to $30.7 billion.
This growth consisted of a $10 billion increase (approximately ten fold) in
refinancings and a $4.3 billion increase (29%) in purchase mortgage closings.
Beginning in January 2001, Merrill Lynch outsourced its mortgage originations
and servicing operations to us. New Merrill Lynch business accounted for 14% of
our mortgage
19
closings in nine months 2001. Partially offsetting record production revenues
was a $32 million decline in loan net servicing revenue. The average servicing
portfolio grew $29 billion (50%) as a result of the high volume of mortgage loan
originations and Merrill Lynch's outsourcing of its mortgage origination
operations to us. However, accelerated servicing amortization expenses, due
primarily to refinancing activity, more than offset the increase in recurring
servicing fees from the portfolio growth. Additionally, operating expenses
within this segment increased to support the higher volume of mortgage
originations and related servicing activities.
Franchise fees from our real estate franchise brands also contributed to revenue
and Adjusted EBITDA growth. Franchise royalties increased $23 million (6%),
despite only modest industry-wide growth and a year-over-year industry decline
in California, principally due to a 5% increase in the average price of homes
sold. In addition, franchise fees increased $15 million in 2001 from the
conversion of certain Century 21 real estate brokerage offices into Coldwell
Banker offices.
Service based fees from relocation activities also contributed to the increase
in revenues and Adjusted EBITDA. Relocation referral fees increased $14 million
and net interest income from relocation operations was $9 million favorable
principally due to reduced debt levels.
Partially offsetting the year-over-year revenue and Adjusted EBITDA increases
was a $10 million gain recognized in second quarter 2000 on the sale of a
portion of our preferred stock investment in NRT.
HOSPITALITY
Revenues and Adjusted EBITDA increased $448 million (58%) and $107 million
(35%), respectively. While our April 2001 acquisition of Fairfield produced the
bulk of the increase in operating results, our pre-existing timeshare exchange
operations also contributed to this growth. Fairfield contributed revenues and
Adjusted EBITDA of $403 million and $101 million, respectively, for the period
subsequent to the acquisition through September 30, 2001. In addition, our
acquisition of Holiday Cottages contributed incremental revenues and Adjusted
EBITDA of $21 million and $7 million, respectively. The additional revenue
growth resulted primarily from an incremental $28 million of timeshare
subscription and transaction fees due to increases in members and exchange
transactions, although timeshare staffing costs also increased to support volume
growth and meet anticipated service levels. The terrorist attacks of September
11th caused a decline in occupancy levels of our franchised lodging properties;
however, marginal increases in available rooms and average room rates
principally offset the impact of lower occupancy. While we expect the events of
September 11th to reduce the growth of our Hospitality segment for the
foreseeable future, we expect that the percentage impact will decline over time,
absent any further shocks to the travel industry.
VEHICLE SERVICES
Revenues and Adjusted EBITDA increased $2.3 billion and $140 million,
respectively, substantially all due to the Avis acquisition. Avis' operating
results were included from the February 28, 2001 acquisition date through
September 30, 2001, whereas in 2000 we recorded earnings from our 18% equity
investment in Avis and received franchise royalties from Avis. While we expect
the events of September 11th to reduce the growth of our car rental operations
for the foreseeable future, we expect that the percentage impact will decline
over time, absent any further shocks to the travel industry.
FINANCIAL SERVICES
Revenues increased $25 million (2%), while EBITDA decreased $43 million (14%).
The decrease in EBITDA was largely due to $41 million of transaction-related
expenses incurred in connection with the outsourcing of our individual
membership business to Trilegiant. Excluding such expenses, EBITDA decreased $2
million (1%). Jackson Hewitt, our tax preparation franchise business,
contributed incremental revenues of $18 million, principally comprised of higher
royalties due to a 32% increase in tax return volume. Such revenues were
recognized with relatively no corresponding increases in expenses due to the
significant operating leverage within our franchise operations. Netmarket Group
contributed $47 million to revenues. Also contributing to increased EBITDA was a
$14 million decrease in marketing expenses due to the outsourcing of marketing
activities to Trilegiant. Conversely, revenues and EBITDA were negatively
impacted from a decrease in membership expirations (revenue is generally
recognized upon expiration of the membership), however, such impact was
partially mitigated by a favorable mix of products and programs with marketing
partners and a reduction in operating expenses, principally commissions, which
directly related to servicing fewer members. Revenues and EBITDA in 2000
included $8 million of fees recognized from the sale of certain referral
agreements with car dealers.
CORPORATE AND OTHER
Revenues decreased $103 million, while Adjusted EBITDA increased $23 million. In
February 2001, we sold Move.com Group and Welcome Wagon International. Such
businesses collectively accounted for a decline in revenues of $57 million and
an improvement to Adjusted EBITDA of $65 million because we had been investing
in
20
development and marketing of the portal during the nine months ended September
30, 2000. Revenues and Adjusted EBITDA were negatively impacted by $34 million
less income from financial investments. In addition, revenues recognized from
providing electronic reservation processing services to Avis ceased subsequent
to the Avis acquisition, with no Adjusted EBITDA impact as Avis was billed for
such services at cost. In addition, Adjusted EBITDA benefited from the absence
of $11 million of costs incurred to pursue internet initiatives. Adjusted EBITDA
also reflects increased unallocated corporate overhead costs due to
infrastructure expansion to support company growth.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Within our car rental, vehicle management, relocation, mortgage services and
timeshare development businesses, we purchase assets or finance the purchase of
assets on behalf of our clients. Assets generated in this process are classified
as assets under management and mortgage programs. We seek to offset the interest
rate exposures inherent in our assets under management and mortgage programs by
matching such assets with financial liabilities that have similar term and
interest rate characteristics. As a result, we minimize the interest rate risk
associated with managing these assets and create greater certainty around the
financial income that they produce. Fees generated from our clients are used, in
part, to repay the interest and principal associated with these liabilities.
Funding for our assets under management and mortgage programs is also provided
by both unsecured corporate borrowings and securitized financing arrangements,
which are classified as liabilities under management and mortgage programs. Cash
inflows and outflows relating to the generation of assets and the principal debt
repayment or financing of such assets are classified as activities of our
management and mortgage programs.
FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2001 2000 CHANGE
------------ ------------ -----------
Total assets exclusive of assets under programs $ 19,335 $ 12,211 $ 7,124
Assets under programs 11,560 2,861 8,699
Total liabilities exclusive of liabilities under programs $ 13,844 $ 7,724 $ 6,120
Liabilities under programs 10,771 2,516 8,255
Mandatorily redeemable securities 375 2,058 (1,683)
Stockholders' equity 5,905 2,774 3,131
Total assets exclusive of assets under programs increased primarily due to an
increase in goodwill resulting from the acquisitions of Avis and Fairfield,
various other increases in assets also due to the acquisitions, cash proceeds
provided by financing activities and our equity investment in Homestore.com.
Assets under programs increased primarily due to vehicles acquired in the
acquisition of Avis.
Total liabilities exclusive of liabilities under programs increased primarily
due to $4.4 billion of debt issued during 2001, approximately $900 million of
debt assumed in the acquisition of Avis and various other increases in
liabilities also due to the acquisitions of Avis and Fairfield. Liabilities
under programs increased primarily due to approximately $6.8 billion of debt
assumed in the acquisition of Avis and $1.6 billion of debt issued during 2001.
Mandatorily redeemable securities decreased due to the exchange of these
securities in connection with the settlement of the purchase contracts
underlying the Feline PRIDES during first quarter 2001, which resulted in the
issuance of approximately 61 million shares of CD common stock.
Stockholders' equity increased primarily due to the above-mentioned issuance of
approximately 61 million shares of CD common stock, the issuance during first
quarter 2001 of 46 million shares of CD common stock at $13.20 per share for
aggregate proceeds of approximately $607 million and net income of $692 million
during 2001.
21
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
2001 2000 CHANGE
---------- ---------- -----------
Cash provided by (used in):
Operating activities $ 2,175 $ 581 $ 1,594
Investing activities (4,794) (329) (4,465)
Financing activities 4,870 (231) 5,101
Effects of exchange rate changes on cash and cash equivalents 6 25 (19)
---------- ---------- -----------
Net change in cash and cash equivalents $ 2,257 $ 46 $ 2,211
========== ========== ===========
Cash flows from operating activities increased primarily due to cash generated
from operations in our acquired businesses.
Cash flows used in investing activities increased primarily due to (i) the
utilization of cash to fund the acquisitions of Avis and Fairfield, (ii) a net
outflow of approximately $1.3 billion to acquire vehicles used in our Avis
business, and (iii) the funding of $750 million to the stockholder litigation
settlement trust during 2001.
Cash flows from financing activities resulted in an inflow of $4.9 billion in
2001 compared to an outflow of $231 million in 2000 primarily due to an increase
of $5.2 billion in proceeds received from debt issuances, net of repayments.
STOCKHOLDER LITIGATION SETTLEMENT LIABILITY
On August 28, 2001, the United States Court of Appeals for the Third Circuit
approved our proposed $2.85 billion settlement of the principal common
stockholder class action lawsuit, overruled all objections to the settlement,
approved a plan of allocation for the settlement proceeds and awarded attorneys'
fees and expenses to the plaintiffs. As of September 30, 2001, we had previously
made payments totaling $1.1 billion to a fund established for the benefit of the
plaintiffs in this lawsuit. We intend to continue making quarterly payments of
$250 million to such fund. We expect that we will be required to fund the
remaining balance no earlier than the end of March 2002, although the precise
timing of this obligation depends upon whether any party seeks review of the
Third Circuit's decision in the United States Supreme Court and the timing of
the disposition of any such proceedings in the Supreme Court. In March 2002, the
unfunded portion of the settlement liability is expected to approximate $1.3
billion. We anticipate funding such amount from a combination of available cash,
operating cash flow and revolving credit facility borrowings.
CAPITAL EXPENDITURES
Capital expenditures during 2001 amounted to $242 million and were utilized to
support operational growth, enhance marketing opportunities and develop
operating efficiencies through technological improvements. We anticipate a
capital expenditure investment during 2001 of approximately $350 million. Such
amount represents an increase from 2000 primarily due to capital expenditures
related to the acquisitions of Avis, Fairfield, Galileo and Cheap Tickets.
DEBT FINANCING
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS
Our total long-term debt (including the Upper DECS) increased $4.7 billion to
$6.6 billion at September 30, 2001. Such increase was primarily attributable to
additional debt issuances and the issuance of the Upper DECS totaling $4.4
billion during 2001 and the assumption of Avis debt of approximately $900
million.
During first quarter 2001, we issued approximately $1.5 billion aggregate
principal amount at maturity of zero-coupon senior convertible notes for
aggregate gross proceeds of approximately $900 million. We used $250 million of
such proceeds to extinguish outstanding borrowings under our then-existing term
loan facility. The remaining proceeds were used for general corporate purposes.
These notes mature in 2021 and were issued at a price representing a
yield-to-maturity of 2.5%. We will not make periodic payments of interest on the
notes, but may be required to make nominal cash payments in specified
circumstances. Each $1,000 principal amount at maturity may be convertible,
subject to satisfaction of specific contingencies, into 33.4 shares of CD common
stock. The notes
22
will not be redeemable by us prior to February 13, 2004, but will be redeemable
thereafter at the issue price of $608.41 per note plus accrued discount through
the redemption date. In addition, holders of the notes may require us to
repurchase the notes on February 13, 2004, 2009 or 2014. In such circumstance,
we may pay the repurchase price in cash, shares of our CD common stock, or any
combination thereof.
During first quarter 2001, we also entered into a $650 million term loan
agreement with terms similar to our other revolving credit facilities.
Borrowings under this facility bore interest at LIBOR plus a margin of 125 basis
points. A portion of this term loan was used to finance the acquisition of Avis.
On October 5, 2001, we converted this term loan into a revolving credit facility
and increased such facility by $500 million to establish a $1.15 billion
committed revolving credit facility. The converted facility matures in February
2004 and now contains the committed capacity to issue up to $300 million in
letters of credit. Borrowings under this facility bear interest at LIBOR plus a
margin of 82.5 basis points. We are required to pay a per annum facility fee of
17.5 basis points under this facility and a per annum utilization fee of 25
basis points if usage under this facility exceeds 33% of aggregate commitments.
Subsequent to the conversion, on October 9, 2001, we repaid the original $650
million term loan from available cash. The total $1.15 billion commitment under
this facility is presently undrawn and available and approximately $270 million
is available under our other existing committed credit facilities.
During second quarter 2001, we issued zero-coupon zero-yield senior convertible
notes for gross proceeds of $1.0 billion. We utilized these proceeds for general
corporate purposes and to reduce certain borrowings. These notes mature in 2021.
We are not required to pay interest on these notes unless an interest adjustment
becomes payable, which may occur in specified circumstances commencing in 2004.
Each $1,000 principal amount at maturity may be convertible, subject to
satisfaction of specific contingencies, into approximately 39 shares of CD
common stock. The notes will not be redeemable by us prior to May 4, 2004, but
will be redeemable thereafter. In addition, holders of the notes may require us
to repurchase the notes on May 4, 2002, 2004, 2006, 2008, 2011 and 2016. In such
circumstance, we may pay the repurchase price in cash, shares of our CD common
stock, or any combination thereof.
During third quarter 2001, we issued approximately 17 million Upper DECS, each
consisting of both a senior note and a forward purchase contract, aggregating
$863 million principal amount. The senior notes have a term of five years and
initially bear interest at an annual rate of 6.75%. The forward purchase
contracts require the holder to purchase a minimum of 1.7593 shares and a
maximum of 2.3223 shares of CD common stock, based upon the average closing
price of CD common stock during a stipulated period, in August 2004. The forward
purchase contracts also require cash distributions from us to each holder at an
annual rate of 1.00% through August 2004 (the date the forward contracts are
required to be settled). The interest rate on the senior notes will be reset
based upon a remarketing in either May or August 2004. We utilized the proceeds
from this offering for general corporate purposes.
During third quarter 2001, we also issued $850 million aggregate principal
amount of 6.875% notes to qualified institutional buyers for net proceeds of
$843 million. The notes mature in August 2006. We utilized the proceeds from
this offering for general corporate purposes and to fund a portion of the
acquisitions of Galileo and Cheap Tickets.
On October 1, 2001, our $750 million five-year revolving credit facility
matured.
During third quarter 2001, we filed a registration statement, which provides for
an aggregate public offering of up to $3.0 billion of debt or equity securities.
We currently have $3.0 billion available under this registration statement.
RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Debt related to our management and mortgage programs increased $7.7 billion to
$9.7 billion at September 30, 2001. Such increase was primarily attributable to
the assumption of Avis debt (principally comprising $3.7 billion of securitized
term notes, $1.6 billion of securitized interest bearing notes and $957 million
of securitized commercial paper) and additional debt issuances aggregating
approximately $1.6 billion during 2001.
During first quarter 2001, PHH issued $650 million of unsecured medium-term
notes under its existing shelf registration statement. These notes bear interest
at a rate of 8 1/8% per annum and mature in February 2003. PHH currently has
approximately $2.4 billion available for issuing medium-term notes under its
shelf registration statement.
23
During first quarter 2001, our car rental subsidiary issued $750 million of
floating rate asset-backed notes secured by rental vehicles owned by such
subsidiary. The notes bear interest at a rate of LIBOR plus 20 basis points per
annum and mature in April 2004.
During second quarter 2001, our car rental subsidiary also registered $500
million of auction rate asset-backed notes secured by rental vehicles owned by
such subsidiary. These notes bear interest at a rate of LIBOR plus or minus an
applicable margin determined from time to time through an auction. As of
September 30, 2001, approximately $155 million was issued under this
registration statement.
Coincident with the acquisition of Fairfield, an unaffiliated bankruptcy remote
special purpose entity, Fairfield Receivables Corporation, committed to purchase
on a revolving basis for cash, at our option, up to $500 million of our
timeshare receivables. We also maintain non-revolving sales agreements with
various other unaffiliated bankruptcy remote special purpose entities that allow
for the transfer of timeshare receivables. We will retain a subordinated
residual interest and the related servicing rights and obligations in all of the
transferred timeshare receivables. At September 30, 2001, we were servicing
approximately $446 million of timeshare receivables transferred under all
agreements.
During first quarter 2001, PHH renewed its $750 million syndicated revolving
credit facility that was due in 2001. The new facility bears interest at LIBOR
plus an applicable margin, as defined in the agreement, and terminates on
February 21, 2002. PHH is required to pay a per annum utilization fee of .25% if
usage under the facility exceeds 25% of aggregate commitments. Under the new
facility, any loans outstanding as of February 21, 2002 may be converted into a
term loan with a final maturity of February 21, 2003. In addition to this new
facility, PHH maintains a $750 million five-year syndicated committed revolving
credit facility, which matures in February 2005, and two other committed
facilities totaling $275 million with maturity dates in November 2002.
During third quarter 2001, our car rental subsidiary terminated its $450 million
revolving credit facility.
On October 23, 2001, a subsidiary of our fleet management business issued $750
million of floating rate callable asset backed notes for net proceeds of
approximately $747 million. The notes bear interest at one-month LIBOR plus an
applicable spread and were issued in two tranches: $425 million maturing in
September 2006 and $325 million maturing in September 2013. PHH has the option
to prepay the notes in whole on certain dates after March 2003.
STRATEGIC BUSINESS INITIATIVES
On October 1, 2001, we acquired all of the outstanding shares of Galileo
International, Inc. a leading provider of electronic global distribution
services for the travel industry, for approximately $1.9 billion, including
approximately $36 million of estimated transaction costs and expenses and
approximately $32 million related to the conversion of Galileo employee stock
options into CD common stock options. Approximately $1.5 billion of the merger
consideration was funded through the issuance of approximately 117 million
shares of CD common stock, with the remainder being financed from available
cash. As part of the acquisition, we also assumed approximately $586 million of
Galileo debt, $555 million of which has been repaid.
On October 5, 2001, we acquired all of the outstanding common stock of Cheap
Tickets, a leading provider of discount leisure travel products, for $313
million (approximately $286 million in cash, net of cash acquired), including
$18 million of estimated transaction costs and expenses and $27 million related
to the conversion of Cheap Tickets employee stock options into CD common stock
options.
In accordance with SFAS No. 142, goodwill and certain other intangible assets
arising from these transactions will not be amortized.
We continually explore and conduct discussions with regard to acquisitions and
other strategic corporate transactions in our industries and in other franchise,
franchisable or service businesses in addition to transactions previously
announced. As part of our regular on-going evaluation of acquisition
opportunities, we currently are engaged in a number of separate, unrelated
preliminary discussions concerning possible acquisitions. The purchase price for
the possible acquisitions may be paid in cash, through the issuance of CD common
stock or other of our securities, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other things,
initiate and complete satisfactorily our due diligence investigations; negotiate
the financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate board of directors, regulatory and shareholder
or other necessary consents and approvals; and, if necessary, secure financing.
No assurance can be given with respect to the timing, likelihood or business
effect of any possible transaction. In the past, we have been involved in both
relatively small acquisitions and acquisitions which have been significant.
24
In addition, we continually review and evaluate our portfolio of existing
businesses to determine if they continue to meet our business objectives. As
part of our ongoing evaluation of such businesses, we intend from time to time
to explore and conduct discussions with regard to joint ventures, divestitures
and related corporate transactions. However, we can give no assurance with
respect to the magnitude, timing, likelihood or financial or business effect of
any possible transaction. We also cannot predict whether any divestitures or
other transactions will be consummated or, if consummated, will result in a
financial or other benefit to us.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and requires additional
disclosures for material business combinations completed after such date. This
standard also addresses financial accounting and reporting for goodwill and
other intangible assets acquired in a business combination at acquisition. On
July 1, 2001, we adopted the provisions of this standard relating to
acquisitions made subsequent to June 30, 2001, as required. The provisions
regarding the classification of previously acquired intangible assets will be
adopted simultaneously with the provisions of SFAS No. 142 on January 1, 2002,
as required.
SFAS No. 142 addresses financial accounting and reporting for intangible assets
acquired outside of a business combination. The standard also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. We will be required to assess goodwill and
other intangible assets for impairment annually, or more frequently if
circumstances indicate a potential impairment. On July 1, 2001, we adopted the
provisions requiring that goodwill and certain other intangible assets acquired
after June 30, 2001 not be amortized. We will adopt the remaining provisions of
this standard on January 1, 2002, as required. Transition-related impairment
losses, if any, resulting from the initial assessment of goodwill and certain
other intangible assets will be recognized by us as a cumulative effect of
accounting change as of January 1, 2002. We are currently evaluating the impact
of adopting the remaining provisions of this standard on our financial position
and results of operations. Based upon a preliminary assessment of previously
acquired goodwill and certain other intangible assets that will no longer be
amortized upon the adoption of SFAS No. 142, we expect that the related
reduction to amortization expense during the nine months ended September 30,
2001 and 2000 would approximate $160 million and $80 million, respectively. Such
amortization expense for the nine months ended September 30, 2001 is net of the
amortization of our deferred gain recorded on the sale of move.com to
Homestore.com, which would also no longer be accreted through earnings. The
estimated impact for 2002 with respect to goodwill and certain other intangible
assets that will no longer be subject to amortization is expected to reduce
amortization expense by approximately $215 million based upon existing goodwill
and other intangible assets as of September 30, 2001.
During October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and replaces the accounting and reporting provisions
of APB Opinion No. 30, "Reporting Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" as it relates to the disposal of
a segment of a business. SFAS No. 144 requires the use of a single accounting
model for long-lived assets to be disposed of by sale, including discontinued
operations, by requiring those long-lived assets to be measured at the lower of
carrying amount or fair value less cost to sell. The impairment recognition and
measurement provisions of SFAS No. 121 were retained for all long-lived assets
to be held and used with the exception of goodwill. We will adopt this standard
on January 1, 2002.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in our public filings or other public statements are
subject to known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
25
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical facts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements:
o the impacts of the September 11, 2001 terrorist attacks on New York City
and Washington, D.C. on the travel industry in general, and our travel
businesses in particular, are not known at this time, but are expected to
include negative impacts on financial results due to reduced demand for
travel in the near term; other attacks, acts of war; or measures taken by
governments in response thereto may negatively affect the travel industry,
our financial results and could also result in a disruption in our
business;
o the impact of the anthrax attacks through the United States mail system on
the marketing programs of our FISI Madison/BCI subsidiaries and on
Trilegiant are not known at this time, but may have negative impacts on
the financial results of such businesses if consumers become reluctant to
open and respond to such programs;
o the effect of economic conditions and interest rate changes on the economy
on a national, regional or international basis and the impact thereof on
our businesses;
o the effects of a decline in travel, due to political instability, adverse
economic conditions or otherwise, on our travel related businesses;
o the effects of changes in current interest rates, particularly on our real
estate franchise and mortgage businesses;
o the resolution or outcome of our unresolved pending litigation relating to
the previously announced accounting irregularities and other related
litigation;
o our ability to develop and implement operational, technological and
financial systems to manage growing operations and to achieve enhanced
earnings or effect cost savings;
o competition in our existing and potential future lines of business and the
financial resources of, and products available to, competitors;
o failure to reduce quickly our substantial technology costs in response to
a reduction in revenue, particularly in our computer reservations and
global distribution systems businesses;
o our failure to provide fully integrated disaster recovery technology
solutions in the event of a disaster;
o our ability to integrate and operate successfully acquired and merged
businesses and risks associated with such businesses, including the
acquisitions of Avis Group Holdings, Inc., Fairfield Resorts, Inc.,
Galileo International, Inc. and Cheap Tickets, Inc., the compatibility of
the operating systems of the combining companies, and the degree to which
our existing administrative and back-office functions and costs and those
of the acquired companies are complementary or redundant;
o our ability to obtain financing on acceptable terms to finance our growth
strategy and to operate within the limitations imposed by financing
arrangements and rating agencies;
o competitive and pricing pressures in the vacation ownership and travel
industries, including the car rental industry;
o changes in the vehicle manufacturer repurchase arrangements in our Avis
car rental business in the event that used vehicle values decrease;
o and changes in laws and regulations, including changes in accounting
standards and privacy policy regulation.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. Most of these factors are
difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us and our businesses generally.
Except for our ongoing obligations to disclose material information under the
federal securities laws, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report the
occurrence of unanticipated events unless required by law. For any
forward-looking statements contained in any document, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As previously discussed in our 2000 Annual Report on Form 10-K/A, we assess our
market risk based on changes in interest and foreign currency exchange rates
utilizing a sensitivity analysis. The sensitivity analysis measures the
potential loss in earnings, fair values, and cash flows based on a hypothetical
10% change (increase and decrease) in our market risk sensitive positions. We
used September 30, 2001 market rates to perform a sensitivity analysis
separately for each of our market risk exposures. The estimates assume
instantaneous, parallel shifts in interest rate yield curves and exchange rates.
We have determined, through such analyses, that the impact of a 10% change in
interest and foreign currency exchange rates and prices on our earnings, fair
values and cash flows would not be material.
27
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
See Exhibit 99 attached hereto regarding available pro forma financial data
giving effect to the acquisitions of Avis Group Holdings, Inc. on March 1, 2001
and Galileo International, Inc. on October 1, 2001 as of and for the nine months
ended September 30, 2001 and for the year ended December 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Exhibit Index
(b) REPORTS ON FORM 8-K
On July 3, 2001, we filed a current report on Form 8-K to make available under
Item 5 pro forma financial information giving effect to the acquisition of Avis
Group Holdings, Inc. on March 1, 2001 and various first quarter 2001
finance-related activities.
On July 10, 2001, we filed a current report on Form 8-K to report under Item 5
the agreement to outsource and license our individual membership and loyalty
businesses to Trilegiant Corporation.
On July 19, 2001, we filed a current report on Form 8-K to make available under
Item 5 preliminary pro forma financial information with respect to our
acquisition of Galileo International, Inc.
On July 19, 2001, we filed a current report on Form 8-K to report under Item 5
our second quarter 2001 financial results.
On July 23, 2001, we filed a current report on Form 8-K to report under Item 5
the public offering of $750 million of Upper DECS(SM) consisting of senior notes
and forward purchase contracts.
On July 24, 2001, we filed a current report on Form 8-K/A to make available
under Item 5 preliminary financial information with respect to our acquisition
of Galileo International, Inc.
On July 31, 2001, we filed a current report on Form 8-K to report under Item 5
our Consolidated Condensed Statements of Cash Flows and our Consolidated
Schedule of Free Cash Flow for the twelve months ended June 30, 2001 and 2000.
On August 1, 2001, we filed a current report on Form 8-K to make available under
Item 5 certain exhibits relating to our offering of the Upper DECS(SM).
On August 2, 2001, we filed a current report on Form 8-K to report under Item 5
the expected consummation date of our acquisition of Galileo International, Inc.
On August 16, 2001, we filed a current report on Form 8-K to report under Item 5
our planned acquisition of Cheap Tickets, Inc.
On August 27, 2001, we filed a current report on Form 8-K to report under Item 5
the exchange ratio to be utilized in our acquisition of Galileo International,
Inc.
On August 30, 2001, we filed a current report on Form 8-K to report under Item 5
the settlement decisions issued by the United States Court of Appeals for the
Third Circuit relating to the class action lawsuit pending against us and the
approval of the proposed merger by the stockholders of Galileo International,
Inc.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CENDANT CORPORATION
/s/ Kevin M. Sheehan
------------------------------------
Kevin M. Sheehan
Senior Executive Vice President and
Chief Financial Officer
/s/ Tobia Ippolito
------------------------------------
Tobia Ippolito
Executive Vice President and
Chief Accounting Officer
Date: November 14, 2001
29
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Form
10-Q/A for the quarterly period ended March 31, 2000, dated July
28, 2000).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Form 10-Q/A for the
quarterly period ended March 31, 2000, dated July 28, 2000).
4.1 Fourth Supplemental Indenture, dated as of July 27, 2001, between
Cendant Corporation and The Bank of Nova Scotia Trust Company of
New York, as trustee (incorporated in reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed on August 1, 2001).
10.1 Underwriting Agreement, dated July 20, 2001 between Cendant
Corporation and Salomon Smith Barney Inc. (incorporated in
reference to Exhibit 1.1 to the Company's Current Report on Form
8-K filed on August 1, 2001).
10.2 Forward Purchase Contract Agreement, dated as of July 27, 2001,
between Cendant Corporation and Bank One Trust Company, National
Association, as Forward Purchase Contract Agent (incorporated in
reference to Exhibit 4.4 to the Company's Current Report on Form
8-K filed on August 1, 2001).
10.3 Pledge Agreement, dated as of July 27, 2001, among Cendant
Corporation, The Chase Manhattan Bank, as Collateral Agent, and
Bank One Trust Company, National Association, as Forward Purchase
Contract Agent (incorporated by reference to Exhibit 4.7 to the
Company's Current Report on Form 8-K filed on August 1, 2001).
10.4 Remarketing Agreement, dated as of July 27, 2001, among Cendant
Corporation, Bank One Trust Company, National Association as
Forward Purchase Contract Agent, and Salomon Smith Barney Inc., as
Remarketing Agent (incorporated by reference to Exhibit 4.8 to the
Company's Current Report on Form 8-K filed on August 1, 2001).
10.5 Form of 6 7/8% Notes due 2006 (incorporated by reference to
Exhibit 4.2 the Company's Registration Statement on Form S-4 filed
on November 2, 2001).
10.6 Registration Rights Agreement, dated August 13, 2001, between
Cendant Corporation and J.P. Morgan Securities Inc., Banc of
America Securities LLC, Barclays Capital Inc., Credit Lyonnais
Securities (USA) Inc., The Royal Bank of Scotland plc, Scotia
Capital (USA) Inc., The Williams Capital Group, L.P. and
Tokyo-Mitsubishi International plc (incorporated by reference to
Exhibit 4.3 the Company's Registration Statement on Form S-4 filed
on November 2, 2001).
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges.
99 Pro Forma Financial Information (unaudited).
EXHIBIT 12
CENDANT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
---------- ---------
EARNINGS BEFORE FIXED CHARGES:
Income before income taxes, minority interest and equity in Homestore.com $ 1,246 $ 852
Plus: Fixed charges 711 400
Less: Equity income (loss) in unconsolidated affiliates (5) 14
Minority interest 33 95
---------- ---------
Earnings available to cover fixed charges $ 1,929 $ 1,143
========== =========
FIXED CHARGES (1):
Interest, including amortization of deferred financing costs $ 633(2) $ 259(3)
Minority interest 33 95
Interest portion of rental payment 45 46
---------- ---------
Total fixed charges $ 711 $ 400
========== =========
RATIO OF EARNINGS TO FIXED CHARGES $ 2.71x(4) $ 2.86x(5)
========== =========
- ----------
(1) Consists of interest expense on all indebtedness (including amortization
of deferred financing costs and capitalized interest) and the portion of
operating lease rental expense that is representative of the interest
factor.
(2) Consists of interest expense incurred by the Company's PHH subsidiary
($225 million), related to the Company's stockholder litigation settlement
liability ($105 million) and all other ($303 million).
(3) Consists of interest expense incurred by the Company's PHH subsidiary
($117 million), related to the Company's stockholder litigation settlement
liability ($20 million) and all other ($122 million).
(4) Income before income taxes, minority interest and equity in Homestore.com
includes a net gain on the dispositions of businesses of $435 million,
partially offset by other charges of $299 million. Excluding such amounts,
the ratio of earnings to fixed charges is 2.52x.
(5) Income before income taxes, minority interest and equity in Homestore.com
includes other charges of $103 million and a net loss on the dispositions
of businesses of $7 million. Excluding such amounts, the ratio of earnings
to fixed charges is 3.13x.
EXHIBIT 99
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following Unaudited Pro Forma Condensed Combined Balance Sheet gives effect
to the October 1, 2001 acquisition of Galileo International, Inc. ("Galileo").
The following Unaudited Pro Forma Condensed Combined Statements of Operations
gives effect to the acquisition of Galileo and the Company's March 1, 2001
acquisition of Avis Group Holdings, Inc. ("Avis"). Both transactions have been
accounted for under the purchase method of accounting.
Since the acquisition of Avis occurred on March 1, 2001, the financial position
of Avis is included in the Company's historical balance sheet as of September
30, 2001. The Unaudited Pro Forma Condensed Combined Balance Sheet assumes the
acquisition of Galileo occurred on September 30, 2001. The Unaudited Pro Forma
Condensed Combined Statements of Operations assume the acquisitions of Avis and
Galileo both occurred on January 1, 2000. The unaudited pro forma financial
information is based on the historical consolidated financial statements of the
Company, Avis and Galileo under the assumptions and adjustments set forth in the
accompanying explanatory notes.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 2000 also gives effect to various significant finance-related
activities that occurred during the first quarter of 2001, which comprise the
issuance of debt securities (net of debt retirements) and equity securities, the
conversion of PRIDES to CD common stock and the issuance of zero-coupon senior
convertible notes. The Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 2000 assumes these financing
activities occurred on January 1, 2000.
For purposes of developing the Unaudited Pro Forma Condensed Combined Balance
Sheet, Galileo's assets and liabilities were recorded at their estimated fair
values and the excess purchase price was assigned to goodwill. These fair values
are based on preliminary estimates. Accordingly, the pro forma adjustments may
be subject to revision once appraisals, evaluations and other studies of the
fair value of Galileo's assets and liabilities are finalized. Pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS," the Company will not be amortizing goodwill and
certain other intangible assets arising from the acquisition of Galileo.
Since Avis was consolidated with the Company as of March 1, 2001, Avis' results
of operations between January 1, 2001 and February 28, 2001 were combined with
the Company's results of operations for the full nine months, which were then
added to Galileo's results of operations for the full nine months, subject to
certain pro forma adjustments, to provide the combined pro forma results of
operations. All intercompany transactions were eliminated on a pro forma basis.
Historically, Avis paid the Company for services the Company provided related to
call centers and information technology and for the use of the Company's
trademarks, and Avis paid Galileo for services Galileo provided related to
reservations for vehicle rentals.
The pro forma adjustments relating to the acquisition of Galileo reflect the
disbursement of a combination of CD common stock and cash aggregating $20.91 for
each share of Galileo common stock outstanding, the fair value of CD common
stock options exchanged with certain fully-vested Galileo stock options of
approximately $32 million and estimated transaction costs and expenses of
approximately $36 million. Approximately $1,482 million of the merger
consideration was funded through the issuance of CD common stock, with the
remainder being financed by available cash. In addition, Cendant repaid, from
available cash, $555 million of $586 million of Galileo's debt assumed.
In August 2000, Avis contributed its European vehicle management and leasing
business ("PHH Europe") to a newly formed joint venture in exchange for cash,
settlement of intercompany debt and a 20% interest in the venture (the "PHH
Europe Transaction"). The accompanying Supplemental Unaudited Pro Forma
Condensed Combined Statement of Operations of Avis for the year ended December
31, 2000 has been adjusted to reflect the PHH Europe Transaction.
The Company continues to review acquired operations, which may result in a plan
to realign or reorganize certain of those operations. The costs of implementing
such a plan, if it were to occur, have not been reflected in the accompanying
pro forma financial information. The impact of a potential realignment or
reorganization could increase or decrease the amount of goodwill and intangible
assets and any related amortization in the accompanying pro forma financial
information. Additionally, the Unaudited Pro Forma Condensed Combined Statement
of Operations excludes any benefits that might result from the acquisitions due
to synergies that may be derived or from the elimination of duplicate efforts.
The Company's management believes that the assumptions used provide a reasonable
basis on which to present the unaudited pro forma financial information. The
Company has completed other acquisitions and dispositions which are not
significant and, accordingly, have not been included in the accompanying
unaudited pro
1
forma financial information. The unaudited pro forma financial information may
not be indicative of the financial position or results of operations that would
have occurred if the acquisitions of Avis and Galileo had been in effect on the
dates indicated or which might be obtained in the future.
The unaudited pro forma financial information should be read in conjunction with
the historical consolidated financial statements and accompanying notes thereto
for the Company, Avis and Galileo. Certain reclassifications have been made to
the historical amounts of Galileo to conform with the Company's classification.
2
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(in millions)
PURCHASE
HISTORICAL HISTORICAL AND OTHER COMBINED
CENDANT GALILEO ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 3,201 $ 25 $ (931)(a)(b) 2,295
Receivables, net 1,196 215 -- 1,411
Stockholder litigation settlement trust 1,100 -- -- 1,100
Deferred income taxes 827 22 -- 849
Other current assets 1,087 33 -- 1,120
--------- -------- -------- -------
Total current assets 7,411 295 (931) 6,775
Property and equipment, net 1,654 392 26 (b) 2,072
Deferred income taxes 347 -- -- 347
Franchise agreements, net 1,653 -- -- 1,653
Goodwill, net 5,496 288 1,591 (b) 7,375
Other intangibles, net 782 394 50 (b) 1,226
Other assets 1,992 128 (50)(b) 2,070
--------- -------- -------- -------
Total assets exclusive of assets under programs 19,335 1,497 686 21,518
--------- -------- -------- -------
Assets under management and mortgage programs
Mortgage loans held for sale 826 -- -- 826
Relocation receivables 339 -- -- 339
Vehicle-related, net 8,166 -- -- 8,166
Timeshare receivables 280 -- -- 280
Mortgage servicing rights 1,949 -- -- 1,949
--------- -------- -------- -------
11,560 -- -- 11,560
--------- -------- -------- -------
TOTAL ASSETS $ 30,895 $ 1,497 $ 686 $33,078
========= ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 2,703 $ 228 $ 150 (b) $ 3,081
Current portion of long-term debt 221 133 (121)(a) 233
Stockholder litigation settlement 2,850 -- -- 2,850
Deferred income 984 -- -- 984
Deferred income taxes -- -- (1)(b) (1)
--------- -------- -------- -------
Total current liabilities 6,758 361 28 7,147
Long-term debt, excluding Upper DECS 5,521 453 (434)(a) 5,540
Upper DECS 863 -- -- 863
Other liabilities 702 142 119 (b) 963
--------- -------- -------- -------
Total liabilities exclusive of liabilities under programs 13,844 956 (287) 14,513
--------- -------- -------- -------
Liabilities under management and mortgage programs
Debt 9,741 -- -- 9,741
Deferred income taxes 1,030 -- -- 1,030
--------- -------- -------- -------
10,771 -- -- 10,771
--------- -------- -------- -------
Mandatorily redeemable preferred interest in a subsidiary 375 -- -- 375
--------- -------- -------- -------
Stockholders' equity 5,905 541 973(c) 7,419
--------- -------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,895 $ 1,497 $ 686 $33,078
========= ======== ======== =======
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET.
3
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
(a) Represents the repayment of a portion of the Galileo long-term debt
assumed ($555).
(b) Represents the excess of the purchase price over the preliminary estimate
of the fair value of the identifiable net assets acquired, calculated as
follows:
Calculation of acquisition of goodwill
Cash consideration $ 358
Issuance of CD common stock 1,482
Fair value of CD common stock options issued in exchange for Galileo stock options 32
Transition costs and expenses (includes cash payments of $18) 36
----------
Total purchase price 1,908
----------
Preliminary estimate of fair value of identifiable net assets acquired
Historical book value of assets acquired net of liabilities assumed 541
Elimination of Galileo goodwill (288)
Preliminary estimate of fair value adjustments to identifiable intangible assets 50
Preliminary estimate of fair value adjustments to property and equipment 26
Preliminary estimate of fair value adjustments to other current liabilities (132)
Preliminary estimate of fair value adjustments to other assets ($50) and other liabilities ($119) (169)
Deferred tax liability on fair value adjustments and transaction costs and expenses 1
----------
Preliminary estimate of fair value of identifiable net assets acquired 29
----------
Acquisition goodwill $ 1,879
==========
Calculation of acquisition goodwill adjustment
Acquisition goodwill $ 1,879
Historical Galileo goodwill (288)
----------
Acquisition goodwill adjustment $ 1,591
==========
(c) Represents the issuance of CD common stock in exchange for all outstanding
shares of Galileo common stock ($1,482) and the issuance of CD common
stock options in exchange for all outstanding Galileo stock options ($32),
partially offset by the elimination of Galileo equity balances ($541).
4
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
AVIS AVIS GALILEO
HISTORICAL JAN 1-FEB 28, PURCHASE ADJUSTED HISTORICAL PURCHASE COMBINED
CENDANT 2001 ADJUSTMENTS CENDANT GALILEO ADJUSTMENTS PRO FORMA
---------- ------------- ----------- -------- ----------- ----------- ---------
REVENUES
Membership and service fees, net $3,803 $ 27 $ (34)(a) $3,796 $ -- $ -- $3,796
Vehicle-related 2,520 594 -- 3,114 -- -- 3,114
Global distribution services -- -- -- -- 1,244 (9)(f) 1,235
Other 47 20 -- (b) 67 65 -- 132
------ ----- ----- ------ ------ ----- ------
Net revenues 6,370 641 (34) 6,977 1,309 (9) 8,277
EXPENSES
Operating 2,101 174 (34)(a) 2,241 305 (9)(f) 2,537
Selling, general and administrative 1,351 115 -- 1,466 592 (39)(g) 2,019
Vehicle depreciation, lease charges
and interest, net 1,285 350 -- 1,635 -- -- 1,635
Non-vehicle depreciation and
amortization 347 23 2 (c) 372 179 (109)(g) 442
Other charges, net 299 -- -- 299 -- -- 299
Non-vehicle interest, net 176 12 1 (d) 189 26 (28)(h) 187
Other, net -- -- -- -- 5 -- 5
------ ----- ----- ------ ------ ----- ------
Total expenses 5,559 674 (31) 6,202 1,107 (185) 7,124
------ ----- ----- ------ ------ ----- ------
Net gain on dispositions of businesses 435 -- -- 435 -- -- 435
------ ----- ----- ------ ------ ----- ------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY IN
HOMESTORE.COM 1,246 (33) (3) 1,210 202 176 1,588
Provision (benefit) for income
taxes 438 (10) (2)(e) 426 89 52(i) 567
Minority interest, net of tax 22 -- -- 22 -- -- 22
Losses related to equity in
Homestore.com, net of tax 56 -- -- 56 -- -- 56
------ ----- ----- ------ ------ ----- ------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ 730 $ (23) $ (1) $ 706 $ 113 $ 124 $ 943
====== ===== ===== ====== ====== ===== ======
CD COMMON STOCK INCOME PER SHARE
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
Basic $ 0.85 $0.83 $ 0.98
Diluted 0.81 0.78 0.93
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 832 832 117(j) 949
Diluted 883 883 117(j) 1,000
MOVE.COM COMMON STOCK INCOME PER SHARE
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
Basic $ 9.94 $9.94 $ 9.94
Diluted 9.81 9.81 9.81
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2 2 2
Diluted 2 2 2
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS.
5
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
THE FOLLOWING PRO FORMA ADJUSTMENTS RELATE TO THE ACQUISITION OF AVIS.
(a) Represents the elimination of amounts paid by Avis to the Company for
services provided related to call centers and information technology and
for the use of trademarks.
(b) Represents the elimination of the Company's earnings attributable to its
investment in Avis for which the combined effect is zero.
(c) Represents the amortization of goodwill generated on the excess of the
purchase price over the preliminary estimate of fair value of identifiable
net assets acquired on a straight-line basis over 40 years, partially
offset by the reversal of Avis' amortization of pre-acquisition goodwill
and other identifiable intangibles resulting from the allocation of the
purchase price on a straight-line basis over 20 years.
(d) Represents interest expense on debt issued to finance a portion of the
purchase price ($7), partially offset by the amortization of the fair
value adjustment on acquired debt ($4) and the reversal of Avis'
amortization of debt-related costs ($2).
(e) Represents the income tax effect of the purchase adjustments at an
estimated statutory rate of 38.5% (not including adjustments for
non-deductible goodwill).
THE FOLLOWING PRO FORMA ADJUSTMENTS RELATE TO THE ACQUISITION OF GALILEO.
(f) Represents the elimination of amounts paid by Avis to Galileo for services
provided related to reservations for vehicle rentals.
(g) Represents the (i) amortization of estimated identifiable intangibles on a
straight-line basis ($10) and (ii) depreciation and amortization of the
estimated value of property and equipment ($60), net of the reversal of
Galileo's (i) amortization of pre-acquisition goodwill ($41), (ii)
amortization of other intangible assets ($31), (iii) depreciation and
amortization of property and equipment ($107) and (iv) amortization of
other assets ($39).
(h) Represents interest expense relating to the Galileo long-term debt that
was repaid at closing.
(i) Represents the income tax effect of the purchase adjustments at an
estimated statutory rate of 38.5% (not including adjustments for
non-deductible goodwill).
(j) Represents the issuance of 117 million shares of CD common stock used to
fund a portion of the purchase price.
6
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AVIS OTHER GALILEO
HISTORICAL ADJUSTED PURCHASE PRO FORMA ADJUSTED HISTORICAL PURCHASE COMBINED
CENDANT AVIS(*) ADJUSTMENTS ADJUSTMENTS CENDANT GALILEO ADJUSTMENTS PRO FORMA
--------- -------- ----------- ----------- -------- ---------- ----------- ---------
REVENUES
Membership and service
fees, net $ 4,512 $ 155 $(173)(a) $ -- $ 4,494 $ -- $ -- $ 4,494
Vehicle-related -- 3,783 -- -- 3,783 -- -- 3,783
Global distribution services -- -- -- -- -- 1,561 (13)(k) 1,548
Other 147 151 (39)(b) -- 259 82 -- 341
------- ------ ----- ----- ------- ------ ----- --------
Net revenues 4,659 4,089 (212) -- 8,536 1,643 (13) 10,166
EXPENSES
Operating 1,426 966 (173)(a) -- 2,219 368 (13)(k) 2,574
Vehicle depreciation, lease
charges and interest, net -- 1,671 -- -- 1,671 -- -- 1,671
Selling, general and
administrative 1,508 637 -- -- 2,145 701 (40)(l) 2,806
Non-vehicle depreciation
and amortization 352 74 16(c) -- 442 218 (123)(l) 537
Other charges, net 111 -- -- -- 111 28 -- 139
Non-vehicle interest, net 148 482 6(d) 54(g,i) 690 45 (47)(m) 688
Other, net -- -- -- -- -- 17 -- 17
------- ------ ----- ----- ------- ------ ----- --------
Total expenses 3,545 3,830 (151) 54 7,278 1,377 (223) 8,432
------- ------ ----- ----- ------- ------ ----- --------
Net loss on dispositions of
businesses (8) -- (35)(e) -- (43) -- -- (43)
------- ------ ----- ----- ------- ------ ----- --------
Income before income taxes,
minority interest and equity
in Homestore.com 1,106 259 (96) (54) 1,215 266 210 1,691
Provision for income taxes 362 117 (30)(f) (20)(f) 429 117 61(n) 607
Minority interest, net of tax 84 7 -- (66)(h) 25 -- -- 25
------- ------ ----- ----- ------- ------ ----- --------
Income before extraordinary
loss and cumulative effect
of accounting change $ 660 $ 135 $ (66) $ 32 $ 761 $ 149 $ 149 $ 1,059
======= ====== ===== ===== ======= ====== ===== ========
CD COMMON STOCK INCOME PER
SHARE INCOME BEFORE
EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
Basic $ 0.92 $ 0.92 $ 1.12
Diluted 0.89 0.90 1.09
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 724 107(j) 831 117(o) 948
Diluted 762 107(j) 869 117(o) 986
MOVE.COM COMMON STOCK LOSS
PER SHARE LOSS BEFORE
EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
Basic $ (1.76) $ (1.76) $ (1.76)
Diluted (1.76) (1.76) $ (1.76)
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 3 3 3
Diluted 3 3 3
- ----------
(*) See Supplemental Unaudited Condensed Combined Statement of Operations and
Notes included herein.
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS.
7
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THE FOLLOWING PRO FORMA ADJUSTMENTS RELATE TO THE ACQUISITION OF AVIS AND THE
FINANCING ACTIVITIES.
(a) Represents the elimination of amounts paid by Avis to the Company for
services provided related to call centers and information technology and
for the use of trademarks.
(b) Represents the elimination of the Company's earnings attributable to its
investment in Avis.
(c) Represents the amortization of goodwill generated on the excess of fair
value over the net assets acquired on a straight-line basis over 40 years,
net of the reversal of Avis' amortization of pre-acquisition goodwill and
other identifiable intangibles resulting from the allocation of purchase
price on a straight-line basis over 20 years.
(d) Represents interest expense on debt issued to finance the acquisition of
Avis ($44), net of amortization of the fair value adjustment on acquired
debt ($25) and the reversal of Avis' amortization of debt related costs
($13).
(e) Represents the reversal of a gain of $35 million recorded by the Company,
which represents the recognition of a portion of its previously recorded
deferred gain from the 1999 sale of its fleet business due to the
disposition of PHH Europe by Avis in August 2000.
(f) Represents the income tax effect of the purchase adjustments and other pro
forma adjustments at an estimated statutory rate of 37.5% (not including
adjustments for non-deductible goodwill), except Note (e) above where the
tax effect was approximately 2%, which represented the rate at which taxes
were provided on the related gain.
(g) Represents interest expense relating to the issuance of the zero-coupon
senior convertible notes, medium-term notes, borrowing under a $650
million term loan agreement and the repayment of an existing term loan,
net of interest expense allocated to the acquisition of Avis (See Note (d)
above).
(h) Represents the reduction in preferred stock dividends resulting from the
conversion of the PRIDES to CD common stock.
(i) No adjustment has been made to reduce interest expense for interest income
on the incremental cash of $1,587 raised through the Financing Activities.
Assuming the incremental cash was invested at 5%, which represents the
Company's current rate for cash investments, interest expense would have
been reduced by $79. Additionally, income before extraordinary loss and
cumulative effect of accounting change and income per share before
extraordinary loss and cumulative effect of accounting change would have
improved by $49 and $0.06, respectively.
(j) Represents the issuance of CD common stock of 61 million shares and 46
million shares relating to the conversion of PRIDES to CD common stock and
the issuance of CD common stock, respectively.
THE FOLLOWING PRO FORMA ADJUSTMENTS RELATE TO THE ACQUISITION OF GALILEO.
(k) Represents the elimination of amounts paid by Avis to Galileo for services
provided related to reservations for vehicle rentals.
(l) Represents the (i) amortization of estimated identifiable intangibles on a
straight-line basis over 25 years ($13) and (ii) depreciation and
amortization of the estimated value of property and equipment ($82), net
of the reversal of Galileo's (i) amortization of pre-acquisition goodwill
($47), (ii) amortization of other intangibles assets ($39), (iii)
depreciation and amortization of property and equipment ($132) and (iv)
amortization of other assets ($40).
(m) Represents interest expense relating to the Galileo long-term debt that
was repaid at closing.
(n) Represents the income tax effect of the purchase adjustments at an
estimated statutory rate of 37.5% (not including adjustments for
non-deductible goodwill).
(o) Represents the issuance of 117 million shares of CD common stock used to
fund a portion of the purchase price.
8
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN MILLIONS)
The unaudited pro forma financial data presented below was prepared to reflect
the historical consolidated financial statements of Avis, excluding the PHH
Europe Transaction. Avis will receive an annual license fee in connection with
the PHH Europe Transaction from the joint venture for the license of the PHH
fleet management technology, PHH interactive. Avis utilized the proceeds of the
PHH Europe Transaction to reduce Avis' indebtedness and to pay transaction
costs.
HISTORICAL SALE OF PRO FORMA ADJUSTED
AVIS PHH EUROPE (a) ADJUSTMENTS AVIS
------------ -------------- ----------- ------------
REVENUES
Service fees, net $ 241 $ (86) $ -- $ 155
Vehicle rental 2,467 -- -- 2,467
Vehicle leasing and other fees 1,389 (73) -- 1,316
Other 146 -- 5(b) 151
------------ -------------- ----------- ------------
Net revenues 4,243 (159) 5 4,089
EXPENSES
Operating 966 -- -- 966
Vehicle depreciation and lease charges 1,695 (24) -- 1,671
Selling, general and administrative 693 (56) -- 637
Interest, net 577 (37) (58)(c) 482
Depreciation and amortization 89 (12) (3)(d) 74
------------ -------------- ----------- ------------
Total expenses 4,020 (129) (61) 3,830
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 223 (30) 66 259
Provision (benefit) for income taxes 95 (3) 25(e) 117
Minority interest 7 -- -- 7
------------ ----------- ---------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 121 $ (27) $ 41 $ 135
============ =========== ========== ============
SEE ACCOMPANYING NOTES TO SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS.
9
NOTES TO SUPPLEMENTAL UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
(a) Represents adjustments to pro forma the results of operations of PHH
Europe, assuming that the PHH Europe Transaction occurred on January 1,
2000.
(b) Represents fleet management technology fee income and the equity in the
earnings of the joint venture formed pursuant to the PHH Europe
Transaction, net of the amortization of the excess of cost over the assets
acquired.
(c) Represents a reduction in interest expense resulting from the retirement
of acquisition debt and revolving credit facilities related to the
application of proceeds of $1,053 from the PHH Europe Transaction.
(d) Represents a decrease in amortization expense relating to goodwill
generated from the PHH Europe Transaction, net of the reversal of PHH
Europe goodwill.
(e) Represents the income tax effect of the pro forma adjustments at an
estimated statutory rate of 39% (not including adjustments for
non-deductible goodwill).
10
