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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 10019
New York, NY (Zip Code)
(Address of principal executive office)
(212) 413-1800
(Registrant's telephone number, including area code)
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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 each of the Registrant's classes of common
stock as of May 31, 2001 was 854,237,638 shares of CD common stock and 1,861,995
shares of Move.com common stock.
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Cendant Corporation and Subsidiaries
Index
Page
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PART I Financial Information
Item 1. Restated Financial Statements
Consolidated Condensed Statements of Income for the three months
ended March 31, 2001 and 2000 1
Consolidated Condensed Balance Sheets as of March 31, 2001 and
December 31, 2000 2
Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Restated Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risks 18
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Forward-looking statements in this Quarterly Report on Form 10-Q\A are subject
to known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical acts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements: the effect of economic conditions
and interest rate changes on the economy on a national, regional or
international basis and the impact thereof on our businesses; the effects of
changes in current interest rates, particularly on our real estate franchise and
mortgage businesses; the resolution or outcome of our unresolved pending
litigation relating to the previously announced accounting irregularities and
other related litigation; our ability to develop and implement operational and
financial systems to manage growing operations and to achieve enhanced earnings
or effect cost savings; competition in our existing and potential future lines
of business and the financial resources of, and products available to,
competitors; our ability to integrate and operate successfully acquired and
merged businesses and risks associated with such businesses, including the
pending acquisition of Galileo International, Inc. and the acquisitions of Avis
Group Holdings, Inc. and Fairfield Communities, Inc., the compatibility of the
operating systems of the combining companies, and the degree to which our
existing administrative and back-office functions and costs and those of the
acquired companies are complementary or redundant; our ability to obtain
financing on acceptable terms to finance our growth strategy and to operate
within the limitations imposed by financing arrangements and rating agencies;
competitive and pricing pressures in the vacation ownership and travel
industries, including the car rental industry; changes in the vehicle
manufacturer repurchase arrangements between vehicle manufacturers and Avis
Group in the event that used vehicle values decrease; and changes in laws and
regulations, including changes in accounting standards and privacy policy
regulation. Other factors and assumptions not identified above were also
involved in the derivation of these forward-looking statements, and the failure
of such other assumptions to be realized as well as other factors may also cause
actual results to differ materially from those projected. Most of these factors
are difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
PART I - FINANCIAL INFORMATION
Item 1. Restated Financial Statements
Cendant Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In millions, except per share data)
Three Months Ended
March 31,
------------------
2001 2000
------- -------
Revenues
Membership and service fees, net $ 1,076 $ 995
Vehicle-related 398 70
Other 12 63
------- -------
Net revenues 1,486 1,128
------- -------
Expenses
Operating 451 368
Vehicle depreciation, lease charges and interest, net 181 --
Marketing and reservation 250 215
General and administrative 161 133
Non-vehicle depreciation and amortization 101 85
Other charges (credits):
Restructuring and other unusual charges 185 106
Litigation settlement and related costs 11 (38)
Merger-related costs 8 --
Non-vehicle interest, net 60 26
------- -------
Total expenses 1,408 895
------- -------
Net gain (loss) on dispositions of businesses 435 (13)
------- -------
Income before income taxes, minority interest and
equity in Homestore.com 513 220
Provision for income taxes 205 77
Minority interest, net of tax 13 16
Losses related to equity in Homestore.com, net of tax 18 --
------- -------
Income before extraordinary loss and cumulative effect
of accounting change 277 127
Extraordinary loss, net of tax -- (2)
------- -------
Income before cumulative effect of accounting change 277 125
Cumulative effect of accounting change, net of tax (38) (56)
------- -------
Net income $ 239 $ 69
======= =======
CD common stock income per share
Basic
Income before extraordinary loss and cumulative effect of accounting change $ 0.32 $ 0.18
Net income $ 0.28 $ 0.10
Diluted
Income before extraordinary loss and cumulative effect of accounting change $ 0.30 $ 0.17
Net income $ 0.26 $ 0.09
Move.com common stock income per share
Basic
Income before extraordinary loss and cumulative effect of accounting change $ 10.41
Net income $ 10.34
Diluted
Income before extraordinary loss and cumulative effect of accounting change $ 10.13
Net income $ 10.07
See Notes to Consolidated Condensed Financial Statements.
1
Cendant Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
2001 2000
-------- --------
Assets
Current assets
Cash and cash equivalents $ 2,092 $ 944
Receivables, net 1,380 753
Other current assets 1,030 1,031
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Total current assets 4,502 2,728
Property and equipment, net 1,508 1,345
Stockholder litigation settlement trust 600 350
Deferred income taxes 1,358 1,108
Franchise agreements, net 1,514 1,462
Goodwill, net 4,950 3,176
Other intangibles, net 764 647
Other assets 1,738 1,395
-------- --------
Total assets exclusive of assets under programs 16,934 12,211
-------- --------
Assets under management and mortgage programs
Relocation receivables 329 329
Mortgage loans held for sale 917 879
Mortgage servicing rights 1,667 1,653
Vehicle-related, net 7,747 --
-------- --------
10,660 2,861
-------- --------
Total assets $ 27,594 $ 15,072
======== ========
Liabilities and stockholders' equity
Current liabilities
Accounts payable and other current liabilities $ 2,258 $ 1,446
Current portion of long-term debt 267 --
Deferred income 1,046 1,020
Deferred income taxes 227 --
-------- --------
Total current liabilities 3,798 2,466
Long-term debt 3,903 1,948
Stockholder litigation settlement 2,850 2,850
Other liabilities 706 460
-------- --------
Total liabilities exclusive of liabilities under programs 11,257 7,724
-------- --------
Liabilities under management and mortgage programs
Debt 9,589 2,040
Deferred income taxes 1,030 476
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10,619 2,516
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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
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Commitments and contingencies (Note 6)
Stockholders' equity
Preferred stock, $.01 par value - authorized 10 million
shares; none issued and outstanding -- --
CD common stock, $.01 par value - authorized 2 billion
shares; issued 1,024,993,334 and 914,655,918 shares 10 9
Move.com common stock, $.01 par value - authorized 500 million
shares; issued and outstanding 1,861,995 and 2,181,586
shares; notional issued shares with respect to Cendant
Group's retained interest 22,500,000 -- --
Additional paid-in capital 6,861 4,540
Retained earnings 2,266 2,027
Accumulated other comprehensive loss (234) (234)
CD treasury stock, at cost, 178,239,362 and 178,949,432 shares (3,560) (3,568)
-------- --------
Total stockholders' equity 5,343 2,774
-------- --------
Total liabilities and stockholders' equity $ 27,594 $ 15,072
======== ========
See Notes to Consolidated Condensed Financial Statements.
2
Cendant Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
March 31,
------------------
2001 2000
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Operating Activities
Net income $ 239 $ 69
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 277 127
Adjustments to reconcile income before extraordinary loss
and cumulative effect of accounting change to net cash
provided by (used in) operating activities:
Non-vehicle depreciation and amortization 101 85
Non-cash portion of other charges, net 38 47
Net (gain) loss on dispositions of businesses (435) 13
Deferred income taxes 185 22
Proceeds from sales of trading securities 110 --
Net change in assets and liabilities, excluding the
impact of acquired businesses:
Receivables (172) (49)
Income taxes (16) 135
Accounts payable and other current liabilities (122) (229)
Deferred income 8 (14)
Other, net -- (41)
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Net cash provided by (used in) operating activities
exclusive of management and mortgage programs (26) 96
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Management and mortgage programs:
Depreciation and amortization 181 27
Origination of mortgage loans (7,326) (3,916)
Proceeds on sale of and payments from mortgage
loans held for sale 7,276 3,802
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131 (87)
------- -------
Net cash provided by operating activities 105 9
------- -------
Investing Activities
Property and equipment additions (68) (49)
Funding of stockholder litigation settlement trust (250) --
Proceeds from sales of marketable securities 7 356
Purchases of marketable securities (10) (348)
Net assets acquired (net of cash acquired) and
acquisition-related payments (978) (8)
Other, net (14) (33)
------- -------
Net cash used in investing activities exclusive of
management and mortgage programs (1,313) (82)
------- -------
Management and mortgage programs:
Investment in vehicles (832) --
Payments received on investment in vehicles 681 --
Equity advances on homes under management (176) (1,619)
Repayment on advances on homes under management 169 1,655
Additions to mortgage servicing rights (48) (139)
Proceeds from sales of mortgage servicing rights 13 35
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(193) (68)
------- -------
Net cash used in investing activities (1,506) (150)
------- -------
Financing Activities
Proceeds from borrowings 1,600 --
Principal payments on borrowings (316) (776)
Issuances of common stock 657 499
Repurchases of common stock (10) (198)
Proceeds from mandatorily redeemable preferred interest
in a subsidiary -- 375
Other, net (34) (4)
------- -------
Net cash provided by (used in) financing activities
exclusive of management and mortgage programs 1,897 (104)
------- -------
Management and mortgage programs:
Proceeds from borrowings 2,712 777
Principal payments on borrowings (2,081) (1,421)
Net change in short-term borrowings 26 672
------- -------
657 28
------- -------
Net cash provided by (used in) financing activities 2,554 (76)
------- -------
Effect of changes in exchange rates on cash and cash
equivalents (5) 1
------- -------
Net increase (decrease) in cash and cash equivalents 1,148 (216)
Cash and cash equivalents, beginning of period 944 1,164
------- -------
Cash and cash equivalents, end of period $ 2,092 $ 948
======= =======
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.
On July 2, 2001, the Company entered into a number of agreements,
including a forty-year outsourcing agreement, with a third party whereby
the Company will have an ongoing interest in its individual membership
business. Prior to entering into these agreements, the Company had planned
to spin-off this business to its stockholders and therefore had treated
the results of this business as a discontinued operation. As a result of
this change in plan and the Company's ongoing involvement in this
business, the Consolidated Condensed Financial Statements and Notes
thereto have been amended to reverse the classification of the Company's
individual membership business as a discontinued operation. Accordingly,
the account balances and activities of the individual membership business
have been reclassified from discontinued operations to continuing
operations for all periods presented. The amended Consolidated Condensed
Financial Statements presented herein are the Company's historical
financial statements for all periods presented.
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 benefit of $10 million recorded in other revenues
within the Consolidated Condensed Statement of Income.
Derivative Instruments
The Company uses derivative instruments as part of its overall strategy to
manage its exposure to market risks associated with fluctuations in
interest rates, foreign currency exchange rates, prices of mortgage loans
held for sale, anticipated mortgage loan closings arising from commitments
issued and changes in the fair value of its mortgage servicing rights. As
a matter of policy, the Company does not use derivatives for trading or
speculative purposes.
4
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
other revenues in the Consolidated Condensed Statement of Income.
o Changes in fair value of the hedged item in a fair value hedge are
recorded as an adjustment to the carrying amount of the hedged item
and recognized currently in earnings.
o The effective portion of changes in fair value of derivatives
designated as cash flow hedging instruments is recorded as a
component of other comprehensive income. The ineffective portion is
reported currently in earnings.
o Amounts included in other comprehensive income are reclassified into
earnings in the same period during which the hedged item affects
earnings.
The Company is also party to certain contracts containing embedded
derivatives. As required by SFAS No. 133, certain embedded derivatives
were required to be 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 Pronouncement
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities--a replacement of FASB Statement
No. 125." SFAS No. 140 revises criteria for accounting for
securitizations, other financial-asset transfers and collateral and
introduces new disclosures, but otherwise carries forward most of the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" without amendment.
The Company adopted the disclosure requirements of SFAS No. 140 on
December 31, 2000, as required. All other provisions of SFAS No. 140 were
adopted after March 31, 2001, as required by the standard. The impact of
adopting the remaining provisions of this standard was not material to the
Company's financial position or results of operations.
2. Earnings Per Share
Earnings per share ("EPS") for periods after March 31, 2000, the date of
the original issuance of Move.com common stock, has been calculated using
the two-class method. Income per common share before extraordinary loss
and cumulative effect of accounting change for each class of common stock
was computed as follows:
Three Months Ended
March 31,
-----------------
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(a) $ 256 $ 127
Convertible debt interest, net of tax 3 2
Adjustment to Cendant Group's retained interest in Move.com Group(a) (6) --
----- -----
Income before extraordinary loss and cumulative effect of accounting
change for diluted EPS $ 253 $ 129
===== =====
Weighted average shares outstanding:
Basic 790 717
Stock options, warrants and non-vested shares 22 34
Convertible debt 18 18
----- -----
Diluted 830 769
===== =====
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(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.
5
Three Months Ended
March 31, 2001
-----------------
Move.com Common Stock
Income before extraordinary loss and cumulative effect of accounting change,
excluding Cendant Group's retained interest in Move.com Group $21
Adjustment to Cendant Group's retained interest in Move.com Group(a) 6
---
Income before extraordinary loss and cumulative effect of accounting
change for diluted EPS $27
---
Weighted average shares outstanding:
Basic 2
Stock options 1
---
Diluted 3
===
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(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 and $0.08 for the three months
ended March 31, 2001 and 2000, respectively.
The following table summarizes the Company's outstanding common stock
equivalents, which were antidilutive and therefore excluded from the
computation of diluted EPS:
March 31,
-------------
CD Common Stock 2001 2000
---- ----
Options(a) 109 79
Warrants(b) 2 31
FELINE PRIDES -- 61
Move.com Common Stock
Options(c) 2
---------
(a) The weighted average exercise prices for antidilutive options at
March 31, 2001 and 2000 were $22.00 and $24.53, respectively.
(b) The weighted average exercise prices for antidilutive warrants at
March 31, 2001 and 2000 were $21.31 and $22.91, respectively.
(c) The weighted average exercise price for antidilutive options at
March 31, 2001 was $24.21.
3. Acquisitions and Dispositions of Businesses
Acquisitions
Galileo International, Inc. On June 18, 2001, the Company announced that
it had entered into a definitive agreement to acquire all of the
outstanding common stock of Galileo International, Inc. ("Galileo"), a
leading provider of electronic global distribution services for the travel
industry, at an expected value of $33 per share, or approximately $2.9
billion in aggregate. As part of the acquisition, the Company will also
assume approximately $600 million of Galileo net debt. The final
acquisition price will be paid in a combination of CD common stock and
cash. The number of shares of CD common stock to be paid to Galileo
stockholders will fluctuate, between 116 million and 137 million shares,
within a collar of $17 to $20 per share of CD common stock. The remainder
of the purchase price, approximately $562 million, will be paid in cash
and may fluctuate if the average price per share of CD common stock during
a stipulated period is above or below the collar. The transaction is
subject to customary regulatory approvals and the approval of Galileo's
stockholders. Although no assurances can be given, the Company expects the
transaction to close in the fall of 2001.
Avis Group Holdings, Inc. On March 1, 2001, the Company acquired all of
the outstanding shares of Avis Group Holdings, Inc. ("Avis Group") that it
did not already own for $33.00 per share in cash, or approximately $994
million, including $40 million of transaction costs and expenses. The
acquisition has been accounted for using the purchase method of
accounting; accordingly, assets acquired and liabilities assumed were
recorded based upon their estimated fair values at the date of
acquisition. The results of operations of Avis Group have been included in
the Consolidated Condensed Statement of Income since the date of
acquisition.
6
The excess of the purchase price over the estimated fair value of the
underlying net assets acquired was allocated to goodwill which will be
amortized over 40 years on a straight-line basis. The allocation of the
excess purchase price is based upon preliminary estimates and assumptions
and is subject to revision when appraisals have been finalized.
Accordingly, revisions to the allocation, which may be significant, will
be recorded by the Company as further adjustments to the purchase price
allocation. The preliminary allocation of the purchase price is summarized
as follows:
Amount
------
Cash consideration $ 937
Fair value of converted options 17
Transaction costs and expenses 40
------
Total purchase price 994
Book value of Cendant's existing net investment in Avis Group 406
------
Cendant's basis in Avis Group 1,400
Historical value of liabilities assumed in excess of assets acquired 207
Fair value adjustments 108
------
Unallocated excess purchase price over assets acquired and liabilities assumed $1,715
======
In connection with the acquisition, the Company continues to evaluate the
integration of the operations of Avis Group and believes that it may incur
transition costs relating to such integration. Transition costs may result
from integrating operating systems, relocating employees, closure of
facilities, reducing duplicative efforts and exiting and consolidating
certain other activities. These costs will be recorded on the Company's
Consolidated Condensed Balance Sheet as adjustments to the purchase price
or on the Company's Consolidated Condensed Statement of Income as
expenses.
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 Group occurred on
January 1, for each of the periods presented:
Three Months Ended
March 31,
------------------
2001 2000
------ ------
Net revenues $2,093 $2,018
Income before extraordinary loss and cumulative effect of accounting change 253 139
Net income 207 81
CD common stock income per share:
Basic
Income before extraordinary loss and cumulative effect of accounting change $ 0.29 $ 0.19
Net income 0.24 0.11
Diluted
Income before extraordinary loss and cumulative effect of accounting change $ 0.28 $ 0.19
Net income 0.22 0.11
The pro forma results do not give effect to any synergies expected to
result from the acquisition of Avis Group. The pro forma results are not
necessarily indicative of what actually would have occurred if the
acquisition had been consummated on January 1, 2001 and 2000, nor are they
necessarily indicative of future consolidated results.
Fairfield Communities, Inc. On April 2, 2001, the Company acquired all of
the outstanding shares of Fairfield Communities, Inc. ("Fairfield"), one
of the largest vacation ownership companies in the United States, for
approximately $750 million in cash, including transaction costs and
expenses and the conversion of Fairfield employee stock options into CD
common stock options.
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 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 included in deferred income within
the Consolidated Condensed Balance Sheet at March 31, 2001 and is being
recognized into income over five years. The amortization of the deferred
gain is included as a component of equity in Homestore.com within the
Consolidated Condensed Statement of Income for the three months ended
March 31, 2001. The Company's investment in Homestore is included in other
assets within the Consolidated Condensed Balance Sheet. The difference
between the value of this investment and the underlying equity in the net
assets of Homestore was $431 million, which is being amortized over five
years as a component of equity in Homestore.com within the Consolidated
Condensed Statement of Income. During first quarter 2001, such amount was
reduced by $30 million due to the contribution of approximately 2 million
shares of Homestore to Travel Portal, Inc. ("Travel Portal"), a company
that was created to pursue the development of an online travel business
for the benefit of certain current and future franchisees.
7
4. Other Charges (Credits)
Restructuring and Other Unusual Charges
During first quarter 2001, the Company incurred unusual charges totaling
$185 million. Such charges primarily consisted of (i) $95 million to fund
an irrevocable contribution to an independent technology trust responsible
for providing technology initiatives for the benefit of current and future
franchisees at Century 21, Coldwell Banker and ERA and (ii) $85 million
incurred in connection with the creation of Travel Portal.
Merger-related Costs
During first quarter 2001, the Company incurred charges of $8 million
related to the acquisition and integration of Avis Group.
Litigation Settlement and Related Costs
During first quarter 2001, the Company recorded a $25 million charge for
litigation settlement and related costs in connection with previously
discovered accounting irregularities in the former business units of CUC
International, Inc. and resulting investigations into such matters. Such
charge was partially offset by a non-cash credit of $14 million to reflect
an adjustment to the PRIDES class action litigation settlement charge
recorded in fourth quarter 1998 primarily for Rights that expired
unexercised.
5. Debt Issuances and Redemption
Debt Issuances
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.
Term Loan. During first quarter 2001, the Company entered into a $650
million term loan agreement with terms similar to its other revolving
credit facilities. This term loan amortizes in three equal installments on
August 22, 2002, May 22, 2003 and February 22, 2004. Borrowings under this
facility bear interest at LIBOR plus a margin of 125 basis points.
Medium-Term Notes. During first quarter 2001, PHH Corporation ("PHH"), a
wholly-owned subsidiary of the Company, issued $650 million of medium-term
notes under an existing shelf registration statement. These notes bear
interest at a rate of 8 1/8% per annum and mature in February 2003. During
first quarter 2001, the Company's Avis car rental subsidiary issued $750
million of floating rate rental car asset backed notes. The notes are
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.
8
Debt Redemption
During first quarter 2001, the Company made a principal payment of $250
million to extinguish outstanding borrowings under its then existing term
loan facility.
Credit Facility
During first quarter 2001, PHH renewed its $750 million syndicated
revolving credit facility, which was due in 2001. The new facility bears
interest at LIBOR plus an applicable margin, as defined in the agreement,
and terminates on February 21, 2002. PHH is required to pay a per annum
utilization fee of .25% if usage under the facility exceeds 25% of
aggregate committments. 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.
6. Commitments and Contingencies
The June 1999 disposition of the Company's fleet businesses was structured
as a tax-free reorganization and, accordingly, no tax provision was
recorded on a majority of the gain. However, pursuant to a recent
interpretive ruling, the Internal Revenue Service ("IRS") has taken the
position that similarly structured transactions do not qualify as tax-free
reorganizations under the Internal Revenue Code Section 368(a)(1)(A). If
the transaction is not considered a tax-free reorganization, the resultant
incremental liability could range between $10 million and $170 million
depending upon certain factors, including utilization of tax attributes.
Notwithstanding the IRS interpretive ruling, the Company believes that,
based upon analysis of current tax law, its position would prevail, if
challenged.
The Company is involved in litigation asserting claims associated with the
accounting irregularities discovered in former CUC business units outside
of the principal common stockholder class action litigation. The Company
does not believe that it is feasible to predict or determine the final
outcome or resolution of these unresolved proceedings. An adverse outcome
from such unresolved proceedings could be material with respect to
earnings in any given reporting period. However, the Company does not
believe that the impact of such unresolved proceedings should result in a
material liability to the Company in relation to its consolidated
financial position or liquidity.
The Company is involved in pending litigation in the usual course of
business. In the opinion of management, such other litigation will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
7. Stockholders' Equity
Issuances of CD Common Stock
During first quarter 2001, the purchase contracts underlying the Company's
FELINE PRIDES settled. 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.
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.
Comprehensive Income
The components of comprehensive income are summarized as follows:
9
Three Months Ended
March 31,
------------------
2001 2000
----- -----
Net income $ 239 $ 69
Other comprehensive income (loss):
Currency translation adjustments (74) (21)
Unrealized gains (losses) on marketable securities, net of tax:
Unrealized gains (losses) arising during period 32 (12)
Reclassification adjustment for losses realized in net income 45 --
Unrealized losses on cash flow hedges, net of tax (3) --
----- -----
Total comprehensive income $ 239 $ 36
===== =====
The after-tax components of accumulated other comprehensive loss for the
three months ended March 31, 2001 are as follows:
Unrealized Unrealized Accumulated
Currency Gains/(Losses) Losses Other
Translation on Marketable on Cash Flow Comprehensive
Adjustments Securities Hedges Loss
----------- ---------- ------ ----
Balance, January 1, 2001 $(165) $ (69) $ -- (234)
Current period change (74) 77 (3) --
----- ----- ----- -----
Balance, March 31, 2001 $(239) $ 8 $ (3) $(234)
===== ===== ===== =====
8. Derivatives
Consistent with its historical risk management policies, the Company
entered into foreign currency forwards during first quarter 2001 to manage
currency fluctuation risks during fiscal year 2001. The Company also
entered into interest rate swaps and instruments with option features to
hedge interest rate risks on certain car rental, fleet management and
mortgage-related asset and liability accounts, as well as the interest
expense associated with its $2.85 billion principal common stockholder
litigation settlement liability. Such instruments were also used by the
Company to create a desired mix of fixed and floating rate debt.
Foreign Currency Risk
The Company uses forward contracts to manage its exposure to changes in
foreign currency exchange rates. These risks include non-functional
currency receivables, earnings of foreign entities and forecasted royalty
streams in non-functional currencies. The Company primarily hedges its
foreign currency exposure to the British pound, Canadian dollar and Euro.
The majority of the forward contracts do not qualify for hedge accounting
treatment under SFAS No. 133. The fluctuations in the value of these
foreign currency forwards do, however, effectively offset the impact of
changes in the value of the underlying risk that they are intended to
hedge. Forward contracts that are used to hedge certain forecasted
transactions do qualify for hedge accounting treatment as cash flow
hedges. The impact of those foreign currency forwards is not material to
the Company's results of operations or financial position at March 31,
2001.
Interest Rate Risk
The debt used to finance much of the Company's operations, its car rental
business and its mortgage-related assets is subject to volatility due to
interest rate fluctuations. The Company uses various hedging strategies
and derivative financial instruments to create a desired mix of fixed and
floating rate debt and interest rate related assets. Derivative
instruments currently used in managing the Company's exposure to interest
rate fluctuations include swaps and instruments with option features. A
combination of fair value hedges, cash flow hedges and financial
instruments that do not qualify for hedge accounting treatment under SFAS
No. 133 are used to manage the Company's portfolio of interest sensitive
assets and liabilities.
Fair value hedges are used to manage the Company's mortgage servicing
rights, mortgage loans held for sale and medium-term notes. During first
quarter 2001, the Company recorded a loss of $4 million to reflect the
ineffective portion of its fair value hedges. Such amount is included in
net revenues within the Consolidated Condensed Statement of Income.
Cash flow hedges are used to manage the interest expense incurred on the
Company's floating rate debt and on a portion of its principal common
stockholder litigation settlement liability. No ineffectiveness resulted
from these cash flow hedging relationships during first quarter 2001.
Derivative gains and losses included in other comprehensive income are
reclassified into earnings when interest payments or other
liability-related accruals are made. During first quarter 2001, the amount
of gains or losses reclassified from other comprehensive income to
earnings was not material. Over the next 12 months, derivative losses of
approximately $8 million are expected to be reclassified into earnings.
Certain of the Company's forecasted cash flows are hedged up to three
years into the future.
9. Segment Information
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation and amortization and
minority interest calculation. For this purpose, Adjusted EBITDA is
defined as earnings before non-operating interest, income taxes,
non-vehicle depreciation and amortization, minority interest
10
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 March 31,
---------------------------------------------
2001 2000
-------------------- --------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
-------- ------ -------- ------
Real Estate Services $ 339 $ 132 $ 289 $ 114
Hospitality 264 104 242 91
Vehicle Services 454 93 137 72
Financial Services 390 131 381 133
------ ------ ------ ------
Total Reportable Segments 1,447 460 1,049 410
Corporate and Other 39 (17) 79 2
------ ------ ------ ------
Total Company $1,486 $ 443 $1,128 $ 412
====== ====== ====== ======
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.
Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes, minority interest and equity in Homestore.com.
Three Months Ended
March 31,
------------------
2001 2000
----- -----
Adjusted EBITDA $ 443 $ 412
Non-vehicle depreciation and amortization (101) (85)
Other (charges) credits:
Restructuring and other unusual charges (185) (106)
Litigation settlement and related costs (11) 38
Merger-related costs (8) --
Non-vehicle interest, net (60) (26)
Net gain (loss) on dispositions of businesses 435 (13)
----- -----
Income before income taxes, minority interest and
equity in Homestore.com $ 513 $ 220
===== =====
10. Subsequent Events
Convertible Notes. During May 2001, the Company issued zero-coupon
zero-yield convertible senior notes to a qualified institutional buyer in
a private offering for gross proceeds of $1.0 billion. The notes mature in
2021. The Company may be required to repurchase these notes on May 4,
2002. The Company is not required to pay interest on the notes unless an
interest adjustment becomes payable, which may occur in specified
circumstances commencing in 2004. Each $1,000 principal amount at maturity
may be convertible, subject to satisfaction of specific contingencies,
into approximately 39 shares of CD common stock.
Asset-Backed Notes. During May 2001, the Company's Avis car rental
subsidiary registered $500 million of auction rate rental car asset backed
notes. These notes are secured by rental vehicles owned by such
subsidiary. The notes bear interest at a rate of LIBOR plus or minus an
applicable margin determined from time to time through an auction. The
Company issued approximately $200 million under this registration
statement.
Repurchase of Move.com Common Stock. During June 2001, the Company bought
back 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.
--------------------
11
Item 2. Restated Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with our Consolidated
Condensed Financial Statements and accompanying Notes thereto included elsewhere
herein. Unless otherwise noted, all dollar amounts are in millions.
RESULTS OF CONSOLIDATED OPERATIONS - 2001 vs. 2000
On March 1, 2001, we acquired all of the outstanding shares of Avis Group
Holdings, Inc. that we did not already own for $33.00 per share in cash, or
approximately $994 million, including $40 million of transaction costs and
expenses (referred to herein as "the Acquisition"). Avis Group is one of the
world's leading service and information providers for comprehensive automotive
transportation and vehicle management solutions. The consolidated results of
operations of Avis Group have been included in our consolidated results of
operations since the date of acquisition.
Strong contributions from many of our businesses and the addition of the
operations of Avis Group to our Vehicle Services segment contributed to revenue
growth of $358 million, or 32%. As a result of the Acquisition and certain
unusual charges, our expenses increased $513 million, or 57%. Such unusual
charges primarily consisted of (i) $95 million to fund an irrevocable
contribution to an independent technology trust responsible for providing
technology initiatives for the benefit of current and future franchisees at
Century 21, Coldwell Banker and ERA, (ii) $85 million incurred in connection
with the creation of Travel Portal, Inc., a company that was created to pursue
the development of an online travel business for the benefit of certain current
and future franchisees, (iii) $25 million of professional fees and settlement
costs incurred in connection with accounting irregularities in the former
business units of CUC International, Inc. and resulting investigations into such
matters and (iv) $8 million related to the acquisition and integration of Avis
Group. Such charges were partially offset by a non-recurring non-cash credit of
$14 million to reflect an adjustment to the PRIDES class action litigation
settlement charge recorded in the fourth quarter of 1998 primarily for Rights
that expired unexercised. Our non-vehicle interest expense increased $34 million
primarily as a result of interest expense accrued on our stockholder litigation
settlement liability, which was partially offset by interest income earned on
our deposits to an escrow fund established for the benefit of the plaintiffs in
such litigation.
Also during first quarter 2001, we sold our real estate Internet portal,
move.com, along with certain ancillary businesses to Homestore.com, Inc. in
exchange for approximately 21 million shares of Homestore common stock valued at
$718 million. We recorded a gain of $548 million on the sale of these
businesses, of which $436 million ($262 million, after tax) was recognized at
the time of closing. We deferred $112 million of the gain, which represents the
portion that was equivalent to our common equity ownership percentage in
Homestore at the time of closing.
Our overall effective tax rate for continuing operations was 40% in first
quarter 2001 and 35% in first quarter 2000. The higher tax rate in 2001 was
primarily due to higher state income taxes on the net gain on dispositions of
businesses discussed above.
As a result of the above-mentioned items, income before extraordinary loss and
cumulative effect of accounting change increased $150 million.
RESULTS OF REPORTABLE SEGMENTS
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating 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.
12
Three Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000
Adjusted EBITDA
Revenues Adjusted EBITDA Margin
------------------------- ------------------------------- ----------------
% %
2001 2000 Change 2001 2000(a) Change 2001 2000
------ ------ ------ ------ ------ ------ ---- ----
Real Estate Services $ 339 $ 289 17% $ 132(d) $ 114 16% 39% 39%
Hospitality 264 242 9 104 91(g) 14 39 38
Vehicle Services 454 137 231 93(e) 72 29 20(b) 53
Financial Services 390 381 2 131 133 (2) 34 35
------ ------ ------ ------
Total Reportable Segments 1,447 1,049 460 410
Corporate and Other(c) 39 79 * (17)(f) 2(h) * * *
------ ------ ------ ------
Total Company $1,486 $1,128 $ 443 $ 412
====== ====== ====== ======
----------
* Not meaningful.
(a) Excludes a charge of $106 million in connection with restructuring and
other initiatives ($2 million, $63 million, $31 million and $10 million
within Real Estate Services, Hospitality, Financial Services and Corporate
and Other, respectively).
(b) The decrease in the Adjusted EBITDA Margin is primarily due to the
inclusion of the consolidated results of operations of Avis Group in
connection with the Acquisition. Prior to the Acquisition, revenue and
Adjusted EBITDA of this segment consisted principally of earnings from our
equity investment in Avis Group, royalties received from Avis Group and
the operations of our National Car Parks subsidiary.
(c) 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.
(d) 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 current and future franchisees at Century
21, Coldwell Banker and ERA.
(e) Excludes a charge of $4 million related to the acquisition and integration
of Avis Group and includes $5 million of interest expense related to debt
used in the Acquisition.
(f) Excludes (i) a net gain of $435 million related to the dispositions of
businesses and (ii) a non-cash credit of $14 million to reflect an
adjustment to the PRIDES class action litigation settlement charge
recorded in the fourth quarter of 1998 primarily for Rights that expired
unexercised. Such amounts were partially offset by charges of (i) $85
million incurred in connection with the creation of Travel Portal, Inc., a
company that was created to pursue the development of an online travel
business for the benefit of certain current and future franchisees, (ii)
$25 million for investigation-related costs, (iii) $7 million related to a
non-cash contribution to the Cendant Charitable Foundation and (iv) $4
million related to the acquisition and integration of Avis Group.
(g) Excludes $4 million of losses related to the dispositions of businesses.
(h) Excludes a non-cash credit of $41 million in connection with a change to
the original estimate of the number of Rights to be issued in connection
with the PRIDES settlement resulting from unclaimed and uncontested
Rights. Such credit was partially offset by (i) $9 million of losses
related to the dispositions of businesses and (ii) $3 million of
investigation-related costs.
Real Estate Services
Revenues and Adjusted EBITDA increased $50 million (17%) and $18 million (16%),
respectively. Our brands continue to hold leading market positions in
residential real estate brokerage and employee relocation services, and Cendant
Mortgage is now one of the largest retail mortgage lenders in the United States.
The increase in operating results was principally driven by a significant
increase in mortgage loan production, mortgage servicing portfolio growth and
increased service based fees generated from client relocations.
Revenues from mortgage loans sold increased $34 million (64%), driven by
significant increases in both purchase and refinancing volume during first
quarter 2001. Collectively, mortgage loans sold increased $2.2 billion (59%) to
$5.9 billion. Beginning in January 2001, Merrill Lynch has outsourced its
mortgage originations and servicing operations to us. On a pro forma basis,
inclusive of Merrill Lynch's loan volume, we would have ranked as the second
largest retail mortgage lender in 2000. Closed mortgage loans increased $3.7
billion (97%) to $7.6 billion. This growth consisted of a $2.5 billion
(approximately 700%) increase in refinancings and a $1.3 billion (36%) increase
in purchase mortgage closings. New Merrill Lynch business accounted for 13% of
our mortgage closings in first 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). Loan servicing revenues increased $8 million (34%)
due to a $29 billion (56%) increase in the average servicing portfolio. In
conjunction with Merrill Lynch outsourcing its mortgage origination operations
to us, we added $11.3 billion to the servicing portfolio in first quarter 2001.
Service based fees from relocation activities also contributed to the increase
in revenues and Adjusted EBITDA. Relocation referral fees increased $5 million
due to increased market penetration and higher average fees. During first
quarter 2001, we increased our global client base by 46 clients and increased
services to over 100 clients. Royalties from real estate franchising remained
relatively unchanged in first quarter 2001 despite soft industry-wide
conditions, particularly in
13
California. A 3% reduction in home sales volume, was offset by a 5% increase in
the average price of homes sold, increased unit growth from franchise sales and
acquisitions by NRT Incorporated, our largest franchisee.
Hospitality
Revenues and Adjusted EBITDA increased $22 million (9%) and $13 million (14%),
respectively. Timeshare subscription and exchange revenues grew $9 million
(10%), primarily due to a 10% increase in average members and a 8% increase in
the number of exchange transactions. In January 2001, we acquired Holiday
Cottages Group Limited, the leading UK brand in the holiday cottage rental
sector. Holiday Cottages generated $9 million of revenues and $4 million of
Adjusted EBITDA in first quarter 2001. The Adjusted EBITDA margin increased from
38% to 39% as increased timeshare call and exchange volume was achieved with
lesser increases in expenses due to the operating leverage we have within our
timeshare exchange operations.
Vehicle Services
Prior to the Acquisition, revenue and Adjusted EBITDA of this segment consisted
principally of earnings from our equity investment in Avis Group, royalties
received from Avis Group and the operations of our National Car Parks
subsidiary. Subsequent to the Acquisition, the operations of Avis Group were
added to this segment. The operations of Avis Group are comprised of the car
rental business, which provides vehicle rentals to business and leisure
customers, and the fleet management business, which provides fully integrated
fleet management services to corporate customers including vehicle leasing,
advisory services, fuel and maintenance cards, other expense management programs
and productivity enhancement. Avis Group contributed revenue and Adjusted EBITDA
of $346 million and $35 million, respectively, for the one-month period ended
March 31, 2001. Adjusted EBITDA for Avis Group included $5 million of interest
expense on vehicle-related debt incurred to fund the Acquisition. Partially
offsetting the operating results of Avis Group was a $13 million income
reduction at National Car Parks, of which $9 million was due to reduced income
from financial investments.
Financial Services
Revenues increased $9 million (2%) while Adjusted EBITDA declined $2 million
(2%). Jackson Hewitt, our tax preparation franchise business experienced strong
quarter over quarter growth in revenues of $10 million (20%) principally due to
a 20% increase in tax return volume. Also contributing favorably to revenues and
Adjusted EBITDA was a favorable mix of products and programs with marketing
partners for individual memberships. Additionally, the integration of Netmarket,
our online membership business, during fourth quarter 2000 contributed $16
million and $3 million to first quarter 2001 revenues and Adjusted EBITDA,
respectively. Partially offsetting these favorable results were fewer individual
memberships expiring during first quarter 2001 (revenue is generally recognized
upon expiration of the membership) and reduced billings and collections of
insurance premiums at our FISI/BCI insurance wholesale subsidiary.
On July 2, 2001, we announced that we had entered into a number of agreements,
including a forty-year outsourcing agreement, with Trilegiant Corporation, a
newly formed company owned by the former management of our Cendant Membership
Services and Cendant Incentives subsidiaries. Under the terms of these
agreements, we will continue to recognize revenue and collect membership fees
and are obligated to provide membership benefits to existing members of our
individual membership business. Trilegiant will provide fulfillment services to
these members in exchange for a servicing fee. Trilegiant will license and/or
lease from us the assets of our individual membership business to service
existing members and to obtain new members for which Trilegiant will retain the
economic benefits and service obligations. Beginning in the third quarter of
2002, we will receive from Trilegiant a royalty from membership fees generated
by their new membership joins. The royalty received will range from a rate of 5%
to 16% of Trilegiant membership revenue. In connection with the foregoing
arrangements we have also agreed to fund up to a total of approximately $130
million (approximately $100 million in cash and $30 million in non-cash assets)
of Trilegiant's marketing expenses, subject to certain conditions, over the next
four years and have made a $20 million investment in Trilegiant in the form of
convertible preferred stock. As a result of these agreements, we will not
spin-off our individual membership business to our stockholders, as previously
planned.
Corporate and Other
Revenues and Adjusted EBITDA growth were negatively impacted by $30 million less
income recognized from financial investments during first quarter 2001.
14
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
March 31, December 31,
2001 2000 Change
------- ------- -------
Total assets exclusive of assets under programs $16,934 $12,211 $ 4,723
Assets under programs 10,660 2,861 7,799
Total liabilities exclusive of liabilities under programs $11,257 $ 7,724 $ 3,533
Liabilities under programs 10,619 2,516 8,103
Mandatorily redeemable securities 375 2,058 (1,683)
Stockholders' equity 5,343 2,774 2,569
Total assets exclusive of assets under programs increased primarily due to cash
proceeds provided by financing activities during first quarter 2001, an increase
in goodwill resulting from the Acquisition and various other increases in assets
also due to the Acquisition. Assets under programs increased primarily due to
vehicles acquired in the Acquisition.
Total liabilities exclusive of liabilities under programs increased primarily
due to first quarter 2001 debt issuances aggregating $1.6 billion, approximately
$900 million of debt assumed as a result of the Acquisition and various other
increases in liabilities also due to the Acquisition. Liabilities under programs
increased primarily due to approximately $6.8 billion of debt assumed in the
Acquisition and first quarter 2001 debt issuances aggregating $1.4 billion.
Mandatorily redeemable securities decreased due to 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 first quarter 2001 net
income of $239 million.
Liquidity and Capital Resources
Based upon cash flows provided by our operations and access to liquidity through
various other sources, including public debt and equity markets and financial
institutions, we have sufficient liquidity to fund our current business plans
and obligations.
Cash Flows
Three Months Ended
March 31,
-----------------------------
2001 2000 Change
------- ------- -------
Cash provided by (used in) continuing operations:
Operating activities $ 105 $ 9 $ 96
Investing activities (1,506) (150) (1,356)
Financing activities 2,554 (76) 2,630
Effects of exchange rate changes on cash and cash equivalents (5) 1 (6)
------- ------- -------
Net change in cash and cash equivalents $ 1,148 $ (216) $ 1,364
======= ======= =======
Cash flows from operating activities increased primarily due to the impact of
the Acquisition.
Cash flows used in investing activities increased primarily due to the
utilization of cash to fund the Acquisition and the funding of $250 million to
the stockholder litigation settlement trust during first quarter 2001.
Cash flows from financing activities resulted in an inflow of $2.6 billion in
first quarter 2001 compared to an outflow of $76 million in first quarter 2000,
primarily due to proceeds of $2.3 billion received from the issuances of debt
and CD common stock during first quarter 2001.
15
Capital Expenditures
Capital expenditures during first quarter 2001 amounted to $68 million and were
utilized to support operational growth, enhance marketing opportunities and
develop operating efficiencies through technological improvements. We anticipate
a capital expenditure investment during 2001 ranging from $275 million to $325
million. Such amount represents an increase from 2000 primarily due to the
acquisitions of Avis Group and Fairfield Communities, Inc.
Debt Financing
Activities of our management and mortgage programs include the former fleet
management business and car rental operations of Avis Group, as well as our
mortgage and relocation businesses. Such activities are autonomous and distinct
from our other activities. Therefore, management believes it is more useful to
review the debt financing of management and mortgage programs separately from
the debt financing of our other activities.
Exclusive of Management and Mortgage Programs
Our total long-term debt increased $2.2 billion to $4.2 billion at March 31,
2001. Such increase was primarily attributable to the assumption of Avis Group
debt of approximately $900 million and additional debt issuances of $1.6
billion. During first quarter 2001, we issued $1.5 billion aggregate principal
amount at maturity of zero-coupon convertible senior notes for aggregate gross
proceeds of approximately $900 million and borrowed $650 million under a new
term loan agreement.
During May 2001, we issued zero-coupon zero-yield convertible senior notes to a
qualified institutional buyer in a private offering for gross proceeds of $1.0
billion. We expect to utilize the proceeds for general corporate purposes and to
reduce certain borrowings. The notes mature in 2021. We are not required to pay
interest on the notes unless an interest adjustment becomes payable, which may
occur in specified circumstances. Each $1,000 principal amount at maturity may
be convertible, subject to satisfaction of specific contingencies, into
approximately 39 shares of CD common stock.
Coincident with the acquisition of Avis Group, we assumed and guaranteed a $450
million six-year revolving credit facility maturing in June 2005. Borrowings
under the six-year credit facility bear interest at LIBOR plus a margin of
approximately 175 basis points. We are required to pay a per annum facility fee
of 37.5 basis points. Also issued under this facility are letters of credit of
$130 million as of March 31, 2001. At March 31, 2001, we had approximately $20
million of availability under this facility and, in addition, we had
approximately $1.0 billion available under existing credit facilities.
Related to Management and Mortgage Programs
Activities of our management and mortgage programs are primarily supported by
the issuance of commercial paper and medium-term notes and by maintaining
secured obligations, depending upon asset growth and financial market
conditions.
Debt related to our management and mortgage programs increased $7.5 billion to
$9.6 billion at March 31, 2001. Such increase was primarily attributable to the
assumption of Avis Group debt principally comprising $3.7 billion of medium-term
notes, $1.6 billion of interest bearing notes and $957 million of commercial
paper and also additional medium-term notes issuances aggregating $1.4 billion
during first quarter 2001. Medium-term notes of $650 million were issued under
an existing shelf registration statement filed by our PHH subsidiary. We have
approximately $2.4 billion remaining available for issuing medium-term notes
under this shelf registration statement. The remaining $750 million consisted of
floating rate rental car asset backed notes which were issued through our Avis
car rental subsidiary.
During second quarter 2001, our Avis car rental subsidiary also registered $500
million of auction rate rental car asset backed notes. These notes are secured
by rental vehicles owned by such subsidiary. The notes bear interest at a rate
of LIBOR plus or minus an applicable spread determined from time to time through
an auction. We issued approximately $200 million under this registration
statement and utilized such proceeds to reduce outstanding commercial paper
borrowings.
16
Other Liquidity
During June 2001, we bought back 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.
Strategic Business Initiatives
On June 18, 2001, we announced that we had entered into a definitive agreement
to acquire all of the outstanding common stock of Galileo International, Inc., a
leading provider of electronic global distribution services for the travel
industry, at an expected value of $33 per share, or approximately $2.9 billion
in aggregate. As part of the acquisition, we will also assume approximately $600
million of Galileo net debt. The final acquisition price will be paid in a
combination of CD common stock and cash. The number of shares of CD common stock
to be paid to Galileo stockholders will fluctuate, between 116 million and 137
million shares, within a collar of $17 to $20 per share of CD common stock. The
remainder of the purchase price, approximately $562 million, will be paid in
cash and may fluctuate if the average price per share of CD common stock during
a stipulated period is above or below the collar. We anticipate funding the cash
portion of the final acquisition price from available cash, lines of credit or
debt issuances. The transaction is subject to customary regulatory approvals and
the approval of Galileo's stockholders. Although no assurances can be given, we
expect the transaction to close in the fall of 2001.
On April 2, 2001, we consummated the acquisition of all of the outstanding
common stock of Fairfield Communities, Inc., one of the largest vacation
ownership companies in the United States, for approximately $750 million,
including transaction costs and expenses and the conversion of Fairfield
employee stock options into CD common stock options. The acquisition was funded
from available cash.
We continually explore and conduct discussions with regard to acquisitions and
other strategic corporate transactions in our industries and in other franchise,
franchisable or service businesses in addition to transactions previously
announced. As part of our regular on-going evaluation of acquisition
opportunities, we currently are engaged in a number of separate, unrelated
preliminary discussions concerning possible acquisitions. The purchase price for
the possible acquisitions may be paid in cash, through the issuance of CD common
stock or other of our securities, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other things,
initiate and complete satisfactorily our due diligence investigations; negotiate
the financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and, if necessary, secure financing. No
assurance can be given with respect to the timing, likelihood or business effect
of any possible transaction. In the past, we have been involved in both
relatively small acquisitions and acquisitions which have been significant.
17
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 March 31, 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.
18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
On January 9, 2001, we filed a current report on Form 8-K to report under Item 5
changes in our management.
On January 18, 2001, we filed a current report on Form 8-K to report under Item
5 the prospectus covering the issuance and sale of new and additional Feline
PRIDES.
On January 19, 2001, we filed a current report of Form 8-K/A to report under
Item 5 the reclassification of our individual membership business as a
discontinued operation.
On February 8, 2001, we filed a current report on Form 8-K to report under Item
5 the issuance of CD common stock, our agreement to issue debt securities in a
private offering and our projected adjusted earnings per share from continuing
operations for 2001.
On February 8, 2001, we filed a current report on Form 8-K to report under Item
5 our fourth quarter and full year 2000 financial results.
On February 20, 2001, we filed a current report on Form 8-K to report under Item
5 the issuance of debt securities.
On March 9, 2001, we filed a current report on Form 8-K to report under Item 2
the acquisition of Avis Group Holdings, Inc. on March 1, 2001.
On March 12, 2001, we filed a current report on Form 8-K to report under Item 5
our Consolidated Schedule of Free Cash Flow for the years ended December 31,
2000 and 1999.
On March 21, 2001, we filed a current report on Form 8-K/A to report under Item
7 the final Indenture relating to the issuances of debt securities in February
2001.
19
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, Finance and
Chief Accounting Officer
Date: July 2, 2001
20
Exhibit Index
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the Company's 10-Q/A
for the quarterly period ended March 31, 2000, dated July 28, 2000).
3.2 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's 10-Q/A for the quarterly
period ended March 31, 2000, dated July 28, 2000).
4.1 Indenture dated as of February 11, 1997, between CUC International
Inc. and Marine Midland Bank, as Trustee (Incorporated by reference
to Exhibit 4(a) to the Company's Current Report on Form 8-K dated
February 13, 1997).
4.2 Indenture dated February 24, 1998 between the Company and The Bank
of Nova Scotia Trust Company of New York, as Trustee (Incorporated
by reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-3, Registration No. 333-45227, dated January 29, 1998).
4.3 Global Note (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated December 4, 1998).
4.4 Indenture dated November 6, 2000 between PHH Corporation and Bank
One Trust Company, N.A., as Trustee (Incorporated by reference to
Exhibit 4.0 to PHH Corporation's Current Report on Form 8-K dated
December 12, 2000).
4.5 Supplemental Indenture No. 1 dated November 6, 2000 between PHH
Corporation and Bank One Trust Company, N.A., as Trustee
(Incorporated by reference to Exhibit 4.1 to PHH Corporation's
Current Report on Form 8-K dated December 12, 2000).
4.6 Supplemental Indenture No. 2 dated January 30, 2001 between PHH
Corporation and Bank One Trust Company, N.A., as Trustee
(Incorporated by reference to Exhibit 4.1 to PHH Corporation's
Current Report on Form 8-K dated February 8, 2001).
4.7 Indenture dated February 13, 2001 between the Company and The Bank
of New York, as Trustee (Incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated February 20, 2001).
4.8 Purchase Agreement (including as Exhibit A the form of the Warrant
for the Purchase of Shares of Common Stock), dated December 15,
1999, between Cendant Corporation and Liberty Media Corporation
(Incorporated by reference to Exhibit 4.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
4.9 Resale Registration Rights Agreement dated as of February 13, 2001
between the Company and Lehman Brothers Inc. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000).
4.10 Indenture dated as of May 4, 2001 between the Company and The Bank
of New York, as Trustee (Incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated May 11, 2001).
10.1 Consulting Agreement with Martin L. Edelman, dated March 21, 2001.
(Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 2001,
dated May 11, 2001).
10.2 Employment Agreement with Kevin M. Sheehan, dated March 1, 2001.
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 2001,
dated May 11, 2001).
10.3 Amendment to the Five Year Competitive Advance and Revolving Credit
Agreement dated as of February 22, 2001, among the Company, the
financial institutions parties thereto and The Chase
Manhattan Bank, as Administrative Agent (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.4 Amendment to the Three Year Competitive Advance and Revolving Credit
Agreement, dated as of February 22, 2001, among the Company, the
lenders parties thereto and The Chase Manhattan Bank, as
Administrative Agent (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000).
10.5 $650,000,000 Term Loan Agreement dated as of February 22, 2001,
among the Company, the lenders therein and The Chase Manhattan Bank,
as Administrative Agent (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000).
10.6 364-Day Competitive Advance and Revolving Credit Agreement dated
March 4, 1997, as amended and restated through February 22, 2001,
among PHH Corporation, the lenders thereto and The Chase Manhattan
Bank, as Administrative Agent (Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges.