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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
COMMISSION FILE NO. 1-10308
---------------
CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0918165
(State or other jurisdiction (I.R.S. Employer
of incorporation or 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)
---------------
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 October 31, 2000 was 728,958,489 shares of CD common stock and
3,742,586 shares of Move.com common stock.
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CENDANT CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three
and nine months ended September 30, 2000 and 1999 1
Consolidated Condensed Balance Sheets as of September 30,
2000 and December 31, 1999 2
Consolidated Condensed Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risks 35
PART II Other Information
Item 1. Legal Proceedings 36
Item 6. Exhibits and Reports on Form 8-K 36
Certain statements in this Quarterly Report on Form 10-Q constitute "forward
looking statements" within the meaning of the Private Litigation Reform Act of
1995. Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance,
or achievements of the Company to be materially different from any future
results, performance, or achievements expressed or implied by such forward
looking statements. These forward looking statements were based on various
factors and were derived utilizing numerous important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward looking statements, include, but are not limited to: the
resolution or outcome of the unresolved pending litigation relating to the
previously announced accounting irregularities and other related litigation;
uncertainty as to the Company's future profitability; the Company's ability to
develop and implement operational and financial systems to manage rapidly
growing operations; competition in the Company's existing and potential future
lines of business; the Company's ability to integrate and operate successfully
acquired and merged businesses and the risks associated with such businesses,
including the acquisition of Avis Group Holdings, Inc. and Fairfield
Communities, Inc.; uncertainty relating to the timing and impact of the proposed
dispositions of certain businesses within the Move.com Group and Welcome Wagon
International, Inc. and the spin-off of the Company's Individual Membership
segment and loyalty business; the Company's ability to obtain financing on
acceptable terms to finance the Company's growth strategy and for the Company to
operate within the limitations imposed by financing arrangements and the effect
of changes in current interest rates, particularly in our Mortgage and Real
Estate Franchise segments. Other factors and assumptions not identified above
were also involved in the derivation of these forward looking statements, and
the failure of such other assumptions to be realized as well as other factors
may also cause actual results to differ materially from those projected. The
Company assumes no obligation to publicly correct or update these forward
looking statements to reflect actual results, changes in assumptions or changes
in other factors affecting such forward looking statements or if the Company
later becomes aware that they are not likely to be achieved.
(i)
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,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
REVENUES
Service fees, net $ 1,009 $ 1,116 $ 2,852 $ 3,280
Fleet leasing (net of depreciation and interest costs of $0, $0,
$0 and $670) - - - 30
Other 35 38 110 117
--------- --------- --------- ---------
Net revenues 1,044 1,154 2,962 3,427
--------- --------- --------- ---------
EXPENSES
Operating 324 383 994 1,189
Marketing and reservation 151 156 451 471
General and administrative 125 140 353 429
Depreciation and amortization 82 82 244 259
Other charges (credits):
Restructuring and other unusual charges 3 5 89 27
Litigation settlement and related costs 20 - (21) -
Investigation-related costs 7 5 15 13
Termination of proposed acquisition - - - 7
Interest, net 38 51 85 153
--------- --------- --------- ---------
Total expenses 750 822 2,210 2,548
--------- --------- --------- ---------
Net gain (loss) on dispositions of businesses 3 83 (7) 799
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 297 415 745 1,678
Provision for income taxes 86 166 234 386
Minority interest, net of tax 23 16 61 46
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 188 233 450 1,246
Discontinued operations:
Income (loss) from discontinued operations, net of tax 26 (24) 65 6
Gain (loss) on sale of discontinued operations, net of tax - (7) - 174
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 214 202 515 1,426
Extraordinary loss, net of tax - - (2) -
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 214 202 513 1,426
Cumulative effect of accounting change, net of tax - - (56) -
--------- --------- --------- ---------
NET INCOME $ 214 $ 202 $ 457 $ 1,426
========= ========= ========= =========
CD COMMON STOCK INCOME PER SHARE
BASIC
Income from continuing operations $ 0.26 $ 0.32 $ 0.63 $ 1.63
Net income 0.30 0.28 0.64 1.86
DILUTED
Income from continuing operations $ 0.25 $ 0.30 $ 0.61 $ 1.53
Net income 0.29 0.26 0.62 1.75
MOVE.COM COMMON STOCK LOSS PER SHARE
BASIC
Loss from continuing operations $ (0.55) $ (1.22)
Net loss (0.55) (1.22)
DILUTED
Loss from continuing operations $ (0.55) $ (1.22)
Net loss (0.55) (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,
2000 1999
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 1,215 $ 1,168
Receivables, net 751 991
Deferred income taxes 1,293 1,305
Other current assets 646 771
------------- -------------
Total current assets 3,905 4,235
Property and equipment, net 1,242 1,279
Goodwill, net 3,000 3,106
Franchise agreements, net 1,408 1,410
Other intangibles, net 642 655
Other assets 1,371 1,120
------------- -------------
Total assets exclusive of assets under management and mortgage programs 11,568 11,805
------------- -------------
Assets under management and mortgage programs
Mortgage loans held for sale 1,249 1,112
Mortgage servicing rights 1,575 1,084
Relocation receivables 194 530
------------- -------------
3,018 2,726
------------- -------------
TOTAL ASSETS $ 14,586 $ 14,531
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,076 $ 1,152
Stockholder litigation settlement and related costs 2,886 2,892
Deferred income 293 228
Current portion of debt - 400
Net liabilities of discontinued operations 163 241
------------- -------------
Total current liabilities 4,418 4,913
Long-term debt 2,074 2,445
Deferred income 417 413
Other noncurrent liabilities 467 452
------------- -------------
Total liabilities exclusive of liabilities under management and
mortgage programs 7,376 8,223
------------- -------------
Liabilities under management and mortgage programs
Debt 2,143 2,314
Deferred income taxes 321 310
------------- -------------
2,464 2,624
------------- -------------
Mandatorily redeemable preferred securities issued by subsidiary holding solely
senior debentures issued by the Company 1,681 1,478
------------- -------------
Mandatorily redeemable preferred interest in a subsidiary 375 -
------------- -------------
Commitments and contingencies (Note 11)
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 907,707,500 and 870,399,635 shares 9 9
Move.com common stock, $.01 par value - authorized 500 million shares and none;
issued and outstanding 3,742,586 shares and none; notional issued shares with
respect to Cendant Group's retained interest 22,500,000 and none - -
Additional paid-in capital 4,571 4,102
Retained earnings 1,883 1,425
Accumulated other comprehensive loss (204) (42)
CD treasury stock, at cost, 179,003,833 and 163,818,148 shares (3,569) (3,288)
------------- -------------
Total stockholders' equity 2,690 2,206
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,586 $ 14,531
============= =============
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,
------------------------------
2000 1999
------------- -------------
OPERATING ACTIVITIES
Net income $ 457 $ 1,426
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of tax (65) (6)
Gain on sale of discontinued operations, net of tax - (174)
Extraordinary loss 4 -
Cumulative effect of accounting change 89 -
Restructuring and other unusual charges 89 27
Payments of restructuring, merger-related and other unusual charges (44) (46)
Litigation settlement and related costs (21) -
Net (gain) loss on dispositions of businesses 7 (799)
Depreciation and amortization 244 259
Other, net (182) 51
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 578 738
------------- -------------
Management and mortgage programs:
Depreciation and amortization 113 668
Origination of mortgage loans (17,980) (20,841)
Proceeds on sale and payments from mortgage loans held for sale 17,839 21,471
------------- -------------
(28) 1,298
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 550 2,036
------------- -------------
INVESTING ACTIVITIES
Property and equipment additions (147) (201)
Net assets acquired (net of cash acquired) and acquisition-related payments (43) (146)
Net proceeds from dispositions of businesses 4 2,772
Other, net (60) 84
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (246) 2,509
------------- -------------
Management and mortgage programs:
Equity advances on homes under management (2,243) (6,026)
Repayment on advances on homes under management 2,752 6,033
Additions to mortgage servicing rights (664) (560)
Proceeds from sales of mortgage servicing rights 93 84
Investment in leases and leased vehicles, net - (774)
------------- -------------
(62) (1,243)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM CONTINUING OPERATIONS (308) 1,266
------------- -------------
FINANCING ACTIVITIES
Proceeds from borrowings 6 1,717
Principal payments on borrowings (776) (1,713)
Issuances of CD common stock 506 76
Issuances of Move.com common stock 45 -
Repurchases of CD common stock (306) (2,635)
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 (1) -
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (60) (2,555)
------------- -------------
Management and mortgage programs:
Principal payments on borrowings (4,283) (6,484)
Proceeds from debt issuance or borrowings 3,237 4,157
Net change in short-term borrowings 875 (1,772)
Proceeds received for debt repayment in connection with disposal
of Fleet segment - 3,017
------------- -------------
(171) (1,082)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES FROM CONTINUING OPERATIONS (231) (3,637)
------------- -------------
Effect of changes in exchange rates on cash and cash equivalents 25 32
------------- -------------
Net cash provided by (used in) discontinued operations 11 (80)
------------- -------------
Net increase (decrease) in cash and cash equivalents 47 (383)
Cash and cash equivalents, beginning of period 1,168 1,002
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,215 $ 619
============= =============
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. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements
include the accounts and transactions of Cendant Corporation and its
wholly-owned subsidiaries (collectively, the "Company").
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 periods. 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 for the
year ended December 31, 1999.
On October 25, 2000, the Company's Board of Directors committed to a plan to
complete a tax-free spin-off of the Company's Individual Membership segment
(consisting of Cendant Membership Services, Inc., a wholly-owned subsidiary)
and loyalty business (consisting of Cendant Incentives, formerly National
Card Control Inc., a wholly-owned subsidiary within the Insurance/Wholesale
segment) through a special dividend to CD common stockholders. In connection
with the planned spin-off, the account balances and activities of the
Company's Individual Membership segment were segregated and reported as
discontinued operations for all periods presented (see Note 5 - Discontinued
Operations).
On March 21, 2000, the Company's stockholders approved a proposal
authorizing a new series of common stock to track the performance of the
Move.com Group, a group of businesses which provide a broad range of quality
relocation, real estate, and home-related products and services through its
flagship portal site, move.com, and through the move.com network. The
Company's existing common stock was reclassified as CD common stock, which
reflects the performance of the Company's other businesses and also a
retained interest in the Move.com Group (collectively referred to as the
"Cendant Group"). In addition, the Company's charter was amended and
restated to increase the number of authorized shares of common stock from
2.0 billion to 2.5 billion, comprised of 2.0 billion shares of CD common
stock and 500 million shares of Move.com common stock. Although the issuance
of Move.com common stock is intended to track the performance of the
Move.com Group, holders are subject to all of the risks associated with an
investment in the Company and all of its businesses, assets and liabilities.
The Company has issued shares of Move.com common stock in several private
financings. See Note 12 - Stockholders' Equity for a description of those
transactions. On October 27, 2000, the Company entered into a definitive
agreement to sell certain businesses within its Move.com Group segment, as
well as certain other businesses (see Note 14 - Subsequent Events).
Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.
2. CHANGE IN ACCOUNTING POLICY
On January 1, 2000, the Company revised certain revenue recognition policies
regarding the recognition of non-refundable one-time fees and the
recognition of pro rata refundable subscription revenue as a result of the
adoption of Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition
in Financial Statements." The Company previously recognized non-refundable
one-time fees at the time of contract execution and cash receipt. This
policy was changed to the recognition of non-refundable one-time fees on a
straight line basis over the life of the underlying contract. The Company
previously recognized pro rata refundable subscription revenue equal to
procurement costs upon initiation of a subscription. Additionally, the
amount in excess of procurement costs was recognized over the subscription
period. This policy was
4
changed to the recognition of pro rata refundable subscription revenue on a
straight line basis over the subscription period. Procurement costs will
continue to be expensed as incurred. The adoption of SAB No. 101 also
resulted in a non-cash charge of approximately $89 million ($56 million,
after tax) on January 1, 2000 to account for the cumulative effect of the
accounting change. The percentage of annual revenues earned from
non-refundable one-time fees and from pro rata refundable subscription
revenue is not material to the Company's consolidated net revenues or to its
consolidated income from continuing operations.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," which
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 was previously amended by SFAS No. 137,
"Accounting For Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which deferred the effective
date of SFAS No. 133 to fiscal years commencing after June 15, 2000. The
Company has appointed a team to implement these standards on an
enterprise-wide basis. The Company has identified certain contracts, which
contain embedded derivatives, and additional freestanding derivatives as
defined by SFAS No. 133. Completion of the Company's implementation plan and
determination of the impact of adopting these standards is expected by the
end of the fourth quarter of 2000. Since the impact is dependent upon market
fluctuations and the notional value of such contracts at the time of
adoption, the impact of adopting these standards is not fully determinable.
However, the Company currently does not anticipate material changes to any
of its existing hedging strategies as a result of such adoption. The Company
will adopt SFAS No. 138 concurrently with SFAS No. 133 on January 1, 2001,
as required.
In October 2000, the 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 will adopt SFAS No. 140 on December 31, 2000, as
required.
4. EARNINGS PER SHARE
Earnings per share ("EPS") is calculated using both the basic and diluted
methods. Basic EPS reflects the weighted average number of shares
outstanding during the period exclusive of non-vested shares. Diluted EPS
further reflects all potentially dilutive securities only if the impact is
dilutive. Potentially dilutive securities include the assumed exercise of
stock options and warrants, non-vested shares, convertible debt and other
common stock equivalents (collectively, "common stock equivalents").
Furthermore, 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. The two-class method is an earnings allocation formula that
determines EPS for each class of common stock according to the related
earnings participation rights.
CD COMMON STOCK
Basic EPS is calculated by dividing earnings attributable to CD common stock
(including Cendant Group's retained interest in Move.com Group) by the
weighted average number of shares of CD common stock outstanding during the
period, exclusive of non-vested shares. Diluted EPS further reflects the
effects of dilutive common stock equivalents. At September 30, 2000, stock
options of 109 million (with a weighted average exercise price of $22.41 per
option) and stock warrants of 31 million (with a weighted average exercise
price of $22.91 per warrant) were antidilutive. At September 30, 1999, stock
options of 59 million (with a weighted average exercise price of $25.50 per
option) and stock warrants of 2 million (with a weighted average exercise
price of $21.31 per warrant) were antidilutive. Therefore, such options and
warrants were excluded from the computation of diluted EPS. In addition, the
Company's FELINE PRIDES ("PRIDES"), which provide for the distribution of CD
common stock shares in February 2001, were antidilutive at September 30,
2000 and 1999 and therefore also excluded from the computation of diluted
EPS.
5
MOVE.COM COMMON STOCK
Basic EPS is calculated by dividing (a) the product of the earnings
applicable to Move.com Group multiplied by the outstanding Move.com
"fraction" by (b) the weighted average number of shares outstanding during
the period. The Move.com "fraction" is a fraction, the numerator of which is
the number of shares of Move.com common stock outstanding and the
denominator of which is the number of shares that, if issued, would
represent 100% of the equity (and would include the 22,500,000 notional
shares of Move.com common stock representing Cendant Group's retained
interest in Move.com Group) in the earnings or losses of Move.com Group.
Diluted EPS further reflects the effects of dilutive common stock
equivalents. At September 30, 2000, stock options of 6 million (with a
weighted average exercise price of $18.48 per option) and stock warrants of
2 million (with a weighted average exercise price of $96.12 per warrant)
were antidilutive due to losses incurred by Move.com Group and therefore
excluded from the computation of diluted EPS.
Income (loss) per common share from continuing operations was computed as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
CD COMMON STOCK
Income from continuing operations:
Cendant Group $ 202 $ 238 $ 498 $ 1,255
Cendant Group's retained interest in Move.com Group (12) (5) (43) (9)
----------- ----------- ----------- -----------
Income from continuing operations for basic EPS 190 233 455 1,246
Convertible debt interest, net of tax 3 3 8 9
----------- ----------- ----------- -----------
Income from continuing operations for diluted EPS $ 193 $ 236 $ 463 $ 1,255
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 725 726 722 765
Dilutive securities
Stock options, warrants and non-vested shares 16 36 23 36
Convertible debt 18 18 18 18
----------- ----------- ----------- -----------
Diluted 759 780 763 819
=========== =========== =========== ===========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2000
--------------- --------------
MOVE.COM COMMON STOCK
Loss from continuing operations:
Move.com Group $ (14) $ (47)
Less: Cendant Group's retained interest in Move.com Group (12) (43)
--------------- --------------
Loss from continuing operations for basic and diluted EPS $ (2) $ (4)
=============== ==============
Weighted average shares outstanding:
Basic and Diluted (1) 4 4
=============== ==============
-----------------
(1) Weighted average shares outstanding for the nine month period was
calculated from the date of issuance of Move.com common stock (March
31, 2000) through September 30, 2000.
Income (loss) per common share from discontinued operations is summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
CD COMMON STOCK
Income (loss) from discontinued operations:
Basic $ 0.04 $ (0.03) $ 0.09 $ 0.01
Diluted 0.04 (0.03) 0.08 0.01
Gain (loss) on sale of discontinued operations:
Basic $ - $ (0.01) $ - $ 0.22
Diluted - (0.01) - 0.21
6
Basic and diluted loss per CD common share from the cumulative effect of an
accounting change for the nine months ended September 30, 2000 was $0.08 and
$0.07, respectively.
5. DISCONTINUED OPERATIONS
On October 25, 2000, the Company's Board of Directors committed to a plan to
complete a tax-free spin-off of the Company's Individual Membership segment
and loyalty business through a special dividend to CD common stockholders.
The final transaction is expected to close by mid-2001.
Summarized financial data of discontinued operations are as follows:
STATEMENTS OF INCOME:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net revenues $ 185 $ 261 $ 540 $ 703
----------- ----------- ----------- -----------
Income (loss) before income taxes $ 42 $ (46) $ 107 $ 3
Provision for (benefit from) income taxes 16 (22) 42 (3)
----------- ------------ ----------- -----------
Income (loss) from discontinued operations $ 26 $ (24) $ 65 $ 6
=========== =========== =========== ===========
BALANCE SHEETS:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------- ------------------
Current assets $ 345 $ 357
Goodwill 161 164
Other assets 98 96
Total liabilities (767) (858)
------------------- ------------------
Net liabilities of discontinued operations $ (163) $ (241)
=================== ==================
For the three and nine months ended September 30, 1999, the Company also
recorded a gain (loss) on the sale of discontinued operations of ($7)
million and $174 million, respectively, relating to certain other business
units of the Company which were previously reported as discontinued
operations.
6. COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income $ 214 $ 202 $ 457 $ 1,426
Other comprehensive income (loss):
Currency translation adjustment (31) 92 (119) 39
Unrealized loss on marketable securities, net of tax - (12) (43) (5)
----------- ----------- ----------- -----------
Total comprehensive income $ 183 $ 282 $ 295 $ 1,460
=========== =========== =========== ===========
The after tax components of accumulated other comprehensive loss for the
nine months ended September 30, 2000 are as follows:
UNREALIZED ACCUMULATED
CURRENCY GAIN/(LOSS) ON OTHER
TRANSLATION MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES LOSS
---------------- --------------- ----------------
Balance, January 1, 2000 $ (58) $ 16 $ (42)
Current period change (119) (43) (162)
---------------- --------------- ----------------
Balance, September 30, 2000 $ (177) $ (27) $ (204)
================ =============== ================
7
7. OTHER CHARGES (CREDITS)
RESTRUCTURING AND OTHER UNUSUAL CHARGES
First Quarter 2000 Charge. During the first quarter of 2000, the Company's
management, with the appropriate level of authority, formally committed to
various strategic initiatives. As a result of such initiatives, the Company
incurred restructuring and other unusual charges ("Unusual Charges") of $106
million during the first quarter of 2000, of which $86 million is included
in restructuring and other unusual charges and $20 million is included in
income (loss) from discontinued operations in the Consolidated Condensed
Statements of Income. The restructuring initiatives were aimed at improving
the overall level of organizational efficiency, consolidating and
rationalizing existing processes, reducing cost structures in the Company's
underlying businesses and other related efforts. These initiatives primarily
affected the Company's Travel and Insurance/Wholesale segments and its
discontinued Individual Membership segment. The initiatives are expected to
be substantially completed over the next six months. Liabilities associated
with Unusual Charges are classified as a component of accounts payable and
other current liabilities. The initial recognition of the Unusual Charges
and the corresponding utilization from inception is summarized by category
of expenditure as follows:
BALANCE AT
UNUSUAL CASH OTHER SEPTEMBER 30,
CHARGES PAYMENTS REDUCTIONS 2000
------------- ------------- ------------- -------------
Personnel related $ 25 $ 17 $ - $ 8
Asset impairments and
contract terminations 26 1 25 -
Facility related 9 1 1 7
Other unusual charges 46 29 14 3
------------- ------------- ------------- -------------
Total Unusual Charges 106 48 40 18
Reclassification for
discontinued operations (20) (8) (10) (2)
------------- ------------- ------------- -------------
Total Unusual Charges related
to continuing operations $ 86 $ 40 $ 30 $ 16
============= ============= ============= =============
Personnel related costs include severance resulting from the consolidation
and relocation of business operations and certain corporate functions as
well as other related costs. The Company formally communicated to 971
employees, representing a wide range of employee groups, as to their
separation from the Company. As of September 30, 2000, approximately 770
employees were terminated. In connection with a change in the Company's
strategic focus to an online business model, the Company recognized $23
million of asset impairments associated with the planned exit of a timeshare
software development business and $3 million of other asset write-offs and
various contract termination costs. Facility related costs consist of
facility closures and lease obligations resulting from the consolidation and
relocation of business operations. Other unusual charges include a $21
million charge to fund an irrevocable contribution to an independent
technology trust responsible for the installation of a Company sponsored
property management system, which will provide for integrated Web
capabilities enabling lodging franchisees to maximize Internet
opportunities. Additionally, the Company incurred other unusual charges of
$11 million associated with executive terminations, $7 million principally
related to the abandonment of certain computer system applications, $3
million related to stock option contract modifications and $4 million of
other related costs. Liabilities remaining at September 30, 2000 consisted
of personnel related costs, charges associated with facility closures and
related lease obligations and other unusual charges.
Third Quarter 2000 Charge. During the third quarter of 2000, the Company
incurred charges of $3 million in connection with the postponement of the
initial public offering of Move.com common stock.
1997 Charge. During the nine months ended September 30, 2000, cash outlays
of $1 million were applied against the 1997 merger-related and other unusual
charges reserve for severance payments. As a result, the 1997 merger-related
and other unusual charges reserve of $71 million at September 30, 2000
primarily relates to future severance payments, executive termination
benefits and lease termination payments, which will be settled upon the
resolution of related contingencies and in accordance with applicable lease
installment plans.
8
LITIGATION SETTLEMENT AND RELATED COSTS
On March 14, 2000, pursuant to a court order approving the previously
disclosed PRIDES settlement, the Company issued approximately 25 million
Rights with a calculated value of $11.71 per Right. Right holders may sell
or exercise the Rights by delivering the Company three Rights together with
two PRIDES in exchange for two new PRIDES (the "New PRIDES") for a period
beginning upon distribution of the Rights and concluding upon expiration of
the Rights (February 2001). The terms of the New PRIDES are the same as the
original PRIDES, except that the conversion rate was revised and fixed so
that, at the time of the issuance of the Rights, the New PRIDES had a value
equal to $17.57 more than the original PRIDES.
In connection with the issuance of the Rights, the Company recorded a
non-cash credit of $41 million to litigation settlement and related costs
during the first quarter of 2000, with a corresponding decrease to
additional paid-in capital. The credit represented an adjustment related to
the number of Rights to be issued, which was decreased by approximately 3
million, as such Rights were unclaimed and uncontested.
On May 3, 2000, pursuant to the PRIDES settlement, the Company issued
approximately 4 million additional PRIDES (the "Additional PRIDES"), with a
face value of $50 per Additional PRIDES, and received approximately $91
million in cash proceeds related to the issuance of such securities. Only
Additional Income PRIDES (having identical terms to the originally issued
Income PRIDES) were issued, of which 3,619,374 were immediately converted
into 3,619,374 New Income PRIDES and 380,626 remained Additional Income
PRIDES. No Additional Growth PRIDES were issued in the offering. Upon the
issuance of the Additional Income PRIDES, the Company recorded a reduction
to stockholders' equity of $108 million equal to the value of the total
future contract adjustment payments to be made.
During the third quarter of 2000, the Company also incurred charges of $20
million in connection with litigation asserting claims associated with
accounting irregularities in the former business units of CUC International
Inc. ("CUC") and outside of the principal common stockholder class action
lawsuit.
8. DEBT REDEMPTION
In January 2000, the Company redeemed its outstanding 7 1/2% senior notes at
a redemption price of 100.695% of par plus accrued interest. In connection
with the redemption, the Company recorded an extraordinary loss of $4
million ($2 million, after tax). The loss consisted of the call premium and
the write-off of deferred issuance costs.
9. SECURITIZATIONS
During the second and third quarters of 2000, the Company entered into three
separate financing agreements with Apple Ridge Funding LLC ("Apple Ridge"),
a bankruptcy remote, special purpose entity. Under the terms of these
agreements, certain relocation receivables will be transferred for cash, on
a revolving basis, to Apple Ridge until March 31, 2007. The Company retains
a subordinated residual interest and the related servicing rights and
obligations in the relocation receivables. At September 30, 2000, the
Company was servicing $703 million of receivables under these agreements.
10. MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIARY
In March 2000, a Company-formed limited liability corporation ("LLC") issued
a mandatorily redeemable preferred interest ("Senior Preferred Interest") in
exchange for $375 million in cash. The Senior Preferred Interest is
classified as a mandatorily redeemable preferred interest in a subsidiary in
the Consolidated Condensed Balance Sheet. The Senior Preferred Interest is
mandatorily redeemable 15 years from the date of issuance and may be
redeemed by the Company after 5 years, or earlier in certain circumstances.
Distributions on the Senior Preferred Interest are based on the three-month
LIBOR plus an applicable margin (1.77%) and are reflected as minority
interest in the Consolidated Condensed Statements of Income. Simultaneous
with the issuance of the Senior Preferred Interest, the Company transferred
certain assets to the LLC. After the sale of the Senior Preferred Interest,
the Company owned 100% of both the common interest and the junior preferred
interest in the LLC. In the event of default, holders of the Senior
Preferred Interest have certain liquidation preferences.
9
11. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LITIGATION AND GOVERNMENT INVESTIGATIONS
Since the April 15, 1998 announcement of the discovery of accounting
irregularities in the former business units of CUC, approximately 70
lawsuits claiming to be class actions, two lawsuits claiming to be brought
derivatively on the Company's behalf and several individual lawsuits and
arbitration proceedings have commenced in various courts and other forums
against the Company and other defendants by or on behalf of persons claiming
to have purchased or otherwise acquired securities or options issued by CUC
or the Company between May 1995 and August 1998.
The Securities and Exchange Commission ("SEC") and the United States
Attorney for the District of New Jersey are also conducting investigations
relating to the matters referenced above. As a result of the findings from
the Company's internal investigations, the Company made all adjustments
considered necessary by the Company, which are reflected in its previously
filed restated financial statements for the years ended December 31, 1997,
1996 and 1995 and for the six months ended June 30, 1998. On June 14, 2000,
pursuant to an offer of settlement made by the Company, the SEC issued an
Order Instituting Public Administrative Proceedings Pursuant to Section 21C
of the Securities and Exchange Act of 1934, Making Findings and Imposing a
Cease and Desist Order. In such Order, the SEC found that the Company had
violated certain financial reporting provisions of the Securities and
Exchange Act of 1934 and ordered the Company to cease and desist from
committing any future violations of such provisions. No financial penalties
were imposed against the Company.
On December 7, 1999, the Company announced that it reached a preliminary
agreement to settle the principal securities class action pending against
the Company in the U.S. District Court in Newark, New Jersey (the
"Settlement Agreement") brought on behalf of purchasers of all Cendant and
CUC publicly traded securities, other than PRIDES, between May 1995 and
August 1998. Under the Settlement Agreement, the Company would pay the class
members approximately $2.85 billion in cash. The definitive settlement
document was approved by the U.S. District Court by order dated August 14,
2000. Certain parties in the class action have appealed the District Court's
orders approving the plan of allocation of the settlement fund and awarding
of attorneys' fees and expenses to counsel for the lead plaintiffs. No
appeals challenging the fairness of the $2.85 billion settlement amount were
filed. The U.S. Court of Appeals for the Third Circuit has not issued a
briefing schedule for the appeals. Accordingly, the Company will not be
required to fund the settlement amount of $2.85 billion for some time.
However, the Settlement Agreement required the Company to post collateral
in the form of credit facilities and/or surety bonds by November 13, 2000.
See "Liquidity and Capital Resources" for management's discussion regarding
collateral arrangements under the Settlement Agreement.
The settlement does not encompass all litigation asserting claims associated
with the accounting irregularities. 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.
FLEET DISPOSITION
The Company's Fleet segment disposition in June 1999 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 and contractual
indemnification provisions. Notwithstanding the IRS interpretive ruling, the
Company believes that, based upon analysis of current tax law, its position
would prevail, if challenged.
OTHER PENDING LITIGATION
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.
10
12. STOCKHOLDERS' EQUITY
CD COMMON STOCK TRANSACTIONS
Repurchases. During the nine months ended September 30, 2000, the Company
repurchased $306 million (approximately 18 million shares) of CD common
stock under its common stock repurchase program.
Strategic Alliance. In February 2000, pursuant to a previously announced
strategic alliance, Liberty Media Corporation ("Liberty Media") invested
$400 million in cash to purchase 18 million shares of CD common stock and a
two-year warrant to purchase approximately 29 million shares of CD common
stock at an exercise price of $23.00 per share. In addition, in March 2000,
Liberty Media's Chairman, John C. Malone, Ph.D., purchased one million
shares of CD common stock for approximately $17 million in cash.
MOVE.COM COMMON STOCK TRANSACTIONS
NRT Incorporated Investment. On April 14, 2000, NRT Incorporated ("NRT")
purchased 319,591 shares of Move.com common stock for $31.29 per share or
approximately $10 million in cash. The Company owns $179 million of NRT
convertible preferred stock, of which $21 million will be convertible, at
the Company's option upon occurrence of certain events, into no more than
50% of NRT's common stock.
Chatham Street Holdings, LLC Investment. In connection with the
recapitalization of NRT in September 1999, the Company entered into an
agreement with Chatham Street Holdings, LLC ("Chatham") as consideration for
certain amendments made with respect to the NRT franchise agreements, which
amendments provided for additional payments of certain royalties to the
Company. Pursuant to this agreement, Chatham was granted the right, until
September 2001, to purchase 1,561,000 shares of Move.com common stock. On
March 31, 2000, Chatham exercised this contractual right and purchased
1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash. In connection with such exercise, for
every two shares of Move.com common stock purchased, Chatham received a
warrant to purchase one share of Move.com common stock at a price equal to
$64.08 per share and a warrant to purchase one share of Move.com common
stock at a price equal to $128.16 per share. Also during March 2000, the
Company invested $25 million in convertible preferred stock of WMC Finance
Co. ("WMC"), an online provider of sub-prime mortgages and an affiliate of
Chatham (which is convertible into 2,541,946 shares or approximately 12% of
WMC's common stock at September 30, 2000), and was granted an option to
purchase approximately 5 million shares of WMC common stock.
Liberty Digital, Inc. Investment. On March 31, 2000, Liberty Digital, Inc.
("Liberty Digital") purchased 1,598,030 shares of Move.com common stock for
$31.29 per share in exchange for consideration consisting of $10 million in
cash and 813,215 shares of Liberty Digital Class A common stock valued at
approximately $40 million. In the event Move.com common stock is not
publicly traded by June 30, 2001, the Company will be required to exchange
such shares for CD common stock.
13. 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, depreciation and
amortization and minority interest, 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.
Prior to the third quarter of 2000, the historical operating results of
Cendant Travel, a subsidiary which facilitates travel arrangements for the
Company's travel-related and membership businesses, were included
11
within the Individual Membership segment. Beginning the third quarter of
2000, the operations of Cendant Travel began being managed as a component of
the Travel segment. Accordingly, the operating results of Cendant Travel are
reflected in the Travel segment for all periods presented.
In connection with the Individual Membership segment being reported as
discontinued operations, general corporate overhead previously allocated to
the Individual Membership segment has been reclassified to the Diversified
Services segment for all periods presented.
SEGMENT INFORMATION
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 (1) 1999
------------------------ ------------------------ 1999 PRO FORMA
ADJUSTED ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA EBITDA (2)
----------- ----------- ----------- ----------- --------------------
Travel $ 344 $ 165 $ 335 $ 164 $ 161
Real Estate Franchise 162 119 161 124 120
Relocation 127 49 117 42 43
Mortgage 132 74 114 59 60
Insurance/Wholesale 145 48 143 48 50
Move.com Group 15 (20) 5 (8) (8)
Diversified Services 121 9 279 46 49
Inter-segment Eliminations (2) - - - -
----------- ----------- ----------- ----------- --------------------
Total $ 1,044 $ 444 $ 1,154 $ 475 $ 475
=========== =========== =========== =========== ====================
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 (1) 1999
------------------------ ------------------------ 1999 PRO FORMA
ADJUSTED ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA EBITDA (2)
----------- ----------- ----------- ----------- --------------------
Travel $ 954 $ 440 $ 948 $ 463 $ 454
Real Estate Franchise 448 328 417 310 303
Relocation 332 105 315 94 96
Mortgage 306 117 314 153 154
Insurance/Wholesale 435 138 426 137 141
Move.com Group 41 (74) 11 (14) (14)
Diversified Services 448 110 789 114 123
Fleet - - 207 81 81
Inter-segment Eliminations (2) - - - -
----------- ----------- ----------- ----------- --------------------
Total $ 2,962 $ 1,164 $ 3,427 $ 1,338 $ 1,338
=========== =========== =========== =========== ====================
-----------------
(1) As of January 1, 2000, the Company refined its corporate overhead
allocation method. As a result, expenses determined to be primarily
associated with a specific business segment are recorded by that
business segment versus allocating those expenses among the segments
based on a percentage of revenue. The Company determined the refinement
in corporate allocation method to be appropriate subsequent to the
completion of the Company's divestiture plan and based on the
composition of the business units comprising the Company in 2000.
(2) Pro forma 1999 Adjusted EBITDA is presented as if the refined method of
allocating corporate overhead in 2000 was applicable to 1999.
Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes and minority interest.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Adjusted EBITDA $ 444 $ 475 $ 1,164 $ 1,338
Depreciation and amortization (82) (82) (244) (259)
Other (charges) credits:
Restructuring and other unusual charges (3) (5) (89) (27)
Litigation settlement and related costs (20) - 21 -
Investigation-related costs (7) (5) (15) (13)
Termination of proposed acquisition - - - (7)
Interest, net (38) (51) (85) (153)
Net gain (loss) on disposition of businesses 3 83 (7) 799
----------- ----------- ----------- -----------
Income before income taxes and minority interest $ 297 $ 415 $ 745 $ 1,678
=========== =========== =========== ===========
12
14. SUBSEQUENT EVENTS
DISPOSITION
On October 27, 2000, the Company announced that it had entered into a
definitive agreement with Homestore.com, Inc. ("Homestore") to sell its
Internet real estate portal, move.com, certain other businesses within its
Move.com Group segment and Welcome Wagon International, Inc. ("Welcome
Wagon") (a wholly-owned subsidiary included within the Diversified Services
segment) in exchange for approximately 26 million shares of Homestore
common stock valued at approximately $761 million. The Company intends on
allocating a portion of the Homestore common stock shares received to
existing Move.com common stockholders and option holders. After such
allocation, the Company expects to retain approximately 19 or 20 million
shares of Homestore common stock. Consummation of the transaction is
subject to certain customary closing conditions, including Hart Scott
Rodino anti-trust approval. Although no assurances can be given, the
Company expects to complete the transaction during the first quarter of
2001.
ACQUISITIONS
Avis Group Holdings, Inc. On November 13, 2000, the Company announced that
they entered into a definitive agreement to acquire all of the outstanding
shares of Avis Group Holdings, Inc. ("Avis") that are not currently owned by
the Company at a price of $33.00 per share in cash. Approximately 26 million
outstanding shares of Avis common stock, and options to purchase
approximately 7.9 million additional shares, are not currently owned by the
Company. Accordingly, the transaction is valued at approximately
$935 million, net of option proceeds.
The acquisition will be made by PHH Corporation ("PHH"), a wholly-owned
subsidiary of the Company. PHH will distribute the consumer car rental
business, Avis Rent a Car, to a Company subsidiary not within PHH's
ownership structure. After the acquisition and the distribution of the
consumer car rental business, PHH will own and operate the Vehicle
Management and Leasing business as well as the Wright Express fuel card
business. The merger is conditioned upon, among other things, approval of a
majority of the votes cast by Avis stockholders who are unaffiliated with
the Company and also customary regulatory approvals. Although no assurances
can be given, the Company expects the transaction to close in the first
quarter of 2001.
Fairfield Communities, Inc. On November 2, 2000, the Company announced that
it had entered into a definitive agreement with Fairfield Communities, Inc.
("Fairfield") to acquire all of its outstanding common stock at $15 per
share, or approximately $635 million in aggregate. The final acquisition
price may increase to a maximum of $16 per share depending upon a formula
based on the average trading price of CD common stock over a twenty trading
day period prior to the date on which Fairfield stockholders meet to approve
the transaction. At least 50% of the consideration will be in cash and the
balance will either be in cash or CD common stock, at the Company's
election. Consummation of the transaction is subject to customary regulatory
approvals. Although no assurances can be given, the Company expects to
complete the acquisition in early 2001.
15. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In connection with the issuance of Move.com common stock, the Company began
disclosing separately, for financial reporting purposes, financial
information for the Cendant Group and the Move.com Group. Cendant Group
provides various services to and receives various services from the Move.com
Group. Inter-group revenues and expenses have been broken out seperately and
self-eliminate in consolidation.
ALLOCATION POLICIES
Treasury Activities. Through March 31, 2000 (the date of original issuance
of Move.com common stock), Cendant Group had provided all necessary funding
for the operations and investments of the Move.com Group since inception and
such funding had been accounted for as capital contributions from the
Cendant Group. Accordingly, no interest charges from the Cendant Group were
reflected in the accompanying Consolidating Condensed Statements of Income.
Surplus cash, transferred from the Move.com Group to the Cendant Group from
time to time, had been accounted for as a return of capital. Subsequent to
March 31, 2000, all cash transfers from one group to or for the account of
the other group are accounted for as inter-group revolving credit advances
and may bear interest at a rate similar to the Company's prevailing
revolving line of credit rate determined by the Company's Board of
Directors, in its sole discretion.
Revenues. Revenue allocations are supported by signed agreements between the
Cendant Group and the Move.com Group and are intended to approximate the
fair value of services provided.
Expenses. Cendant Group allocates the cost of its corporate overhead
services to the Move.com Group generally based on utilization. Where
determinations based on utilization are impracticable, the Cendant Group
uses percentages of revenues or other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of costs
attributable to the Move.com Group. The allocations of corporate overhead to
the Move.com Group are consistent with the allocations made to subsidiaries
within the Cendant Group. Corporate overhead includes charges for legal,
accounting (tax and financial),
13
information and telecommunications services, marketing, intellectual
property, public relations, corporate offices and travel.
Expenses, other than corporate overhead allocations, are allocated based
upon utilization and usage volume.
Income Taxes. Move.com Group is included in the consolidated federal income
tax return of Cendant Group. In addition, Move.com Group files unitary and
combined state income tax returns with Cendant Group in jurisdictions where
required. As such, income tax expense is allocated to Move.com Group in
accordance with Cendant Group's tax allocation policy.
ALLOCATIONS
The allocations from the Cendant Group to the Move.com Group are comprised
as follows: (a) revenues for selling advertising space and links on the
Cendant Group real estate franchise systems Web sites, (b) revenues for Web
site management associated with the Cendant Group's real estate franchise
systems, (c) revenues associated with the Web site development of Welcome
Wagon, (d) expenses for overhead charges, (e) expenses associated with an
Internet engineering services agreement and (f) expenses associated with the
Web site development Welcome Wagon. Additionally, portions of the benefit
for income taxes and balance sheet accounts of Move.com Group are based on
allocations from the Cendant Group.
The consolidating condensed financial information, which includes certain
allocations between the Cendant Group and the Move.com Group, is presented
as follows:
14
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000 THREE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------- -------------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
----------- ----------- ------------ ----------- ----------- ------------
REVENUES
External revenues $ 1,035 $ 9 $ 1,044 $ 1,149 $ 5 $ 1,154
Inter-group agreements (6) 6 - - - -
----------- ----------- ------------ ----------- ----------- ------------
Net revenues 1,029 15 1,044 1,149 5 1,154
----------- ----------- ------------ ----------- ----------- ------------
EXPENSES
Operating:
External expenses 313 11 324 375 8 383
Inter-group allocated expenses (6) 6 - (1) 1 -
Marketing and reservation 142 9 151 156 - 156
General and administrative:
External expenses 118 7 125 136 4 140
Inter-group allocated expenses (1) 1 - - - -
Depreciation and amortization 80 2 82 81 1 82
Other charges, net 27 3 30 10 - 10
Interest, net 38 - 38 51 - 51
----------- ----------- ------------ ----------- ----------- ------------
Total expenses 711 39 750 808 14 822
----------- ----------- ------------ ----------- ----------- ------------
Net gain on dispositions of
businesses 3 - 3 83 - 83
----------- ----------- ------------ ----------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 321 (24) 297 424 (9) 415
Provision (benefit) for income taxes 96 (10) 86 170 (4) 166
Minority interest, net of tax 23 - 23 16 - 16
----------- ----------- ------------ ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 202 (14) 188 238 (5) 233
Discontinued operations:
Income (loss) from
discontinued operations 26 - 26 (24) - (24)
Loss on sale of discontinued
operations, net of tax - - - (7) - (7)
----------- ----------- ------------ ----------- ----------- ------------
NET INCOME (LOSS) $ 228 $ (14) $ 214 $ 207 $ (5) $ 202
=========== =========== ============ =========== =========== ============
15
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------ ------------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
----------- ----------- ------------ ----------- ----------- ------------
REVENUES
External revenues $ 2,937 $ 25 $ 2,962 $ 3,416 $ 11 $ 3,427
Inter-group agreements (16) 16 - - - -
----------- ----------- ------------ ----------- ----------- ------------
Net revenues 2,921 41 2,962 3,416 11 3,427
----------- ----------- ------------ ----------- ----------- ------------
EXPENSES
Operating:
External expenses 964 30 994 1,176 13 1,189
Inter-group allocated expenses (15) 15 - (1) 1 -
Marketing and reservation 402 49 451 471 - 471
General and administrative:
External expenses 334 19 353 418 11 429
Inter-group allocated expenses (2) 2 - - -
Depreciation and amortization 240 4 244 257 2 259
Other charges, net 79 4 83 47 - 47
Interest, net 86 (1) 85 153 - 153
----------- ----------- ------------ ----------- ----------- ------------
Total expenses 2,088 122 2,210 2,521 27 2,548
----------- ----------- ------------ ----------- ----------- ------------
Net gain (loss) on dispositions of
businesses (7) - (7) 799 - 799
----------- ----------- ------------ ----------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 826 (81) 745 1,694 (16) 1,678
Provision (benefit) for income taxes 267 (33) 234 393 (7) 386
Minority interest, net of tax 61 - 61 46 - 46
----------- ----------- ------------ ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 498 (48) 450 1,255 (9) 1,246
Discontinued operations:
Income from discontinued
operations 65 - 65 6 - 6
Gain on sale of discontinued
operations, net of tax - - - 174 - 174
----------- ----------- ------------ ----------- ----------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 563 (48) 515 1,435 (9) 1,426
Extraordinary loss, net of tax (2) - (2) - - -
---------- ----------- ----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 561 (48) 513 1,435 (9) 1,426
Cumulative effect of accounting
change, net of tax (56) - (56) - - -
---------- ----------- ------------ ----------- ----------- ------------
NET INCOME (LOSS) $ 505 $ (48) $ 457 $ 1,435 $ (9) $ 1,426
=========== =========== ============ =========== =========== ============
16
CONSOLIDATING CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------------------------- --------------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
----------- ----------- ------------ ----------- ----------- ------------
ASSETS
Cash and cash equivalents $ 1,211 $ 4 $ 1,215 $ 1,167 $ 1 $ 1,168
Receivables, net 743 8 751 983 8 991
Deferred income taxes 1,287 6 1,293 1,305 - 1,305
Other current assets 635 11 646 768 3 771
Property and equipment, net 1,227 15 1,242 1,276 3 1,279
Goodwill, net 2,991 9 3,000 3,101 5 3,106
Other noncurrent assets 3,407 14 3,421 3,183 2 3,185
Assets under management
and mortgage programs 3,018 - 3,018 2,726 - 2,726
----------- ----------- ------------ ----------- ----------- ------------
TOTAL ASSETS $ 14,519 $ 67 $ 14,586 $ 14,509 $ 22 $ 14,531
=========== =========== ============ =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 4,397 $ 21 $ 4,418 $ 4,892 $ 21 $ 4,913
Noncurrent liabilities 2,955 3 2,958 3,310 - 3,310
Liabilities under management
and mortgage programs 2,464 - 2,464 2,624 - 2,624
Mandatorily redeemable preferred
securities issued by subsidiary
holding solely senior debentures
issued by the Company 1,681 - 1,681 1,478 - 1,478
Mandatorily redeemable
preferred interest in a subsidiary 375 - 375 - - -
Stockholders' equity
Common stock 9 - 9 9 - 9
Additional paid-in capital 4,454 117 4,571 4,083 19 4,102
Retained earnings
(accumulated deficit) 1,949 (66) 1,883 1,443 (18) 1,425
Accumulated other
comprehensive loss (196) (8) (204) (42) - (42)
CD treasury stock, at cost (3,569) - (3,569) (3,288) - (3,288)
----------- ----------- ------------ ----------- ----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 14,519 $ 67 $ 14,586 $ 14,509 $ 22 $ 14,531
=========== =========== ============ =========== =========== ============
17
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------ ------------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
---------- ---------- ------------- ---------- ---------- ------------
OPERATING ACTIVITIES
Net income (loss) $ 505 $ (48) $ 457 $ 1,435 $ (9) $ 1,426
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Income from discontinued
operations, net of tax (65) - (65) (6) - (6)
Gain on sale of discontinued
operations, net of tax - - - (174) - (174)
Extraordinary loss 4 - 4 - - -
Cumulative effect of
accounting change 89 - 89 - - -
Restructuring and other
unusual charges 85 4 89 27 - 27
Payments of restructuring,
merger-related and other
unusual charges (40) (4) (44) (46) - (46)
Litigation settlement and related
costs (21) - (21) - - -
Net (gain) loss on dispositions
of businesses 7 - 7 (799) - (799)
Depreciation and amortization 240 4 244 257 2 259
Other, net (167) (15) (182) 47 4 51
Management and mortgage
programs (28) - (28) 1,298 - 1,298
---------- ---------- ------------- ---------- ---------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 609 (59) 550 2,039 (3) 2,036
---------- ---------- ------------- ---------- ---------- ------------
INVESTING ACTIVITIES
Property and equipment additions (134) (13) (147) (200) (1) (201)
Net assets acquired (net of
cash acquired) and acquisition-
related payments (43) - (43) (146) - (146)
Net proceeds from dispositions of
businesses 4 - 4 2,772 - 2,772
Other, net (62) 2 (60) 84 - 84
Management and mortgage
programs (62) - (62) (1,243) - (1,243)
---------- ---------- ------------- ---------- ---------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (297) (11) (308) 1,267 (1) 1,266
---------- ---------- ------------- ---------- ---------- ------------
FINANCING ACTIVITIES
Proceeds from borrowings 6 - 6 1,717 - 1,717
Principal payments on borrowings (776) - (776) (1,713) - (1,713)
Issuances of CD common stock 506 - 506 76 - 76
Issuances of Move.com
common stock - 45 45 - - -
Repurchases of CD common stock (306) - (306) (2,635) - (2,635)
Proceeds from mandatorily redeemable
preferred securities issued by
subsidiary holding solely senior
debentures issued by the Company 91 - 91 - - -
Proceeds from mandatorily
redeemable preferred interest in
a subsidiary 375 - 375 - - -
Other, net (1) - (1) - - -
Management and mortgage
programs (171) - (171) (1,082) - (1,082)
Inter-group funding, net (28) 28 - (4) 4 -
---------- ---------- ------------- ---------- ---------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (304) 73 (231) (3,641) 4 (3,637)
---------- ---------- ------------- ---------- ---------- ------------
Effect of changes in exchange rates
on cash and cash equivalents 25 - 25 32 - 32
---------- ---------- ------------- ---------- ---------- ------------
Net cash provided by (used in)
discontinued operations 11 - 11 (80) - (80)
---------- ---------- ------------- ---------- ---------- ------------
Net increase (decrease) in cash and
cash equivalents 44 3 47 (383) - (383)
Cash and cash equivalents,
beginning of period 1,167 1 1,168 1,002 - 1,002
---------- ---------- ------------- ---------- ---------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,211 $ 4 $ 1,215 $ 619 $ - $ 619
========== ========== ============= ========== ========== ============
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in 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
REVENUES
Revenues for the three months ended September 30, 2000 decreased $110
million (10%) compared with the corresponding period in 1999 primarily due
to the effects of non-strategic businesses disposed throughout 1999.
Excluding the operating results of such dispositions, revenues increased $32
million (3%), which primarily reflected increased loan production in our
mortgage business and an increase in service based fees from our relocation
business, partially offset by a decline in revenues related to financial
investment income.
Revenues for the nine months ended September 30, 2000 decreased $465 million
(14%) compared with the corresponding period in 1999 due to the effects of
non-strategic businesses disposed throughout 1999. Excluding the operating
results of such dispositions, revenues increased $103 million (4%), which
primarily reflected growth attributable to (i) an increase in real estate
royalty fees, (ii) an increase in service based fees from our relocation
business, (iii) an increase in sponsorship revenues due to our continued
investment in the marketing of the move.com network and (iv) an increase in
tax return volume and average fee per tax return; partially offset by a
decline related to a decrease in mortgage volume.
OTHER CHARGES (CREDITS)
RESTRUCTURING AND OTHER UNUSUAL CHARGES
First Quarter 2000 Charge. During the first quarter of 2000, management,
with the appropriate level of authority, formally committed to various
strategic initiatives. As a result of such initiatives, we incurred
restructuring and other unusual charges ("Unusual Charges") of $106 million
during the first quarter of 2000, of which $86 million is included in
restructuring and other unusual charges and $20 million is included in
income (loss) from discontinued operations in the Consolidated Condensed
Statements of Income. The restructuring initiatives were aimed at improving
the overall level of organizational efficiency, consolidating and
rationalizing existing processes, reducing cost structures in our underlying
businesses and other related efforts. These initiatives primarily affected
our Travel and Insurance/Wholesale segments and our discontinued Individual
Membership segment. The initiatives are expected to be substantially
completed over the next six months. The initial recognition of the Unusual
Charges and the corresponding utilization from inception is summarized by
category of expenditure as follows:
BALANCE AT
UNUSUAL CASH OTHER SEPTEMBER 30,
CHARGES PAYMENTS REDUCTIONS 2000
------------- ------------- ------------- -------------
Personnel related $ 25 $ 17 $ - $ 8
Asset impairments and
contract terminations 26 1 25 -
Facility related 9 1 1 7
Other unusual charges 46 29 14 3
------------- ------------- ------------- -------------
Total Unusual Charges 106 48 40 18
Reclassification for
discontinued operations (20) (8) (10) (2)
------------- ------------- ------------- -------------
Total Unusual Charges related
to continuing operations $ 86 $ 40 $ 30 $ 16
============= ============= ============= =============
Personnel related costs include severance resulting from the consolidation
and relocation of business operations and certain corporate functions as
well as other related costs. We formally communicated to 971 employees,
representing a wide range of employee groups, as to their separation from
us. As of September 30, 2000, approximately 770 employees were terminated.
In connection with a change in our strategic focus to an online business
model, we recognized $23 million of asset impairments associated
19
with the planned exit of a timeshare software development business and $3
million of other asset write-offs and various contract termination costs.
Facility related costs consist of facility closures and lease obligations
resulting from the consolidation and relocation of business operations.
Other unusual charges include a $21 million charge to fund an irrevocable
contribution to an independent technology trust responsible for the
installation of a property management system sponsored by us, which will
provide for integrated Web capabilities enabling lodging franchisees to
maximize Internet opportunities. Additionally, we incurred other unusual
charges of $11 million associated with executive terminations, $7 million
principally related to the abandonment of certain computer system
applications, $3 million related to stock option contract modifications and
$4 million of other related costs. The total Unusual Charges will require
cash expenditures of approximately $62 million, expected to be spent
primarily in 2000, and are anticipated to increase pre-tax income by
approximately $25 million to $30 million annually, commencing in 2001. All
cash requirements are expected to be funded from operations. Liabilities
remaining at September 30, 2000 consisted of personnel related costs,
charges associated with facility closures and related lease obligations and
other unusual charges.
Third Quarter 2000 Charge. During the third quarter of 2000, we incurred
charges of $3 million in connection with the postponement of the initial
public offering of Move.com common stock.
1997 Charge. During the nine months ended September 30, 2000, cash outlays
of $1 million were applied against the 1997 merger-related and other unusual
charges reserve for severance payments. As a result, the 1997 merger-related
and other unusual charges reserve of $71 million at September 30, 2000
primarily relates to future severance payments, executive termination
benefits and lease termination payments, which will be settled upon the
resolution of related contingencies and in accordance with applicable lease
installment plans.
LITIGATION SETTLEMENT AND RELATED COSTS
In connection with the issuance of Rights on March 14, 2000 under the FELINE
PRIDES ("PRIDES") settlement, we recorded a non-cash credit of $41 million
during the first quarter of 2000. The credit represented an adjustment
related to the number of Rights to be issued, which was decreased by
approximately 3 million, as such Rights were unclaimed and uncontested. For
a detailed discussion regarding the issuance of Rights pursuant to the
PRIDES settlement, see Note 7 to our Consolidated Condensed Financial
Statements.
During the third quarter of 2000, we also incurred charges of $20 million in
connection with litigation asserting claims associated with accounting
irregularities in the former business units of CUC International Inc.
("CUC") and outside of the principal common stockholder class action
lawsuit.
INTEREST, NET AND MINORITY INTEREST, NET OF TAX
Interest, net for the three and nine months ended September 30, 2000
decreased $13 million (25%) and $68 million (44%), respectively, primarily
as a result of a decrease in the average debt balance outstanding, partially
offset by $20 million of interest expense incurred on the common stockholder
litigation settlement. Minority interest, net of tax for the three and nine
months ended September 30, 2000 increased $7 million (44%) and $15 million
(33%), respectively, primarily due to the May 2000 issuance of Additional
PRIDES and the March 2000 issuance of a mandatorily redeemable preferred
interest in a subsidiary. For a detailed discussion regarding the Additional
PRIDES and the mandatorily redeemable preferred interest, see Notes 7 and
10, respectively, to our Consolidated Condensed Financial Statements.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended September 30, 2000
decreased to 29.0% from 40.0% in 1999. Such change is attributable to
higher income taxes provided on net gains on certain businesses which were
disposed of in the third quarter of 1999 and also the recognition in 2000 of
a portion of the deferred gain on the disposition of our former Fleet
segment that was treated as a tax-free reorganization. Our effective tax
rate for the nine months ended September 30, 2000 increased to 31.4% from
23.0% in 1999. Such change is attributable to the June 1999 disposition of
our former Fleet segment.
20
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for the three months ended September 30,
2000 decreased $45 million (19%) compared with the corresponding period in
1999 primarily as a result of:
o the 1999 net gain on dispositions of businesses ($32 million),
o the impact of operating results from disposed businesses ($15
million)
o an increase in other charges ($12 million) and
o an increase in minority interest ($7 million);
partially offset by:
o the 2000 net gain on dispositions of businesses ($15 million) and
o a reduction in interest expense ($8 million).
Income from continuing operations for the nine months ended September 30,
2000 decreased $796 million (64%) compared with the corresponding period in
1999 primarily as a result of:
o the 1999 net gain on dispositions of businesses ($720 million),
o the impact of operating results from disposed businesses ($51
million),
o an increase in other charges ($24 million) and
o an increase in minority interest ($15 million);
partially offset by:
o a reduction in interest expense ($43 million) and
o the 2000 net gain on dispositions of businesses ($9 million).
DISCONTINUED OPERATIONS
On October 25, 2000, our Board of Directors committed to a plan to complete
a tax-free spin-off of our Individual Membership segment (consisting of
Cendant Membership Services, Inc., a wholly-owned subsidiary) and loyalty
business (consisting of Cendant Incentives, formerly National Card Control
Inc., a wholly-owned subsidiary included within our Insurance/Wholesale
segment) through a special dividend to CD common stockholders. In connection
with the planned spin-off, the account balances and activities of our
Individual Membership segment were segregated and reported as discontinued
operations for all periods presented. The final transaction is expected to
close by mid-2001.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2000, we revised certain revenue recognition policies
regarding the recognition of non-refundable one-time fees and the
recognition of pro rata refundable subscription revenue as a result of the
adoption of Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition
in Financial Statements." We previously recognized non-refundable one-time
fees at the time of contract execution and cash receipt. This policy was
changed to the recognition of non-refundable one-time fees on a straight
line basis over the life of the underlying contract. We previously
recognized pro rata refundable subscription revenue equal to procurement
costs upon initiation of a subscription. Additionally, the amount in excess
of procurement costs was recognized over the subscription period. This
policy was changed to the recognition of pro rata refundable subscription
revenue on a straight line basis over the subscription period. Procurement
costs will continue to be expensed as incurred. The adoption of SAB No. 101
also resulted in a non-cash charge of approximately $89 million ($56
million, after tax) on January 1, 2000 to account for the cumulative effect
of the accounting change.
21
RESULTS OF REPORTABLE OPERATING 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, depreciation and amortization and minority interest, 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.
Prior to the third quarter of 2000, the historical operating results of
Cendant Travel, our subsidiary which facilitates travel arrangements for our
travel-related and membership businesses, were included within the
Individual Membership segment. Beginning in the third quarter of 2000, the
operations of Cendant Travel began being managed as a component of our
Travel segment. Accordingly, the operating results of Cendant Travel are
reflected in the Travel segment for all periods presented.
In connection with the Individual Membership segment being reported as
discontinued operations, general corporate overhead previously allocated to
the Individual Membership segment has been reclassified to the Diversified
Services segment for all periods presented.
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30,
1999
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
----------------------------------- ----------------------------------- -------------------
% %
2000 1999 CHANGE 2000 1999 CHANGE 2000 1999
--------- --------- --------- -------- --------- --------- --------- --------
Travel $ 344 $ 335 3% $ 165 (1) $ 164 1% 48% 49%
Real Estate
Franchise 162 161 1% 119 124 (4)% 73% 77%
Relocation 127 117 9% 49 42 17% 39% 36%
Mortgage 132 114 16% 74 59 25% 56% 52%
Insurance/
Wholesale 145 143 1% 48 48 - 33% 34%
Move.com
Group 15 5 * (20)(2) (8) * * *
Diversified
Services 121 279 (57)% 9 (3) 46(4) (80%) 7% 16%
Inter-segment
Eliminations (2) - - -
--------- --------- -------- ---------
Total $ 1,044 $ 1,154 $ 444 $ 475
========= ========= ======== =========
--------------
* Not meaningful.
(1) Excludes $8 million of losses related to the dispositions of
businesses.
(2) Excludes charges of $3 million in connection with the postponement of
the initial public offering of Move.com common stock.
(3) Excludes (i) a loss of $24 million related to the dispositions of
businesses, (ii) $20 million in connection with litigation asserting
claims associated with accounting irregularities in the former business
units of CUC International, Inc. and outside of the principal common
stockholder class action lawsuit and (iii) $7 million for
investigation-related costs; partially offset by a gain of $35 million,
which represents the recognition of a portion of our previously
recorded deferred gain from the sale of our fleet businesses due to the
disposition of VMS Europe by Avis Group Holdings, Inc. in August 2000.
(4) Excludes a net gain of $83 million related to the dispositions of
businesses, partially offset by $5 million of investigation-related
costs and a $5 million charge principally related to the consolidation
of European call centers in Cork, Ireland.
TRAVEL
Revenues increased $9 million (3%) while Adjusted EBITDA increased $1
million (1%) in third quarter 2000 compared with third quarter 1999.
Royalties from our franchise business increased $5 million (5%) principally
due to a 3% increase in available rooms and a 3% increase in the average
daily room rate within our lodging business and a 3% increase in the volume
of car rental transactions at Avis Group Holdings, Inc. ("Avis"). Our common
equity interest in Avis, which is approximately 18% and accounted for under
the equity method, resulted in equity in earnings of $8 million and $7
million for the three months ended September 30, 2000 and 1999,
respectively. Timeshare subscription and exchange fees grew $8 million (9%)
primarily due to a 3% growth in memberships, a 3% increase in exchange
volume, and an 8% increase in the
22
average fee per exchange. The favorable operations of our Travel segment
were partially offset by a collective $11 million reduction in the
recognition of preferred alliance access fees and timeshare subscription
revenues in third quarter 2000 compared to third quarter 1999, due primarily
to the January 1, 2000 implementation of SAB 101. Adjusted EBITDA in third
quarter 2000 also reflects a net reduction from the timing of cost
allocations to the lodging brands' national advertising funds and additional
corporate overhead allocations. The increase in corporate overhead
allocations resulted from a refinement of allocation methods in 2000 due to
our significant divestitures in 1999. Excluding the impact of non-recurring
items, comprised of SAB 101 and the net increase in allocations, revenues
and Adjusted EBITDA increased $20 million (6%) and $16 million (10%),
respectively, in third quarter 2000 compared with third quarter 1999.
REAL ESTATE FRANCHISE
Revenues increased $1 million (1%) while EBITDA decreased $5 million (4%) in
third quarter 2000 compared with third quarter 1999. Royalties and initial
franchise fees for the CENTURY 21 (Registered Trademark), COLDWELL BANKER
(Registered Trademark) and ERA(Registered Trademark) franchise brands
remained constant quarter over quarter. An 8% reduction in home sale volume
was offset by a 9% increase in the average price of homes sold. While our
results reflected soft industry-wide conditions early in the third quarter
2000, we continued to add franchised brokerages to our brands' systems. The
volume of annual commission revenue added by franchise sales in third
quarter 2000 was 10% higher than in third quarter 1999. Conversely, growth
has been moderated by modestly declining volume and significantly reduced
acquisition activity at our largest franchisee, NRT Incorporated. The
EBITDA reduction includes a $3 million increase in corporate overhead
allocations due to a refinement of allocation methods used in 2000 compared
to 1999 and also reflects $2 million of increased costs for enhanced
franchisee training programs.
RELOCATION
Revenues and EBITDA increased $10 million (9%) and $7 million (17%),
respectively, in third quarter 2000 compared with third quarter 1999 and the
EBITDA margin grew from 36% to 39% for the comparable periods. Revenues and
EDITDA reflect a continuing trend in our business operations from asset
based to service based. Higher service based fees in third quarter 2000
versus third quarter 1999 include increases in (i) outsourcing fees of $3
million as a result of expanded services, (ii) international service fees of
$3 million as a result of increased marketing and sales efforts, and (iii)
referral fees of $4 million. Partially offsetting the increase in service
fee revenues was a decline in corporate and government homesale closings and
the related management fees, which contributed reductions in revenue and
EBITDA of $3 million and $5 million, respectively, in third quarter 2000
versus third quarter 1999. Revenues and EBITDA also reflect $4 million of
improved net interest income in third quarter 2000 compared with third
quarter 1999.
MORTGAGE
Revenues and EBITDA increased $18 million (16%) and $15 million, (25%),
respectively, in third quarter 2000 compared with the third quarter 1999,
principally as a result of increased revenues from loan production. Revenues
from mortgage loans closed increased $18 million due to favorable production
margins. Accordingly, the average production fee increased 28 basis points
in third quarter 2000 compared with third quarter 1999. Total mortgage
closings for third quarter 2000 amounted to $6.5 billion, which was equal to
the comparable prior year quarter. Purchase mortgage closings, however
increased by $278 million (5%) while refinancing volume decreased by $287
million (41%). Retail purchase mortgages, which are loans where we interact
directly with the consumer, increased $225 million to $4.9 billion. Retail
mortgage lending has been our primary focus and accounted for more than 80%
of loan volume in third quarter 2000. Moreover, we ranked as the fourth
largest retail mortgage lender by the National Mortgage News(TM) for the
second quarter of 2000, the latest period for which data are available.
Mortgage closings from our Internet business, known as Log-In, Move-In,
amounted to $183 million in third quarter 2000, compared with $73 million in
third quarter 1999. Revenues generated by our servicing portfolio remained
relatively level with last year despite a $17 billion (36%) increase in the
average servicing portfolio, principally because of higher servicing
amortization and interest expenses and lower revenues from mortgage
insurance. The EBITDA margin increased from 52% in third quarter 1999 to 56%
in third quarter 2000. The increase in EBITDA and EBITDA margin resulted
principally from the increase in the average production fee on mortgage
originations. As we had anticipated, market conditions improved in third
quarter 2000 which produced more positive margin comparisons. The amount of
loans in process at September 30, 2000 was 13% higher than at September 30,
1999. Although no assurances can be made, we continue to expect
period-over-period market conditions to improve in the fourth quarter of the
year.
23
INSURANCE/WHOLESALE
Revenues increased $2 million (1%) in third quarter 2000 compared with third
quarter 1999 while EBITDA remained flat for the comparable periods. The
increase in revenues was principally attributable to international
expansion. There was a 17% increase in international memberships quarter
over quarter.
MOVE.COM GROUP
Move.com Group is our Internet real estate services portal which was
launched in January 2000. Revenues increased $10 million to $15 million in
third quarter 2000, while Adjusted EBITDA decreased $12 million to a loss of
$20 million for the same period. The increase in revenues principally
reflects a significant increase in sponsorship revenues made possible by the
portal's launch. The decline in Adjusted EBITDA reflects our increased
investment in marketing and development of the move.com network.
DIVERSIFIED SERVICES
Revenues decreased $158 million while Adjusted EBITDA decreased $37 million
in third quarter 2000 compared with third quarter 1999. Revenues and
Adjusted EBITDA decreased primarily as a result of the 1999 dispositions of
several business operations. The operating results of divested businesses,
which were included through their respective disposition dates in 1999
contributed revenues and Adjusted EBITDA of $139 million and $27 million in
1999. Additionally, reductions in revenues and Adjusted EBITDA resulted from
a quarter over quarter decline in financial investment income and costs
incurred during third quarter 2000 to pursue Internet initiatives through
our Cendant Internet Group subsidiary.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30,
1999
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
----------------------------------- ----------------------------------- ------------------
% %
2000 1999 CHANGE 2000 1999 CHANGE 2000 1999
--------- --------- --------- -------- --------- --------- --------- -------
Travel $ 954 $ 948 1% $ 440 (1) $ 463 (4) (5)% 46% 49%
Real Estate
Franchise 448 417 7% 328 310 6% 73% 74%
Relocation 332 315 5% 105 94 12% 32% 30%
Mortgage 306 314 (3%) 117 153 (24)% 38% 49%
Insurance/
Wholesale 435 426 2% 138 137 1% 32% 32%
Move.com
Group 41 11 * (74)(2) (14) * * *
Diversified
Services 448 789 * 110 (3) 114 (5) * * *
Fleet - 207 * - 81 * * 39%
Inter-segment
Eliminations (2) - - -
--------- --------- -------- ---------
Total $ 2,962 $ 3,427 $ 1,164 $ 1,338
========= ========= ======== =========
--------------
* Not meaningful.
(1) Excludes $12 million of losses related to the dispositions of
businesses.
(2) Excludes charges of $3 million in connection with the postponement of
the initial public offering of Move.com common stock.
(3) Excludes (i) a non-cash credit of $41 million in connection with a
change in 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 our previously recorded deferred gain from
the sale of our fleet businesses due to the disposition of VMS Europe
and Avis Group Holdings, Inc. in August 2000; partially offset by (i)
$30 million of losses related to the dispositions of businesses, (ii)
$15 million of investigation-related costs and (iii) $20 million in
connection with litigation asserting claims associated with accounting
irregularities in the former business units of CUC and outside of the
principal common stockholder class action lawsuit.
(4) Excludes a charge of $23 million in connection with the transition of
the Company's lodging franchisees to a Company sponsored property
management system.
(5) Excludes a net gain of $799 million related to the dispositions of
businesses and an unusual credit of $1 million recorded in connection
with the sale of a Company subsidiary, partially offset by (i) $13
million of investigation-related costs, (ii) a $7 million charge
related to the termination of a proposed acquisition and (iii) $5
million principally related to the consolidation of European call
centers in Cork, Ireland.
TRAVEL
Revenues increased $6 million (1%) while Adjusted EBITDA decreased $23
million (5%) in nine months 2000 compared with nine months 1999. Royalties
from our franchise business increased $9 million (3%), principally due to a
4% increase in available rooms within our lodging business and a 3% increase
in the volume of car rental transactions at Avis. Timeshare exchange
revenues grew $8 million (5%) primarily due
24
to a 6% increase in the average exchange fee. Timeshare subscription
revenues increased $3 million (3%) period over period, despite the impact of
SAB 101, which resulted in a $6 million reduction in timeshare subscription
revenues. In addition, preferred alliance access fees were $7 million lower
in nine months 2000 compared with the prior year period primarily due to SAB
101. Contributing to the Adjusted EBITDA reduction in nine months 2000 was
an additional $13 million of corporate overhead allocations. The increase in
overhead allocations resulted from a refinement of allocation methods in
2000 due to our significant divestitures in 1999. Other contributing factors
to the Adjusted EBITDA reduction was the recognition in nine months 2000 of
$3 million of obligations relating to a prior acquisition and $6 million of
initial franchise fees received during nine months 1999 in connection with
the generation of a master license agreement and joint venture within our
timeshare business. Additionally, $11 million of gains were recognized in
nine months 1999 associated with the sale of a portion of our common equity
interest in Avis and incremental dividend income of $10 million was
recognized in nine months 2000 from our preferred stock investment in Avis.
Our common equity interest in Avis, which is approximately 18% and accounted
for under the equity method, resulted in equity in earnings of $14 million
and $15 million for the nine months ended September 30, 2000 and 1999,
respectively. Excluding the impact of non-recurring items, comprised of SAB
101, the increase in corporate allocations and the 1999 gains on sale of
Avis stock, revenues and Adjusted EBITDA increased $30 million (3%) and $14
million (3%), respectively, in nine months 2000 compared with nine months
1999.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $31 million (7%) and $18 million
(6%), respectively, in nine months 2000 compared with nine months 1999.
Royalty fees for the CENTURY 21(Registered Trademark), COLDWELL BANKER
(Registered Trademark) and ERA(Registered Trademark) franchise brands
collectively increased $25 million (7%). In addition, initial franchise
fees increased $4 million (48%) primarily from the sale of international
franchise agreements. Industry statistics provided by the National
Association of Realtors for the eight months ended August 31, 2000 (the
latest period for which information is available) indicate that the number
of homes sold has declined by 5% versus the prior year, while the average
price of those homes sold has increased 4%. We have out-performed such
industry statistics as our homesale transactions decreased only 4% while
the average price of such homesale transactions increased by more than 11%.
This was accomplished through a combination of homesales through existing
franchised brokerages and new franchises added during the period. Corporate
overhead allocations were $7 million higher in nine months 2000 due to a
refinement of allocation methods used in 2000 compared to 1999. In
addition, broker services related expenses increased $4 million in nine
months 2000 principally due to increased costs for enhanced franchisee
training programs. The Adjusted EBITDA Margin decreased only 1% despite the
aforementioned increases in expenses. Increases in royalties and franchise
fees are recognized with minimal corresponding increases in expenses due to
our significant operating leverage within our franchise operations.
Excluding the increase in corporate allocations, the Adjusted EBITDA margin
increased 1 percentage point to 75% in nine months 2000 compared with 74%
for the prior year period.
RELOCATION
Revenues and Adjusted EBITDA increased $17 million (5%) and $11 million
(12%), respectively, in nine months 2000 compared with nine months 1999 and
the Adjusted EBITDA margin increased from 30% to 32% for the comparable
periods. Revenues and Adjusted EBITDA reflect a continuing trend in our
business operations from asset based to service based. Higher service based
fees for nine months 2000 versus nine months 1999 including increases in:
(i) outsourcing fees of $9 million as a result of expanded services; (ii)
international fees of $7 million as a result of increased marketing and
sales efforts and; (iii) referral and other ancillary service fees of $10
million. Partially offsetting the increase in service fee revenues was a
decline in corporate and government homesale closings and the related
management fees which contributed reductions in revenues and Adjusted EBITDA
of $10 million and $16 million, respectively, in third quarter 2000 versus
third quarter 1999. Also contributing to increases in revenues and Adjusted
EBITDA was $8 million of improved net interest income in nine months 2000
compared with nine months 1999. In addition, a $7 million gain was
recognized in nine months 1999 on the sale of a minority interest in an
insurance subsidiary. On a comparable basis, excluding the non-recurring
gain, revenues and Adjusted EBITDA increased $24 million (8%) and $18
million (21%), respectively, in nine months 2000 compared with nine months
1999.
MORTGAGE
Revenues and Adjusted EBITDA decreased $8 million (3%) and $36 million
(24%), respectively in nine months 2000 compared with nine months 1999. The
impact on Revenues and Adjusted EBITDA from a $4.8
25
billion (23%) reduction in mortgage loan closings was offset by an increase
in the average production fee. The average production fee increased 29 basis
points (25%) in nine months 2000 compared to the prior year period due to a
reduction in the direct cost per loan. Mortgage loan closings for nine
months 2000 were $16.3 billion, consisting of $15.1 billion in purchase
mortgages and $1.2 billion in refinancing mortgages. The decline in loans
closed in nine months 2000 is substantially a result of a $4.6 billion
reduction in mortgage refinancing volume due to the unprecedented
industry-wide refinancing activity in 1999. Purchase mortgage closings in
our retail lending business amounted to $12.6 billion in nine months 2000
and 1999. Mortgage closings from our Internet business, known as Log-In,
Move-In, amounted to $587 million in nine months 2000, compared with $165
million in nine months 1999. Loan servicing revenues in 1999 included a $9
million gain on the sale of servicing rights. Excluding such gain, recurring
loan servicing revenue increased $11 million (18%) in nine months 2000
compared to nine months 1999. The increase in loan servicing revenues was
principally attributable to a corresponding increase in the average
servicing portfolio which grew approximately $12.7 billion (28%) in nine
months 2000 versus the prior year period. The Adjusted EBITDA margin
decreased from 49% in nine months 1999 to 38% in nine months 2000. The
decline in Adjusted EBITDA and Adjusted EBITDA margin resulted principally
from increased expenses to market to the real estate Phone-In Move-In
offices and salary and infrastructure expenses incurred in the first half of
2000 which were not fully utilized. As we anticipated, market conditions
improved in third quarter 2000, and we continue to expect improvement of our
operating results in fourth quarter 2000 versus fourth quarter 1999.
INSURANCE/WHOLESALE
Revenues increased $9 million (2%) in nine months 2000 compared with nine
months 1999. Adjusted EBITDA increased $1 million (1%) over the same period.
The increase in revenues and Adjusted EBITDA was principally attributable to
international expansion. International revenues and Adjusted EBITDA
increased $8 million and $3 million, respectively, primarily due to a 20%
increase in memberships. Also, the quarter over quarter impact of a decrease
in marketing expense resulting from longer amortization periods for certain
customer acquisition costs was substantially offset by costs incurred during
nine months 2000 related to a consolidation of domestic operations in
Nashville, Tennessee. The consolidation of such domestic operations is
expected to generate significant expense savings in future periods. The
Adjusted EBITDA margin remained constant at 32% for the comparable nine
month periods.
MOVE.COM GROUP
Revenues increased $30 million to $41 million in nine months 2000, while
Adjusted EBITDA decreased $60 million to a loss of $74 million for the same
period. These results reflect a significant increase in sponsorship revenues
made possible by the portal's launch and our increased investment in
marketing and development of the portal.
DIVERSIFIED SERVICES
Revenues and Adjusted EBITDA decreased $341 million and $4 million,
respectively in nine months 2000 compared with nine months 1999. Revenues
decreased primarily as a result of the 1999 dispositions of several business
operations. The operating results of divested businesses were included
through their respective disposition dates in 1999. The absence of such
divested businesses from nine months 2000 operations resulted in a reduction
in revenues and Adjusted EBITDA of $360 million and $25 million,
respectively. Excluding the impact of divested businesses on nine months
1999 operating results, revenues and Adjusted EBITDA increased $16 million
and $15 million, respectively, in nine months 2000. Revenues and Adjusted
EBITDA increases were partially due to the favorable operating results from
our Jackson Hewitt tax preparation franchise business. Jackson Hewitt, which
experienced a 25% increase in year over year tax return volume, contributed
an incremental $14 million and $18 million to revenues and Adjusted EBITDA,
respectively in nine months 2000 compared with nine months 1999. During nine
months 2000 we incurred expenses of $16 million to pursue Internet
initiatives through our Cendant Internet Group. Such expenses were partially
offset by $8 million of incremental income recognized from financial
investments.
FLEET
On June 30, 1999, we completed the disposition of our Fleet segment for
aggregate consideration of $1.8 billion. Revenues and EBITDA for the nine
months ended September 30, 1999, were $207 million and $81 million,
respectively.
26
RESULTS OF DISCONTINUED OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30,
1999
In the third quarter of 2000, revenues and Adjusted EBITDA for Individual
Membership decreased $76 million (29%) and $5 million (10%), respectively,
compared with the third quarter of 1999, while the Adjusted EBITDA margin
increased from 18% to 23% quarter-over-quarter. The 1999 dispositions of
certain business units and the formation of Netmarket Group, Inc. ("NGI") as
an independent company in 1999 collectively contributed $61 million to the
decrease in revenues with no impact to Adjusted EBITDA. On a comparable
basis, excluding the operations of such divested businesses, revenues and
Adjusted EBITDA decreased $15 million (8%) and $5 million (10%),
respectively, while the Adjusted EBITDA margin decreased from 24% to 23%
quarter-over-quarter. The net decline in both revenues and Adjusted EBITDA
primarily reflects fewer annual memberships expiring in the third quarter of
2000 than in the third quarter of 1999 (since revenues are recorded upon
expiration of the membership term). Such decline was partially offset by a
favorable mix of products and programs with marketing partners.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30,
1999
In the nine months ended September 30, 2000, revenues decreased $163 million
(23%) compared with the nine months ended September 30, 1999, while Adjusted
EBITDA increased $68 million (100%) over the same period. The Adjusted
EBITDA margin improved to 25% in the nine months ended September 30, 2000
from 10% in the corresponding period for 1999. The 1999 dispositions of
certain business units and the formation of NGI as an independent company
collectively contributed $171 million to the period-over-period decrease in
revenues and $15 million to the period-over-period increase in Adjusted
EBITDA. On a comparable basis, excluding the operating results of such
divested businesses, revenues and Adjusted EBITDA increased $8 million (2%)
and $53 million (64%), respectively. The Adjusted EBITDA margin increased
substantially as fewer annual memberships expired in the nine months ended
September 30, 2000 than in the corresponding period for 1999, reflecting our
strategy in 2000 to focus principally on profitability within this business
by carefully targeting our marketing efforts and reducing expenses incurred
to reach potential new members. We reduced our solicitation spending by $26
million in the nine months ended September 30, 2000 compared with the
corresponding period for 1999. In addition, we experienced a favorable mix
of products and programs with marketing partners, which further contributed
to revenue and Adjusted EBITDA growth. Also, the sale of certain referral
agreements with car dealers resulted in an additional $8 million of revenues
and Adjusted EBITDA in 2000.
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. Activities of our management and mortgage programs are
autonomous and distinct from our other activities. Therefore, management
believes it is more useful to review the debt financing and cash flows of
management and mortgage programs separately from the debt financing and cash
flows of our other activities.
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 the
transactions previously announced. As part of this 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 (which would increase the
number of shares 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.
27
ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS On November 13, 2000, we announced that we entered into a
definitive agreement to acquire all of the outstanding shares of Avis Group
Holdings, Inc. ("Avis") that are not currently owned by us at a price of
$33.00 per share in cash. Approximately 26 million outstanding shares of
Avis common stock, and options to purchase approximately 7.9 million
additional shares, are not currently owned by us. Accordingly, the
transaction is valued at approximately $935 million, net of option proceeds.
We anticipate that more than 50% of the purchase price will be financed from
new borrowings available to us and to PHH Corporation ("PHH"), our
wholly-owned subsidiary, and expect that the remaining amount will be
provided either from available cash or from the issuance of CD common
stock. However, the actual funding for the acquisition will be finalized
before the closing of the transaction.
The acquisition will be made by PHH. PHH will distribute the consumer car
rental business, Avis Rent a Car, to one of our subsidiaries not within
PHH's ownership structure. After the acquisition and the distribution of the
consumer car rental business, PHH will own and operate the Vehicle
Management and Leasing business as well as the Wright Express fuel card
business. The merger is conditioned upon, among other things, approval of a
majority of the votes cast by Avis stockholders who are unaffiliated with us
and also customary regulatory approvals. Although no assurances can be
given, we expect the transaction to close in first quarter of 2001.
On November 2, 2000, we announced that we had entered into a definitive
agreement with Fairfield Communities, Inc. ("Fairfield") to acquire all of
its outstanding common stock at $15 per share, or approximately $635 million
in aggregate. The final acquisition price may increase to a maximum of $16
per share depending upon a formula based on the average trading price of CD
common stock over a twenty trading day period prior to the date on which
Fairfield stockholders meet to approve the transaction. At least 50% of the
consideration will be in cash and the balance will either be in cash or CD
common stock, at our election. Consummation of the transaction is subject to
customary regulatory approvals. Although no assurances can be given, we
expect to complete the acquisition in early 2001.
DISPOSITIONS
On October 27, 2000, we announced that we had entered into a definitive
agreement with Homestore.com, Inc. ("Homestore") to sell our Internet real
estate portal, move.com, certain other businesses within our Move.com Group
segment and Welcome Wagon International, Inc., (a subsidiary within our
Diversified Services segment) in exchange for approximately 26 million
shares of Homestore common stock valued at approximately $761 million. We
intend on allocating a portion of the Homestore common stock shares received
to existing Move.com common stockholders and option holders. After such
allocation, we expect to retain approximately 19 or 20 million shares of
Homestore common stock. Consummation of the transaction is subject to
certain customary closing conditions, including Hart Scott Rodino anti-trust
approval. Although no assurances can be given, we expect to complete the
transaction during the first quarter of 2001.
On October 25, 2000, our Board of Directors committed to a plan to complete
a tax-free spin-off of our Individual Membership segment and loyalty
business through a special dividend to CD common stockholders. The final
transaction is expected to close by mid-2001.
CLASS ACTION LITIGATION SETTLEMENT
On December 7, 1999, we announced that we reached a preliminary agreement to
settle the principal securities class action pending against us in the U.S.
District Court in Newark, New Jersey (the "Settlement Agreement") brought on
behalf of purchasers of all Cendant and CUC publicly traded securities,
other than PRIDES, between May 1995 and August 1998. Under the Settlement
Agreement, we would pay the class members approximately $2.85 billion in
cash. The definitive settlement document was approved by the U.S. District
Court by order dated August 14, 2000. Certain parties in the class action
have appealed the District Court's orders approving the plan of allocation
of the settlement fund and awarding of attorneys' fees and expenses to
counsel for the lead plaintiffs. No appeals challenging the fairness of the
$2.85 billion settlement amount were filed. The U.S. Court of Appeals for
the Third Circuit has not issued a briefing schedule for the appeals.
Accordingly, we will not be required to fund the settlement amount of $2.85
billion for some time. However, the Settlement Agreement required us to post
collateral in the form of credit facilities and/or surety bonds by November
13, 2000. Accordingly, on November 13, 2000, we posted a surety bond in the
amount of $790 million and letters of credit aggregating $1.71 billion. We
also had the option of forming a trust established for the benefit of the
plaintiffs in lieu of posting collateral. On November 13, 2000, we funded
such trust with a cash deposit of approximately $350 million. Such deposit
will serve to reduce the amount of collateral required to be posted under
the Settlement Agreement. See Debt Financing - Exclusive of Management and
Mortgage Programs for further detail regarding the collateral arrangements
in connection with the Settlement Agreement.
The settlement does not encompass all litigation asserting claims associated
with the accounting irregularities. We do 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, we
do not believe that the impact of such unresolved
28
proceedings should result in a material liability to us in relation to our
consolidated financial position or liquidity.
DEBT FINANCING
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS
At September 30, 2000, aggregate outstanding borrowings consisted of the
following:
7 3/4% senior notes (1) $ 1,149
3% convertible subordinated notes (1) 548
Term loan facility 375
Other 2
--------
$ 2,074
========
----------
(1) Publicly issued fixed rate debt.
During August 2000, we replaced our $1.0 billion, 364-day revolving credit
facility with a $1.75 billion three-year competitive advance and revolving
credit agreement maturing on August 29, 2003. Borrowings under this new
agreement will bear interest at LIBOR plus a margin of approximately 60
basis points. In addition, we are required to pay a per annum facility fee
of approximately 15 basis points and a 0.125% utilization fee of daily
commitments above a certain threshold. The agreement also contains the
committed capacity to issue up to $1.75 billion in letters of credit, which
can be used as part of the collateral arrangements under the Settlement
Agreement. We utilized $1.71 billion of the facility for this purpose
at the time collateral was required to be posted under the Settlement
Agreement. The interest rates and facility fees are subject to change based
upon credit ratings on our senior unsecured long-term debt by nationally
recognized debt rating agencies. As of September 30, 2000, there were no
outstanding borrowings related to the $1.75 billion three-year competitive
advance and revolving credit agreement.
During August 2000, we obtained $790 million in commitments for surety bonds
as an additional source of collateral required to be posted under the
Settlement Agreement.
The $1.75 billion three-year competitive advance and revolving credit
agreement and the $790 million in surety bonds require us to fund a
settlement trust on behalf of the plantiffs in the stockholder securities
class action litigation in four quarterly payments of $150 million, followed
by eight quarterly payments of $200 million, commencing in the quarter ended
March 31, 2001. The escrow deposits will serve to reduce the amount of
collateral previously posted by us, as required by the Settlement Agreement.
We also have $750 million of committed bank facilities, which are currently
undrawn and available, with the exception of $25 million of letters of
credit, and $2.2 billion of availability under existing shelf registration
statements. Our credit facilities contain certain restrictive covenants,
including restrictions on indebtedness of material subsidiaries, consent to
mergers and limitations on liens, liquidations, and sale and leaseback
transactions. Maintenance of certain financial ratios is also required.
In January 2000, we used available cash to redeem our outstanding 7 1/2%
senior notes at a redemption price of 100.695% of par, plus accrued
interest.
RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Our PHH subsidiary operates our mortgage and relocation services businesses
as a separate public reporting entity and supports the origination of
mortgages and advances under relocation contracts primarily by issuing
commercial paper and medium-term notes and by maintaining secured
obligations. PHH debt is not classified based on contractual maturities, but
rather is included in liabilities under management and mortgage programs
since the debt corresponds directly with the high quality related assets. At
September 30, 2000, aggregate outstanding borrowings under management and
mortgage programs consisted of the following:
29
Commercial paper $ 1,494
Secured obligations (1) 400
Medium-term notes 124
Other 125
----------
$ 2,143
==========
-----------
(1) Consists of a 364-day financing agreement to sell mortgage loans under
an agreement to repurchase such mortgages. The agreement is collateralized
by the underlying mortgage loans held in safekeeping by the custodian to the
agreement. The total commitment under this agreement is $500 million. The
agreement is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement.
Debt is issued by PHH without recourse to the parent company. PHH expects to
continue to maximize its access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing
credit standards to minimize credit risk and the potential for losses.
PHH minimizes its exposure to interest rate and liquidity risk by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
domestic and international funding sources and securing available credit
under committed banking facilities. Depending upon asset growth and
financial market conditions, PHH utilizes domestic commercial paper markets,
public and private debt markets, as well as other cost-effective short-term
instruments. As of November 3, 2000, PHH had approximately $3.0 billion
available for issuing medium-term notes under its existing shelf
registration statement. Proceeds from future offerings will continue to be
used to finance assets PHH manages for its clients, for a portion of the
acquisition of Avis and for general corporate purposes.
Augmenting these sources, PHH will continue to manage outstanding debt with
the potential sale or transfer of managed assets to third parties while
retaining fee-related servicing responsibility. At November 3, 2000, PHH
maintained the following agreements, whereby managed assets were sold or
transferred to third parties.
Mortgage. PHH maintains a revolving sales agreement, under which an
unaffiliated bankruptcy remote buyer, Bishops Gate Residential Mortgage
Trust (the "Buyer"), a special purpose entity, committed to purchase, at
PHH's option, mortgage loans originated by PHH on a daily basis, up to the
Buyer's asset limit of $2.1 billion. Under the terms of this sales
agreement, PHH retains the servicing rights on the mortgage loans sold to
the Buyer and arranges for the sale or securitization of the mortgage loans
into the secondary market. The Buyer retains the right to select
alternative sale or securitization arrangements. At September 30, 2000, PHH
was servicing approximately $980 million of mortgage loans owned by the
Buyer.
Relocation. PHH maintains three separate financing agreements with Apple
Ridge Funding LLC ("Apple Ridge"), a bankruptcy remote, special purpose
entity. Under the terms of these agreements, certain relocation receivables
will be transferred for cash, on a revolving basis, to Apple Ridge until
March 31, 2007. PHH retains a subordinated residual interest and the related
servicing rights and obligations in the relocation receivables. At September
30, 2000, PHH was servicing approximately $703 million of receivables under
these agreements.
To provide additional financial flexibility, PHH's current policy is to
ensure that minimum committed facilities aggregate 100 percent of the
average amount of outstanding commercial paper. As of September 30, 2000,
PHH maintained $1.625 billion of unsecured committed credit facilities,
which were provided by domestic and foreign banks. The facilities consisted
of a $750 million revolving credit facility maturing in February 2001, a
$125 million revolving credit facility maturing in September 2001 and a
$750 million revolving credit facility maturing in February 2005. The full
amount of PHH's committed facilities at September 30, 2000 was undrawn and
available to support the average outstanding commercial paper balance.
We closely evaluate not only the credit of the banks, but also the terms of
the various agreements to ensure on-going availability. We believe that our
current policy provides adequate protection should volatility in the
financial markets limit PHH's access to commercial paper or medium-term
notes funding. PHH continuously seeks additional sources of liquidity to
accommodate its asset growth and to provide further protection from
volatility in the financial markets. In the event that the public debt
market is unable to
30
meet PHH's funding needs, we believe that PHH has appropriate alternative
sources to provide adequate liquidity, including current and potential
future securitized obligations and its revolving credit facilities.
MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY SUBSIDIARY HOLDING
SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
On May 3, 2000, pursuant to the PRIDES settlement, we issued approximately 4
million additional PRIDES (the "Additional PRIDES"), with a face value of
$50 per Additional PRIDES, and received approximately $91 million in cash
proceeds related to the issuance of such securities. Only Additional Income
PRIDES (having identical terms to the originally issued Income PRIDES) were
issued, of which 3,619,374 were immediately converted into 3,619,374 New
Income PRIDES and 380,626 remained Additional Income PRIDES. No Additional
Growth PRIDES were issued in the offering.
MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIARY
In March 2000, through a limited liability corporation ("LLC"), we issued a
mandatorily redeemable preferred interest ("Senior Preferred Interest") in
exchange for $375 million in cash. The Senior Preferred Interest is
mandatorily redeemable 15 years from the date of issuance and may be
redeemed after 5 years, or earlier in certain circumstances. Distributions
on the Senior Preferred Interest are based on the three-month LIBOR plus an
applicable margin (1.77%). Simultaneously with the issuance of the Senior
Preferred Interest, we transferred certain assets to the LLC. After the sale
of the Senior Preferred Interest, we owned 100% of both the common interest
and the junior preferred interest in the LLC. In the event of default,
holders of the Senior Preferred Interest have certain liquidation
preferences. Proceeds were used to repay a portion of the outstanding
borrowings under our term loan facility.
STOCKHOLDERS' EQUITY
CD COMMON STOCK TRANSACTIONS
Repurchases. Since inception of our common stock repurchase program in
October 1998 and through September 30, 2000, we repurchased a total of
approximately $2.3 billion (121 million shares) of CD common stock. As of
September 30, 2000, we had approximately $488 million remaining availability
under our common stock repurchase program.
Strategic Alliance. In February 2000, pursuant to a previously announced
strategic alliance, Liberty Media Corporation ("Liberty Media") invested
$400 million in cash to purchase 18 million shares of CD common stock and a
two-year warrant to purchase approximately 29 million shares of CD common
stock at an exercise price of $23.00 per share. In addition, in March 2000,
Liberty Media's Chairman, John C. Malone, Ph.D., purchased one million
shares of CD common stock for approximately $17 million in cash. The
strategic alliance with Liberty Media is intended to develop Internet and
related opportunities associated with our travel, mortgage, real estate and
direct marketing businesses.
MOVE.COM COMMON STOCK TRANSACTIONS
Authorization of Tracking Stock. On March 21, 2000, our stockholders
approved a proposal authorizing a new series of common stock to track the
performance of the Move.com Group, a group of businesses which provide a
broad range of quality relocation, real estate and home-related products and
services through its flagship portal site, move.com, and through the
move.com network. Our existing common stock was reclassified as CD common
stock, which reflects the performance of our other businesses and also a
retained interest in the Move.com Group (collectively referred to as the
"Cendant Group"). In addition, our charter was amended and restated to
increase the number of authorized shares of common stock from 2.0 billion to
approximately 2.5 billion, comprised of 2.0 billion shares of CD common
stock and 500 million shares of Move.com common stock. Although the issuance
of Move.com common stock is intended to track the performance of the
Move.com Group, holders are subject to all of the risks associated with an
investment in all of our businesses, assets and liabilities. We issued
shares of Move.com common stock in the following private financings:
31
NRT Incorporated Investment. On April 14, 2000, NRT Incorporated ("NRT")
purchased 319,591 shares of Move.com common stock for $31.29 per share or
approximately $10 million in cash. We own $179 million of NRT convertible
preferred stock, of which $21 million will be convertible, at our option
upon occurrence of certain events, into no more than 50% of NRT's common
stock.
Chatham Street Holdings, LLC Investment. On March 31, 2000, Chatham Street
Holdings, LLC ("Chatham") exercised a contractual right to purchase
1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash. In connection with such exercise, for
every two shares of Move.com common stock purchased, Chatham received a
warrant to purchase one share of Move.com common stock at a price equal to
$64.08 per share and a warrant to purchase one share of Move.com common
stock at a price equal to $128.16 per share. Also during March 2000, we
invested $25 million in convertible preferred stock of WMC Finance Co.
("WMC"), an online provider of sub-prime mortgages and an affiliate of
Chatham, and were granted an option to purchase approximately 5 million
shares of WMC common stock.
Liberty Digital, Inc. Investment. On March 31, 2000, Liberty Digital, Inc.
("Liberty Digital") purchased 1,598,030 shares of Move.com common stock for
$31.29 per share in exchange for consideration consisting of $10 million in
cash and 813,215 shares of Liberty Digital Class A common stock valued at
approximately $40 million. We and Liberty Digital also agreed to use good
faith efforts to negotiate and enter into mutually acceptable agreements
relating to the development of real estate related programming for Liberty
Digital's interactive home channel based on Move.com Group's Web content.
CASH FLOWS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
2000 1999 CHANGE
-------------- ------------- ---------------
Cash provided by (used in) continuing operations:
Operating activities $ 578 $ 738 $ (160)
Investing activities (246) 2,509 (2,755)
Financing activities (60) (2,555) 2,495
Effects of exchange rate changes on
cash and cash equivalents 25 32 (7)
Net cash provided by (used in)
discontinued operations 11 (80) 91
-------------- ------------- ---------------
Net change in cash and cash equivalents $ 308 $ 644 $ (336)
============== ============= ===============
Cash flows from operating activities decreased primarily due to:
o the effects of non-strategic businesses disposed throughout 1999
and
o a decrease in working capital.
Cash flows from investing activities resulted in an outflow of $246 million
in 2000 compared to an inflow of $2,509 million in 1999, primarily due to
the absence in 2000 of $2.8 billion of net cash proceeds received from the
disposition of businesses in 1999.
Cash flows used in financing activities decreased primarily due to:
o an increase in the issuances of common stock,
o a decrease in the repurchases of CD common stock and
o proceeds from the issuance of a mandatorily redeemable preferred
interest and the Additional PRIDES;
partially offset by:
o a net outflow of funds from borrowing activities.
32
MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 CHANGE
-------------- ------------- ----------------
Cash provided by (used in):
Operating activities $ (28) $ 1,298 $ (1,326)
Investing activities (62) (1,243) 1,181
Financing activities (171) (1,082) 911
-------------- ------------- ----------------
Net change in cash and cash equivalents $ (261) $ (1,027) $ 766
============== ============= ================
Cash flows from operating activities resulted in an outflow of $28 million
in 2000 compared to an inflow of $1,298 million in 1999, primarily due to:
o a decrease in cash flows from the originations of mortgage loans,
which reflects larger mortgage loan originations in proportion to
mortgage loan sales and
o a decrease in depreciation and amortization due to the 1999
disposition of our former Fleet segment.
Cash flows used in investing activities decreased primarily due to:
o the absence in 2000 of a $774 million cash use in 1999 related to
our former Fleet segment and
o a net inflow of funds generated from advances on homes under
management.
Cash flows used in financing activities decreased primarily due to:
o the absence in 2000 of $3.0 billion in proceeds received for debt
repayment in connection with the disposal of our former Fleet
segment and
o a reduction in net borrowing requirements for our investment in
assets under management and mortgage programs.
CAPITAL EXPENDITURES
During the nine months ended September 30, 2000, we invested $147 million in
property and equipment to support operational growth and to enhance
marketing opportunities. In addition, technological improvements were made
to improve operating efficiencies. We anticipate an aggregate capital
expenditure investment of approximately $210 million.
FLEET DISPOSITION
On June 30, 1999, we completed the disposition of our Fleet segment for
aggregate consideration of $1.8 billion. The consideration consisted of the
assumption and subsequent repayment of $1.44 billion of intercompany debt
and the issuance of $360 million of non-voting convertible preferred stock
of Avis Fleet Leasing and Management Corporation. We account for this
convertible preferred stock investment using the cost method. Conversion of
the convertible preferred stock is at our option, subject to earnings and
stock price thresholds within specified intervals of time. As of September
30, 2000, the conversion conditions had not been satisfied. In connection
with our current business plans, we announced on August 15, 2000, that we
had submitted to the Board of Directors of Avis, a preliminary, non-binding
proposal to acquire all of the outstanding shares of Avis that are not
currently owned by us. See "Liquidity and Capital Resources - Acquisitions
and Dispositions" for further detail regarding this proposed transaction.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," which
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 was previously amended by SFAS No. 137 "Accounting
For Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date
of SFAS No. 133 to fiscal years commencing after June 15, 2000. We have
appointed a team to implement these standards on an enterprise-wide basis.
We have identified certain
33
contracts, which contain embedded derivatives, and additional freestanding
derivatives as defined by SFAS No. 133. Completion of our implementation
plan and determination of the impact of adopting these standards is
expected by the end of the fourth quarter of 2000. Since the impact is
dependent upon market fluctuations and the notional value of such contracts
at the time of adoption, the impact of adopting these standards is not
fully determinable. However, we currently do not anticipate material
changes to any of our existing hedging strategies as a result of such
adoption. We will adopt SFAS No. 138 concurrently with SFAS No. 133 on
January 1, 2001, as required.
In October 2000, the 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. We will adopt SFAS No. 140 on December 31, 2000, as required.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As previously discussed in our 1999 Annual Report filed on Form 10-K, 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, 2000 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.
35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussions contained under the headings "Class Action Litigation and
Government Investigations" in Note 11 contained in PART I FINANCIAL INFORMATION,
Item 1. Financial Statements, are incorporated herein by reference in their
entirety.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Exhibit Index.
(B) REPORTS ON FORM 8-K
On August 29, 2000, we filed a current report on Form 8-K to report under Item 5
that the U.S. District Court in Newark, New Jersey approved as final the
previously announced class action litigation settlement with Cendant common
stockholders.
On August 15, 2000, we filed a current report on Form 8-K to report under Item 5
that a preliminary, non-binding proposal to acquire all of the outstanding
shares of Avis Group Holdings, Inc. that are not currently owned by us at a
price of $29.00 per share in cash.
On July 21, 2000, we filed a current report on Form 8-K to report under Item 5
our second quarter 2000 financial results.
36
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/ David M. Johnson
-----------------------------
David M. Johnson
Senior Executive Vice President and
Chief Financial Officer
/s/ John T. McClain
-----------------------------
John T. McClain
Senior Vice President, Finance and
Date: November 14, 2000 Corporate Controller
37
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
Quarterly Report on 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 Quarterly Report on Form
10-Q/A for the quarterly period ended March 31, 2000 dated July
28, 2000)
10.1 Amendment, effective May 15, 2000, to the Amended and Restated
Employment Agreement, dated as of June 30, 1996 and all subsequent
amendments thereto, by and between Cendant Corporation, successor
to HFS Incorporated, and Henry R. Silverman.
10.2 Agreement and Plan of Merger, dated as of November 1, 2000, by
and among Cendant Corporation, Grand Slam Acquisition Corp. and
Fairfield Communities, Inc.
10.3 Agreement and Plan of Reorganization by and among Homestore.com,
Inc., Metal Acquisition Corp, Welcome Wagon Acquisition Corp.,
Move.com, Inc., Welcome Wagon International Inc., Cendant
Membership Services, Inc. and Cendant Corporation, dated as of
October 26, 2000.
10.4 Agreement and Plan of Merger by and among Cendant Corporation, PHH
Corporation, Avis Acquisition Corp. and Avis Group Holdings, Inc.,
dated as of November 11, 2000.
10.5 Three Year Competitive Advance and Revolving Credit Agreement,
dated as of August 29, 2000, among Cendant Corporation, the
lenders referred to therein, and the Chase Manhattan Bank, as
Administrative Agent.
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule (electronic transmission only)