82
EXHIBIT 99.2
RESTATEMENT OF QUARTERLY PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
83
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 902,777 $ 633,903
Marketable securities 308,947 94,200
Receivables, net 1,538,415 1,290,625
Other current assets 630,657 510,865
--------------- --------------
Total current assets 3,380,796 2,529,593
--------------- --------------
Deferred membership acquisition costs 389,870 401,564
Franchise agreements, net 942,780 995,947
Goodwill, net 1,913,478 2,302,226
Other intangibles, net 1,438,537 636,230
Other assets 1,329,370 993,574
--------------- --------------
Total assets exclusive of assets under programs 9,394,831 7,859,134
--------------- --------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,547,217 3,418,666
Relocation receivables 587,310 773,326
Mortgage loans held for sale 1,162,220 1,248,299
Mortgage servicing rights and fees 305,428 288,943
--------------- --------------
5,602,175 5,729,234
--------------- --------------
TOTAL ASSETS $ 14,997,006 $ 13,588,368
=============== ==============
See accompanying notes to supplemental consolidated financial statements.
84
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and
other current liabilities $ 1,358,767 $ 1,664,946
--------------- --------------
Deferred income 1,091,649 1,099,393
Long-term debt 2,422,524 1,004,584
Other noncurrent liabilities 262,407 124,885
--------------- --------------
Total liabilities exclusive of liabilities under programs 5,135,347 3,893,808
--------------- --------------
Liabilities under management and mortgage programs
Debt 4,952,083 5,089,943
Deferred income taxes 300,683 281,948
--------------- --------------
5,252,766 5,371,891
--------------- --------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized 10 million shares;
none issued and outstanding -- --
Common stock, $.01 par value - authorized 2 billion shares;
issued 824,544,641 and 804,655,850 shares, respectively 8,245 8,047
Additional paid-in capital 3,017,461 2,870,422
Retained earnings 1,890,452 1,556,300
Net unrealized gain on marketable securities -- 4,334
Currency translation adjustment (27,024) (12,452)
Restricted stock, deferred compensation (28,664) (28,212)
Treasury stock, at cost (13,964,693 and 6,911,757 shares, respectively) (251,577) (75,770)
---------------- --------------
Total shareholders' equity 4,608,893 4,322,669
---------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,997,006 $ 13,588,368
================ ==============
See accompanying notes to supplemental consolidated financial statements.
85
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------- ------------- -------------
REVENUES
Membership and service fees, net $ 1,288,092 $ 924,246 $ 3,502,423 $ 2,513,994
Fleet leasing (net of depreciation and
interest costs of $307,908, $283,086,
$892,186 and $839,080, respectively) 13,148 14,297 42,905 41,016
Other 130,064 104,358 344,687 244,941
------------ ------------- ------------- -----------
Net revenues 1,431,304 1,042,901 3,890,015 2,799,951
------------ ------------- ------------- -----------
EXPENSES
Operating 464,483 363,426 1,317,841 1,004,391
Marketing and reservation 360,900 283,529 963,349 776,908
General and administrative 105,859 83,811 324,076 255,765
Merger and related costs and other
unusual charges - 147,200 303,000 175,835
Depreciation and amortization 70,240 49,903 190,599 119,529
Interest, net 15,562 2,463 43,920 17,224
------------ ------------- ------------- -----------
Total expenses 1,017,044 930,332 3,142,785 2,349,652
------------ ------------- ------------- -----------
Income before income taxes 414,260 112,569 747,230 450,299
Provision for income taxes 165,996 44,103 346,536 184,795
------------ ------------- ------------- -------------
Net income $ 248,264 $ 68,466 $ 400,694 $ 265,504
============ ============= ============= =============
PER SHARE INFORMATION
Net income per share
Primary $ 0.29 $ 0.08 $ 0.47 $ 0.34
============ ============= ============= ===========
Fully diluted $ 0.28 $ 0.08 $ 0.47 $ 0.33
============ ============= ============= ===========
Weighted average common and common
equivalent shares outstanding
Primary 888,061 834,441 874,379 800,716
Fully diluted 899,447 838,483 877,419 807,607
See accompanying notes to supplemental consolidated financial statements.
86
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1996
------------ --------------
OPERATING ACTIVITIES:
Net income $ 400,694 $ 265,504
Merger related charge 303,000 --
Merger related payments (137,000) --
Depreciation and amortization 168,083 93,606
Increase (decrease) from changes in
assets under management programs
Depreciation and amortization under management
and mortgage programs 812,309 764,173
Mortgage loans held for sale 86,079 (318,767)
Other (314,955) 61,310
------------- --------------
Net cash provided by operating activities 1,318,210 865,826
------------- --------------
INVESTING ACTIVITIES:
Assets under management and mortgage programs
Investment in leases and leased vehicles (1,565,857) (1,217,700)
Payments received on investment in leases and leased vehicles 615,153 470,193
Equity advances on homes under management (4,185,486) (2,347,351)
Repayment of advances on homes under management 4,341,295 2,377,103
Additions to originated mortgage servicing rights (147,608) (115,219)
Proceeds from sales of mortgage servicing rights 48,974 7,113
Property and equipment additions (112,608) (93,381)
Proceeds from sales of marketable securities 233,902 108,071
Purchases of marketable securities (467,176) (96,517)
Investment in preferred stock (181,191) --
Due from Avis Rent A Car, Inc. (124,440) --
Net assets acquired, exclusive of cash acquired (567,438) (990,668)
Other (6,789) 19,853
------------ --------------
Net cash used in investing activities (2,119,269) (1,878,503)
------------ ---------------
FINANCING ACTIVITIES:
Proceeds from borrowings 3,046,657 1,538,130
Principal payments on borrowings (1,767,264) (1,212,446)
Net proceeds from issuance of convertible notes 542,830 --
Redemption of series A preferred stock -- (80,000)
Net change in short term borrowings under management and mortgage programs (693,891) 114,518
Issuance of common stock, net 119,977 1,218,689
Purchases of common stock (171,318) (8,025)
Payment of dividends of pooled entities (6,644) (21,154)
------------ ---------------
Net cash provided by financing activities 1,070,347 1,549,712
----------- -------------
Effect of changes in exchange rates on cash and cash equivalents (414) (17,104)
------------ --------------
Net increase in cash and cash equivalents 268,874 519,931
Cash and cash equivalents, beginning of period 633,903 355,959
----------- --------------
Cash and cash equivalents, end of period $ 902,777 $ 875,890
=========== ==============
See accompanying notes to supplemental consolidated financial statements.
87
CENDANT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The supplemental consolidated balance sheet of Cendant Corporation and
subsidiaries, formerly CUC International Inc. (the "Company"), as of
September 30, 1997, the supplemental consolidated statements of income for
the three and nine months ended September 30, 1997 and 1996, and the
supplemental consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996, are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such
financial statements are included. There were no adjustments of an unusual
nature recorded during the three and nine months ended September 30, 1997
and 1996 except for (i) a one-time charge of $303.0 million ($227.0
million after tax), recorded in the second quarter of 1997 representing
merger and related costs incurred in connection with the merger of HFS
Incorporated ("HFS") with PHH Corporation ("PHH"); (ii) non-recurring
charges of $147.2 ($89.6 million, after tax) and $28.6 million ($25.1
million, after tax) recorded in the third and second quarters of 1996,
respectively, representing merger and related costs incurred in connection
with the 1996 mergers of the Company with Davidson & Associates, Inc.
("Davidson"), Sierra On-Line, Inc. ("Sierra") and Ideon Group, Inc.
("Ideon") and (iii) a $5.0 million restructuring charge recorded in June
1996, related to the contribution of owned Coldwell Banker brokerage
offices to an independent trust.
The supplemental consolidated financial statements include the accounts
and transactions of the Company and all wholly-owned and majority owned
subsidiaries and joint ventures except for the Company's ownership of Avis
Rent A Car Inc. ("ARAC"), which is accounted for under the equity method
(See Note 5). The accompanying supplemental consolidated financial
statements have been restated for the business combinations accounted for
as poolings of interest (See Note 2) as if such combined companies had
operated as one entity since inception. All material intercompany balances
and transactions have been eliminated in consolidation. These supplemental
consolidated financial statements will become the Company's primary
historical financial statements for the periods presented. Interim results
are not necessarily indicative of results for a full year.
The accompanying supplemental consolidated financial statements and
notes thereto are presented in accordance with interim financial reporting
requirements as required by Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. The December 31, 1996 supplemental
consolidated balance sheet was derived from the Company's audited
supplemental consolidated financial statements. For further information,
refer to the supplemental consolidated financial statements and notes
thereto included herein as Exhibit 99.1 in this Form 8-K.
Certain reclassifications have been made to the historical financial
statements of the pooled companies to conform to the restated
presentation.
88
2. BUSINESS COMBINATIONS
1997 POOLINGS
On December 17, 1997, the Company completed a merger with HFS (the
"Cendant Merger") by issuing 440.0 million shares of its common stock in
exchange for all of the outstanding common stock of HFS. Pursuant to the
terms of the agreement and plan of merger, HFS stockholders received
2.4031 shares of Company common stock for each share of HFS common stock.
Upon consummation of the Cendant Merger, the Company changed its name from
CUC International Inc. to Cendant Corporation.
In connection with the Cendant Merger, the Company changed its fiscal
year end from January 31 to December 31. HFS has a calendar year end and
the Company has only recalendarized its 1997 results. Accordingly, the HFS
statements of income for the three and nine months ended September 30,
1997 and September 30, 1996 have been combined with the Company's
statements of income for the three and nine months ended September 30,
1997 and October 31, 1996, respectively.
On October 3, 1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag"), pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440.0 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information.
On April 30, 1997, prior to being merged with and into the Company, HFS
acquired PHH by merger (the "HFS/PHH Merger") which was satisfied by the
issuance of 72.8 million equivalent shares of Company common stock in
exchange for all of the outstanding common stock of PHH. PHH is the
world's largest provider of corporate relocation services and also
provides mortgage services and fleet management services. In connection
with the merger, PHH changed its fiscal year end from April 30 to December
31.
During February 1997, the Company acquired substantially all of the
assets and assumed specific liabilities of Numa Corporation ("Numa") for
$73.5 million. The purchase price was satisfied by the issuance of 3.4
million shares of Company common stock. Numa publishes personalized
heritage publications and markets and sells personalized merchandise.
The following table presents the historical results of the Company and
the respective pooled entities for the last complete periods prior to
their respective mergers ($000's):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net revenues
The Company $ 737,067 $ 602,203 $ 2,002,597 $ 1,673,426
HFS (inclusive of PHH) 649,880 409,571 1,749,477 1,032,615
Hebdo Mag 44,357 31,127 137,941 93,910
------------- ------------- ------------- -------------
$ 1,431,304 $ 1,042,901 $ 3,890,015 $ 2,799,951
============= ============= ============= =============
89
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net income
The Company $ 87,553 $ (18,009) $ 252,082 $ 74,573
HFS (inclusive of PHH) 157,403 84,874 142,057 188,491
Hebdo Mag 3,308 1,601 6,555 2,440
------------- ------------- ------------- -------------
$ 248,264 $ 68,466 $ 400,694 $ 265,504
============= ============= ============= =============
The following table presents the historical results of HFS and PHH for
the periods prior to the HFS/PHH Merger ($000's):
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, 1997 SEPTEMBER 30, 1996
--------------- ------------------
Net revenues
HFS $ 347,962 $ 550,010
PHH 177,923 482,605
--------------- -------------------
$ 525,885 $ 1,032,615
=============== ===================
Net income
HFS $ 58,940 $ 130,960
PHH 32,164 57,531
--------------- -------------------
$ 91,104 $ 188,491
=============== ===================
PURCHASE BUSINESS COMBINATIONS
During the nine months ended September 30, 1997, the Company acquired
certain entities for an aggregate purchase price of $63.3 million,
satisfied by the payment of $27.5 million in cash and the issuance of 1.5
million shares of Company common stock. The goodwill resulting from these
acquisitions aggregated $89.9 million. These acquisitions were accounted
for in accordance with the purchase method of accounting and, accordingly,
the results of operations have been included in the consolidated results
of operations from the respective dates of acquisitions. The results of
operations for the periods prior to the respective dates of acquisition
were not significant to the Company's operations.
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
PHH MERGER CHARGE
HFS recorded a one-time merger and restructuring charge (the "PHH
Merger Charge") of $303.0 million ($227.0 million, after tax) during the
second quarter of 1997 in connection with the HFS/PHH Merger. Excluding
the PHH Merger Charge, net income was $627.7 million for the nine months
ended September 30, 1997. The PHH Merger Charge is summarized by type as
follows (in millions):
90
Personnel related $ 142.4
Professional fees 36.8
Business terminations 44.7
Facility related 57.1
Other costs 22.0
-----------
Total $ 303.0
===========
Personnel related charges are comprised of costs incurred in connection
with employee reductions associated with the combination of HFS's
relocation service businesses and the consolidation of corporate
activities. Personnel related charges include termination benefits such as
severance, medical and other benefits. Also included in personnel related
charges are supplemental retirement benefits resulting from the change of
control. Several grantor trusts were established and funded by HFS to pay
such benefits in accordance with the terms of the HFS/PHH Merger
agreement. Full implementation of the restructuring plan will result in
the termination of approximately 500 employees substantially all of whom
are located in North America, of which 369 employees were terminated as of
September 30, 1997. Professional fees are primarily comprised of
investment banking, accounting and legal fees incurred in connection with
the HFS/PHH Merger. Business termination charges relate to the exit from
certain activities associated with fleet management, mortgage services and
ancillary operations. Facility related expenses include costs associated
with contract and lease terminations, asset disposals and other charges
incurred in connection with the consolidation and closure of excess space.
The Company anticipates that approximately $236.0 million will be paid
in cash in connection with the PHH Merger Charge of which $137.0 million
was paid through September 30, 1997. The remaining cash portion of the PHH
Restructuring Charge will be financed through cash generated from
operations and borrowings under the Company's revolving credit facilities.
It is currently anticipated that the restructuring plan will be completed
during the first quarter of 1998. Revenue and operating results from
activities that will not be continued are not material to the results of
operations of the Company.
1996 POOLINGS
In connection with the Company's 1996 acquisitions of Davidson, Sierra and
Ideon, which were accounted for as poolings of interests, the Company
recorded a non-recurring charge of approximately $179.9 million ($118.7
million, after tax) for the year ended December 31, 1996. Such charge is
comprised of transaction costs, exit costs and a provision relating to
certain litigation matters giving consideration to the Company's intended
approach to these matters. As of September 30, 1997, such charges amounted
to $155.7 million.
4. PRO FORMA INFORMATION
The following table reflects the unaudited operating results of the
Company for the nine months ended September 30, 1996 on a pro forma basis,
which gives effect to HFS's 1996 acquisitions, accounted for under the
purchase method of accounting as if they had occurred on January 1, 1996:
Net revenues $ 3,284,158
Net income 319,439
Net income per share (fully diluted) $ 0.38
91
5. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc.
in July 1996, HFS announced its strategy to dilute its interest in ARAC's
car rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. In September 1997, ARAC completed an initial public
offering ("IPO") of a subsidiary that operated the car rental operations
of HFS Car Rental Inc., which diluted HFS's equity interest in such
subsidiary to approximately 27.5%. Net proceeds from the IPO approximating
$359.3 million retained by ARAC were used to fund its August 20, 1997
acquisition of The First Gray Line Corporation and repay ARAC
indebtedness.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. In
addition, the Company operates the telecommunications and computer
processing system which services ARAC for reservations, rental agreement
processing, accounting and fleet control for which the Company charges
ARAC at cost. Summarized financial information of ARAC is as follows
($000's):
AVIS RENT A CAR, INC.
Balance sheet data: SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- -----------------
Vehicles $ 3,364,660 $ 2,243,492
Total assets 4,717,107 3,131,357
Debt 3,285,548 2,295,474
Total liabilities 4,263,001 3,054,817
Shareholders' equity 454,106 76,540
THREE MONTHS ENDED NINE MONTHS ENDED
Statement of income data: SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------- ------------------
Revenues $ 580,049 $ 1,525,696
Income before provision for income taxes 24,953 49,313
Net income 13,868 26,974
6. SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses
and aggregated $30.0 million and $15.9 million for the three months ended
September 30, 1997 and 1996, respectively, and $79.7 million and $46.1
million for the nine months ended September 30, 1997 and 1996,
respectively. Software revenue included in Other was $265.2 million and
$228.1 million for the nine months ended September 30, 1997 and 1996,
respectively. Costs of software revenue are included in operating expenses
and aggregated $26.7 million and $24.0 million for the three months ended
September 30, 1997 and 1996, respectively, and $82.1 million and $69.9
million for the nine months ended September 30, 1997 and 1996,
respectively.
92
7. REDEMPTION OF 4-1/2% NOTES
On September 22, 1997, HFS exercised its option to redeem the
outstanding 4-1/2% Convertible Senior Notes ("4-1/2% Notes") effective on
October 15, 1997 in accordance with the provisions of the indenture under
which the 4-1/2% Notes were issued. Prior to the redemption date, all of
the outstanding 4-1/2% Notes were converted. Accordingly, 19.7 million
equivalent shares of Company common stock were issued (0.2 million shares
as of September 30, 1997) as a result of the conversion of such notes.
8. ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550.0 million in principal
amount of 3% Convertible Subordinated Notes (the "3% Notes") due February
15, 2002. Interest on the 3% Notes is payable semi-annually. Each $1,000
principal amount of 3% Notes is convertible into 32.6531 shares of Company
common stock subject to adjustment in certain events. The 3% Notes may be
redeemed at the option of the Company at any time on or after February 15,
2000, in whole or in part, at the appropriate redemption prices (as
defined in the indenture governing the 3% Notes) plus accrued interest to
the redemption date. The 3% Notes will be subordinated in right of payment
to all existing and future Senior Debt (as defined in the indenture
governing the 3% Notes) of the Company. Issuance costs are being amortized
on a straight-line basis over five years.
9. INVESTMENT IN NRT
During the third quarter of 1997, HFS acquired $182.0 million of
preferred stock (included in other assets) of NRT Incorporated ("NRT"), a
newly formed corporation created to acquire residential real estate
brokerage firms. HFS acquired $216.1 million of certain intangible assets
including trademarks associated with real estate brokerage firms acquired
by NRT in 1997. HFS, at its discretion, may acquire up to $81.3 million
of additional NRT preferred stock and may also purchase up to $229.9
million of certain intangible assets of real estate brokerage firms
acquired by NRT.
In September 1997, NRT, acquired the real estate brokerage business and
operations of National Realty Trust (the "Trust"), and two other regional
real estate brokerage businesses. The Trust is an independent trust to
which HFS contributed the brokerage offices formerly owned by Coldwell
Banker Corporation in connection with HFS's acquisition of Coldwell Banker
Corporation. NRT is the largest residential brokerage firm in the United
States.
10. SHAREHOLDERS' EQUITY
A. AUTHORIZED SHARES
In conjunction with the Cendant Merger effective on December 17, 1997,
the Company's shareholders approved an amendment to the Company's
restated certificate of incorporation to increase the number of
authorized shares of common stock and preferred stock to 2 billion
shares and 10 million shares, respectively. The Company has never issued
shares of preferred stock.
93
B. TREASURY PURCHASES
In January 1997, HFS's Board of Directors authorized the purchase of 6.2
million equivalent shares of Company common stock to satisfy stock option
exercises and conversions of convertible debt securities and to fund
future acquisitions. The Company acquired approximately 6.2 million
equivalent treasury shares in January and February 1997 for $179.4 million
with revolving credit borrowings.
11. CONTINGENCIES - IDEON
On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Agreement calls for the dismissal with prejudice of certain outstanding
litigation matters between Peter Halmos and certain of the Company's
subsidiaries and the payment to Peter Halmos, over a six-year period, of
$70.5 million. Specifically, the Agreement requires that the Company pay
Peter Halmos one up-front payment of $13.5 million of six subsequent
annual payments of $9.5 million each. For additional disclosure, see
Footnote 13 --Commitments and Contingencies to Exhibit 99.1 -- Supplemental
Consolidated Financial Statements.
94