<PAGE>
CONFORMED
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 2000
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 26, 2000 were 726,196,308 shares of CD common stock and
3,644,774 shares of Move.com common stock.
--------------------------------------------------------------------------------
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three
and six months ended June 30, 2000 and 1999 1
Consolidated Condensed Balance Sheets as of June 30, 2000
and December 31, 1999 2
Consolidated Condensed Statements of Cash Flows for the
six months ended June 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 16
Item 3. Quantitative and Qualitative Disclosures About Market Risks 29
PART II Other Information
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 4. Submissions of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
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, including the
proposed settlement of the class action 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; uncertainty
as to when and if the Company will consummate the public offering of Move.com
tracking stock and the future profitability of Move.com Group; 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; the effect of changes in current interest rates,
particularly in our Mortgage and Real Estate Franchise segments and the
Company's ability to retain and increase memberships in its Individual
Membership segment from its targeted marketing strategy. 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)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net $ 1,124 $ 1,347 $ 2,190 $ 2,600
Fleet leasing (net of depreciation and interest
costs of $0, $343, $0, and $670) - 11 - 30
Other 13 33 75 78
------------ ------------ ------------ ------------
Net revenues 1,137 1,391 2,265 2,708
------------ ------------ ------------ ------------
EXPENSES
Operating 361 455 728 912
Marketing and reservation 228 288 444 550
General and administrative 144 190 277 355
Depreciation and amortization 86 97 171 190
Other charges (credits):
Restructuring and other unusual charges - 23 106 22
Litigation settlement and related costs - - (41) -
Investigation-related costs 5 6 8 8
Termination of proposed acquisition - - - 7
Interest, net 22 54 47 102
------------ ------------ ------------ ------------
Total expenses 846 1,113 1,740 2,146
------------ ------------ ------------ ------------
Net gain (loss) on dispositions of businesses 4 750 (10) 750
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 295 1,028 515 1,312
Provision for income taxes 98 138 176 238
Minority interest, net of tax 22 16 38 31
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 175 874 301 1,043
Gain (loss) on sale of discontinued operations, net of tax - (12) - 181
------------ -------------- ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 175 862 301 1,224
Extraordinary loss, net of tax - - (2) -
------------ ------------ ------------- ------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 175 862 299 1,224
Cumulative effect of accounting change, net of tax - - (56) -
------------ ------------ ------------- ------------
NET INCOME $ 175 $ 862 $ 243 $ 1,224
============ ============ ============ ============
CD COMMON STOCK INCOME PER SHARE
BASIC
Income from continuing operations $ 0.25 $ 1.14 $ 0.42 $ 1.33
Net income 0.25 1.12 0.34 1.56
DILUTED
Income from continuing operations $ 0.24 $ 1.06 $ 0.40 $ 1.25
Net income 0.24 1.05 0.33 1.47
MOVE.COM COMMON STOCK LOSS PER SHARE
BASIC
Loss from continuing operations $ (0.67) $ (0.67)
Net loss (0.67) (0.67)
DILUTED
Loss from continuing operations $ (0.67) $ (0.67)
Net loss (0.67) (0.67)
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
1
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,234 $ 1,164
Receivables, net 882 1,026
Deferred income taxes 1,413 1,427
Other current assets 788 975
----------- -----------
Total current assets 4,317 4,592
Property and equipment, net 1,314 1,347
Goodwill, net 3,177 3,271
Franchise agreements, net 1,416 1,410
Other intangibles, net 649 662
Other assets 1,285 1,141
----------- -----------
Total assets exclusive of assets under programs 12,158 12,423
----------- -----------
Assets under management and mortgage programs
Mortgage loans held for sale 1,392 1,112
Mortgage servicing rights 1,370 1,084
Relocation receivables 205 530
----------- -----------
2,967 2,726
----------- -----------
TOTAL ASSETS $ 15,125 $ 15,149
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,043 $ 1,279
Stockholder litigation settlement and related costs 2,875 2,892
Deferred income 1,046 1,039
Current portion of debt - 400
----------- -----------
Total current liabilities 4,964 5,610
Long-term debt 2,072 2,445
Deferred income 459 413
Other noncurrent liabilities 404 373
----------- -----------
Total liabilities exclusive of liabilities under management and mortgage programs 7,899 8,841
----------- -----------
Liabilities under management and mortgage programs
Debt 2,369 2,314
Deferred income taxes 317 310
----------- -----------
2,686 2,624
----------- -----------
Mandatorily redeemable preferred securities issued by subsidiary holding solely
senior debentures issued by the Company 1,679 1,478
----------- -----------
Mandatorily redeemable preferred interest in a subsidiary 375 -
----------- -----------
Commitments and contingencies (Note 10)
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 904,824,522 and 870,399,635 shares 9 9
Move.com common stock, $.01 par value - authorized 500 million shares and none;
issued and outstanding 3,644,774 shares and none; 22,500,000 notional
shares with respect to Cendant Group's retained interest and none - -
Additional paid-in capital 4,545 4,102
Retained earnings 1,669 1,425
Accumulated other comprehensive loss (173) (42)
CD treasury stock, at cost, 178,669,890 and 163,818,148 shares (3,564) (3,288)
----------- -----------
Total stockholders' equity 2,486 2,206
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,125 $ 15,149
=========== ===========
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 243 $ 1,224
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of discontinued operations, net of tax - (181)
Extraordinary loss 4 -
Cumulative effect of accounting change 89 -
Restructuring and other unusual charges 106 22
Payments of restructuring, merger-related and other unusual charges (38) (34)
Litigation settlement and related costs (41) -
Net (gain) loss on dispositions of businesses 10 (750)
Depreciation and amortization 171 190
Other, net (159) (132)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 385 339
--------- ---------
Management and mortgage programs:
Depreciation and amortization 67 639
Origination of mortgage loans (11,184) (14,520)
Proceeds on sale and payments from mortgage loans held for sale 10,903 14,776
--------- ---------
(214) 895
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 171 1,234
--------- ---------
INVESTING ACTIVITIES
Property and equipment additions (115) (130)
Net assets acquired (net of cash acquired) and acquisition-related payments (16) (142)
Net proceeds from dispositions of businesses 4 2,615
Other, net (79) 30
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (206) 2,373
--------- ---------
Management and mortgage programs:
Equity advances on homes under management (1,853) (3,475)
Repayment on advances on homes under management 2,276 3,506
Additions to mortgage servicing rights (384) (371)
Proceeds from sales of mortgage servicing rights 65 124
Investment in leases and leased vehicles, net - (774)
--------- ---------
104 (990)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (102) 1,383
--------- ---------
FINANCING ACTIVITIES
Principal payments on borrowings (776) (1)
Issuances of CD common stock 491 52
Issuances of Move.com common stock 45 -
Repurchases of CD common stock (300) (1,342)
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 (3) (6)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (77) (1,297)
--------- ---------
Management and mortgage programs:
Principal payments on borrowings (2,719) (4,655)
Proceeds from debt issuance or borrowings 2,009 3,068
Net change in short-term borrowings 765 (763)
Proceeds received for debt repayment in connection with disposal of Fleet segment - 3,017
--------- ---------
55 667
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (22) (630)
--------- ---------
Effect of changes in exchange rates on cash and cash equivalents 23 67
--------- ---------
Net increase in cash and cash equivalents 70 2,054
Cash and cash equivalents, beginning of period 1,164 1,009
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,234 $ 3,063
========= =========
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
3
<PAGE>
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 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 filed a registration statement with the Securities and
Exchange Commission ("SEC") in connection with the potential issuance of
such tracking stock in a public offering. On June 16, 2000, the Company
announced that, in light of then-current market conditions, the public
offering of Move.com common stock would be postponed. The Company has issued
shares of Move.com common stock in several private financings. See Note 11 -
Stockholders' Equity for a description of those transactions.
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 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.
4
<PAGE>
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. Completion
of the Company's implementation plan and determination of the impact of
adopting these standards is expected by the fourth quarter of 2000. The
Company will adopt SFAS No. 138 concurrently with SFAS No. 133 on January 1,
2001, 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 June 30, 2000, stock
options of 105 million (with a weighted average exercise price of $22.71 per
option) and stock warrants of 31 million (with a weighted average exercise
price of $22.91 per warrant) were antidilutive. At June 30, 1999, stock
options of 59 million (with a weighted average exercise price of $25.62 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 June 30, 2000 and
1999 and therefore excluded from the computation of diluted EPS.
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 losses of Move.com Group. Diluted EPS
further reflects the effects of dilutive common stock equivalents. At June
30, 2000, stock options of 6 million (with a weighted average exercise price
of $18.22 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.
5
<PAGE>
Income (loss) per common share from continuing operations was computed as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
CD COMMON STOCK
Income from continuing operations:
Cendant Group $ 192 $ 878 $ 335 $1,047
Cendant Group's retained interest in Move.com Group (15) (4) (32) (4)
------ ------ ------ ------
Income from continuing operations for basic EPS 177 874 303 1,043
Convertible debt interest, net of tax 3 3 5 6
------ ------ ------ ------
Income from continuing operations for diluted EPS $ 180 $ 877 $ 308 $1,049
====== ====== ====== ======
Weighted average shares outstanding:
Basic 722 770 720 785
Dilutive securities
Stock options, warrants and non-vested shares 22 36 27 36
Convertible debt 18 18 18 18
------ ------ ------ ------
Diluted 762 824 765 839
====== ====== ====== ======
</TABLE>
Basic and diluted loss per share from discontinued operations for the three
months ended June 30, 1999 were $0.02 and $0.01, respectively. Basic and
diluted income per share from discontinued operations for the six months
ended June 30, 1999 were $0.23 and $0.22, respectively. Basic and diluted
loss per share from cumulative effect of accounting change for the six
months ended June 30, 2000 were $0.08 and $0.07, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------- -------------
<S> <C> <C>
MOVE.COM COMMON STOCK
Loss from continuing operations:
Move.com Group $ (17) $ (34)
Less: Cendant Group's retained interest in Move.com Group (15) (32)
------- -----
Loss from continuing operations for basic and diluted EPS $ (2) $ (2)
======= =====
Weighted average shares outstanding:
Basic and Diluted (1) 4 4
======= =====
</TABLE>
-----------------
(1) Weighted average shares outstanding for the six month period was calculated
from the date of issuance of Move.com common stock (March 31, 2000) through
June 30, 2000.
5. COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 175 $ 862 $ 243 $1,224
Other comprehensive income (loss):
Currency translation adjustment (67) 15 (88) (53)
Unrealized gain (loss) on marketable securities, net of tax (31) 10 (43) 8
------ ------ ------ ------
Total comprehensive income $ 77 $ 887 $ 112 $1,179
====== ====== ====== ======
</TABLE>
The after tax components of accumulated other comprehensive loss for the
six months ended June 30, 2000 are as follows:
<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
CURRENCY GAIN (LOSS) OTHER
TRANSLATION ON MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES LOSS
---------- ---------- ----
<S> <C> <C> <C>
Balance, January 1, 2000 $ (58) $ 16 $ (42)
Current period change (88) (43) (131)
------ ------ ------
Balance, June 30, 2000 $ (146) $ (27) $ (173)
====== ====== ======
</TABLE>
6
<PAGE>
6. 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. 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, Individual Membership
and Insurance/Wholesale segments and are expected to be substantially
completed over the next nine 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:
<TABLE>
<CAPTION>
UNUSUAL CASH OTHER BALANCE AT
CHARGES PAYMENTS REDUCTIONS JUNE 30, 2000
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Personnel related $ 25 $ 7 $ 1 $ 17
Asset impairments and
contract terminations 26 1 25 -
Facility related 9 - - 9
Other unusual charges 46 29 14 3
------ ------ ------ ------
Total Unusual Charges $ 106 $ 37 $ 40 $ 29
====== ====== ====== ======
</TABLE>
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 June 30, 2000, approximately 340
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 June 30, 2000 consisted of
personnel related costs, charges associated with facility closures and
related lease obligations and other unusual charges.
1997 Charge. During the six months ended June 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 June 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
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
7
<PAGE>
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.
7. 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.
8. SECURITIZATIONS
During the second quarter of 2000, the Company entered into two 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 January 31, 2005. The Company
retains a subordinated residual interest and the related servicing rights
and obligations in the relocation receivables. At June 30, 2000, the Company
was servicing $738 million of receivables under these agreements.
9. 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. Simultaneously
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.
10. 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 International Inc.
("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 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
8
<PAGE>
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 brought on
behalf of purchasers of all Cendant and CUC publicly traded securities,
other than PRIDES, between May 1995 and August 1998. Under the agreement,
the Company would pay the class members approximately $2.85 billion in cash.
The settlement remains subject to approval by the court. On June 28, 2000, a
hearing was held by the court to hear all objectors to the settlement. The
court has not yet entered a ruling on the settlement. If the settlement is
not approved by the court, the Company can make no assurances that the final
outcome or other settlement of this litigation will not be for an amount
greater than that set forth in the preliminary agreement. The proposed
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.
11. STOCKHOLDERS' EQUITY
CD COMMON STOCK REPURCHASES
During the six months ended June 30, 2000, the Company repurchased $300
million (approximately 17 million shares) of CD common stock under its
common stock repurchase program.
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
9
<PAGE>
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 June 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.
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.
12. SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation, amortization and
minority interest calculation. For this purpose, Adjusted EBITDA is defined
as earnings before non-operating interest, income taxes, depreciation,
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 formation of the Move.com Group in the third quarter of 1999,
the historical results of RentNet, Inc. ("RentNet"), a subsidiary of Cendant
which was attributed to the Move.com Group, were included in the Company's
Individual Membership segment. The Company reclassified the financial
results of RentNet for the three and six months ended June 30, 1999 into the
Move.com Group segment.
SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------
2000 (1) 1999 1999 PRO
-------------------- -------------------- FORMA (2)
ADJUSTED ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA EBITDA
-------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
Travel $ 294 $ 145 $ 290 $ 146 $ 144
Real Estate Franchise 166 125 159 114 113
Relocation 114 38 107 34 35
Mortgage 97 30 107 50 50
Individual Membership 188 45 246 17 18
Insurance/Wholesale 145 42 143 50 51
Move.com Group 15 (29) 3 (6) (6)
Diversified Services 118 8 230 12 12
Fleet - - 106 41 41
------ ------ ------ ------ ------
Total $1,137 $ 404 $1,391 $ 458 $ 458
====== ====== ====== ====== ======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
2000 (1) 1999 1999 PRO
-------------------- -------------------- FORMA (2)
ADJUSTED ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA EBITDA
-------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
Travel $ 565 $ 271 $ 562 $ 291 $ 285
Real Estate Franchise 286 209 256 185 182
Relocation 206 56 198 52 53
Mortgage 174 42 200 94 94
Individual Membership 393 96 487 29 30
Insurance/Wholesale 290 90 283 88 90
Move.com Group 26 (55) 6 (6) (6)
Diversified Services 325 107 509 77 82
Fleet - - 207 81 81
------ ------ ------ ------ ------
Total $2,265 $ 816 $2,708 $ 891 $ 891
====== ====== ====== ====== ======
</TABLE>
-----------------
(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.
<TABLE>
<CAPTION>
THREE MONTHS ENDEDSIX MONTHS ENDED
------------------------------------
JUNE 30, JUNE 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Adjusted EBITDA $ 404 $ 458 $ 816 $ 891
Depreciation and amortization (86) (97) (171) (190)
Other (charges) credits:
Restructuring and other unusual charges - (23) (106) (22)
Litigation settlement and related costs - - 41 -
Investigation-related costs (5) (6) (8) (8)
Termination of proposed acquisition - - - (7)
Interest, net (22) (54) (47) (102)
Net gain (loss) on dispositions of businesses 4 750 (10) 750
------ ------ ------ ------
Income before income taxes and minority interest $ 295 $1,028 $ 515 $1,312
====== ====== ====== ======
</TABLE>
13. 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 provide a reasonable estimate of costs
attributable to the Move.com Group. The allocations of
11
<PAGE>
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), 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. The income tax benefit and balance sheet accounts include
allocations from the Cendant Group and are computed as if the Move.com Group
filed its federal and state income tax returns on a stand-alone basis.
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 the
Cendant Group's Welcome Wagon subsidiary, (d) expenses for overhead charges,
(e) expenses associated with an Internet engineering services agreement and
(f) expenses associated with the Web site development of Cendant Group's
Welcome Wagon subsidiary. 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.
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 1999
---------------------------------- -----------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
----- ----- ------------ ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
External revenues $1,128 $9 $1,137 $1,388 $ 3 $1,391
Inter-group agreements (6) 6 - - - -
------ ------ ------ ------ ------ ------
Net revenues 1,122 15 1,137 1,388 3 1,391
------ ------ ------ ------ ------ ------
EXPENSES
Operating:
External expenses 357 4 361 452 3 455
Inter-group allocated expenses (9) 9 - - - -
Marketing and reservation 204 24 228 288 - 288
General and administrative 137 7 144 184 6 190
Depreciation and amortization 85 1 86 96 1 97
Other charges, net 5 - 5 29 - 29
Interest, net 23 (1) 22 54 - 54
------ ------ ------ ------ ------ ------
Total expenses 802 44 846 1,103 10 1,113
------ ------ ------ ------ ------ ------
Net gain on dispositions of
businesses 4 - 4 750 - 750
------ ------ ------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 324 (29) 295 1,035 (7) 1,028
Provision (benefit) for income taxes 110 (12) 98 141 (3) 138
Minority interest, net of tax 22 - 22 16 - 16
------ ------ ------ ------ ------ ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 192 (17) 175 878 (4) 874
Loss on sale of discontinued
operations, net of tax - - - (12) - (12)
------ ------ ------ ------ ------ ------
NET INCOME (LOSS) $ 192 $ (17) $ 175 $ 866 $ (4) $ 862
====== ====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
---------------------------------- --------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
----- ----- ------------ ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
External revenues $2,249 $ 16 $2,265 $2,702 $ 6 $2,708
Inter-group agreements (10) 10 - - - -
------ ------ ------ ------ ------ ------
Net revenues 2,239 26 2,265 2,702 6 2,708
------ ------ ------ ------ ------ ------
EXPENSES
Operating:
External expenses 714 14 728 906 6 912
Inter-group allocated expenses (14) 14 - - - -
Marketing and reservation 405 39 444 550 - 550
General and administrative:
External expenses 264 13 277 349 6 355
Inter-group allocated expenses (1) 1 - - - -
Depreciation and amortization 169 2 171 189 1 190
Other charges, net 72 1 73 37 - 37
Interest, net 48 (1) 47 102 - 102
------ ------ ------ ------ ------ ------
Total expenses 1,657 83 1,740 2,133 13 2,146
------ ------ ------ ------ ------ ------
Net gain (loss) on dispositions of
businesses (10) - (10) 750 - 750
------ ------ ------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 572 (57) 515 1,319 (7) 1,312
Provision (benefit) for income taxes 199 (23) 176 241 (3) 238
Minority interest, net of tax 38 - 38 31 - 31
------ ------ ------ ------ ------ ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 335 (34) 301 1,047 (4) 1,043
Gain on sale of discontinued
operations, net of tax - - - 181 - 181
------ ------ ------ ------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 335 (34) 301 1,228 (4) 1,224
Extraordinary loss, net of tax (2) - (2) - - -
------ ------ ------ ------ ------ ------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 333 (34) 299 1,228 (4) 1,224
Cumulative effect of accounting
change, net of tax (56) - (56) - - -
------ ------ ------ ------ ------ ------
NET INCOME (LOSS) $ 277 $ (34) $ 243 $1,228 $ (4) $1,224
====== ====== ====== ====== ====== ======
</TABLE>
13
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
---------------------------------- ---------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
----- ----- ------------ ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,219 $ 15 $ 1,234 $ 1,163 $ 1 $ 1,164
Receivables, net 875 7 882 1,018 8 1,026
Deferred income taxes 1,409 4 1,413 1,427 - 1,427
Other current assets 769 19 788 972 3 975
Property and equipment, net 1,301 13 1,314 1,344 3 1,347
Goodwill, net 3,169 8 3,177 3,266 5 3,271
Other noncurrent assets 3,331 19 3,350 3,211 2 3,213
Assets under management
and mortgage programs 2,967 - 2,967 2,726 - 2,726
------- ------- ------- ------- ------- -------
TOTAL ASSETS $15,040 $ 85 $15,125 $15,127 $ 22 $15,149
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 4,936 $ 28 $ 4,964 $ 5,589 $ 21 $ 5,610
Noncurrent liabilities 2,932 3 2,935 3,231 - 3,231
Liabilities under management
and mortgage programs 2,686 - 2,686 2,624 - 2,624
Mandatorily redeemable preferred
securities issued by subsidiary
holding solely senior debentures
issued by the Company 1,679 - 1,679 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 4,434 111 4,545 4,083 19 4,102
Retained earnings
(accumulated deficit) 1,721 (52) 1,669 1,443 (18) 1,425
Accumulated other
comprehensive loss (168) (5) (173) (42) - (42)
CD treasury stock, at cost (3,564) - (3,564) (3,288) - (3,288)
------- ------- ------- ------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $15,040 $ 85 $15,125 $15,127 $ 22 $15,149
======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
------------------------------------- -------------------------------------
CENDANT MOVE.COM CENDANT CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED GROUP GROUP CONSOLIDATED
----- ----- ------------ ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 277 $ (34) $ 243 $1,228 $ (4) $1,224
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of discontinued
operations, net of tax - - - (181) - (181)
Extraordinary loss 4 - 4 - - -
Cumulative effect of
accounting change 89 - 89 - - -
Restructuring and other
unusual charges 105 1 106 22 - 22
Payments of restructuring,
merger-related and other
unusual charges (38) - (38) (34) - (34)
Litigation settlement and related
costs (41) - (41) - - -
Net (gain) loss on dispositions
of businesses 10 - 10 (750) - (750)
Depreciation and amortization 169 2 171 188 1 190
Other, net (142) (17) (159) (133) 2 (132)
Management and mortgage
programs (214) - (214) 895 - 895
------ ------ ------ ------ ------ ------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 219 (48) 171 1,235 (1) 1,234
------ ------ ------ ------ ------ ------
INVESTING ACTIVITIES
Property and equipment additions (105) (10) (115) (130) - (130)
Net assets acquired (net of
cash acquired) and acquisition-
related payments (16) - (16) (142) - (142)
Net proceeds from dispositions of
businesses 4 - 4 2,615 - 2,615
Other, net (79) - (79) 30 - 30
Management and mortgage
programs 104 - 104 (990) - (990)
------ ------ ------ ------ ------ ------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (92) (10) (102) 1,383 - 1,383
------ ------ ------ ------ ------ ------
FINANCING ACTIVITIES
Principal payments on borrowings (776) - (776) (1) - (1)
Issuances of CD common stock 491 - 491 52 - 52
Issuances of Move.com
common stock - 45 45 - - -
Repurchases of CD common stock (300) - (300) (1,342) - (1,342)
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 (3) - (3) (6) - (6)
Management and mortgage
programs 55 - 55 667 - 667
Inter-group funding, net (27) 27 - (1) 1 -
------ ------ ------ ------ ------ ------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (94) 72 (22) (631) 1 (630)
------ ------ ------ ------ ------ ------
Effect of changes in exchange rates
on cash and cash equivalents 23 - 23 67 - 67
------ ------ ------ ------ ------ ------
Net increase in cash and
cash equivalents 56 14 70 2,054 - 2,054
Cash and cash equivalents,
beginning of period 1,163 1 1,164 1,009 - 1,009
------ ------ ------ ------ ------ ------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $1,219 $ 15 $1,234 $3,063 $ - $3,063
====== ====== ====== ====== ====== ======
</TABLE>
15
<PAGE>
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 June 30, 2000 decreased $254 million (18%)
compared with the corresponding period in 1999 due to the effects of
non-strategic businesses disposed throughout 1999 and 2000. Excluding the
operating results of 1999 and 2000 dispositions, revenues increased $27 million
(2%), which primarily reflected moderate growth in real estate royalty fees and
an increase in service based fees from our relocation business, partially offset
by a decline in revenues related to a decrease in mortgage volume.
Revenues for the six months ended June 30, 2000 decreased $443 million (16%)
compared with the corresponding period in 1999 due to the effects of
non-strategic businesses disposed throughout 1999 and 2000. Excluding the
operating results of 1999 and 2000 dispositions, revenues increased $93 million
(4%), which primarily reflected growth attributable to (i) an increase in real
estate royalty fees, (ii) a favorable mix of membership products, (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. Revenue increases were partially offset by a revenue
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. 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,
Individual Membership and Insurance/Wholesale segments and are expected to be
substantially completed over the next nine months. The initial recognition of
the Unusual Charges and the corresponding utilization from inception is
summarized by category of expenditure as follows:
<TABLE>
<CAPTION>
UNUSUAL CASH OTHER BALANCE AT
CHARGES PAYMENTS REDUCTIONS JUNE 30, 2000
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Personnel related $ 25 $ 7 $ 1 $ 17
Asset impairments and
contract terminations 26 1 25 -
Facility related 9 - - 9
Other unusual charges 46 29 14 3
------ ------ ------ ------
Total Unusual Charges $ 106 $ 37 $ 40 $ 29
====== ====== ====== ======
</TABLE>
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 June 30,
2000, approximately 340 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 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
16
<PAGE>
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 June 30, 2000
consisted of personnel related costs, charges associated with facility closures
and related lease obligations and other unusual charges.
1997 Charge. During the six months ended June 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 June 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 6 to our Consolidated Condensed Financial Statements.
INTEREST, NET AND MINORITY INTEREST, NET OF TAX
Interest, net for the three and six months ended June 30, 2000 decreased $32
million (59%) and $55 million (54%), respectively, primarily as a result of a
decrease in the average debt balance outstanding. Minority interest, net of tax
for the three and six months ended June 30, 2000 increased $6 million (38%) and
$7 million (23%), 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 6
and 9, respectively, to our Consolidated Condensed Financial Statements.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended June 30, 2000 increased to
33.2% from 13.4% in 1999. Our effective tax rate for the six months ended June
30, 2000 increased to 34.2% from 18.1% in 1999. Such change is attributable to
the 1999 disposition of our former Fleet segment which was treated as a tax-free
reorganization for tax purposes.
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.
17
<PAGE>
NET INCOME
Net income for the three months ended June 30, 2000 decreased $687 million (80%)
compared with the corresponding period in 1999 primarily as a result of:
o the 1999 net gain on dispositions of businesses ($709 million),
o a reduction in Adjusted EBITDA from on-going businesses ($18 million)
and
o the impact of operating results from disposed businesses ($16 million),
partially offset by:
o a reduction in interest expense ($20 million),
o a decrease in other charges ($16 million), and
o the 1999 loss on sale of discontinued operations ($12 million).
Net income for the six months ended June 30, 2000 decreased $981 million (80%)
compared with the corresponding period in 1999 primarily as a result of:
o the 1999 net gain on dispositions of businesses ($709 million),
o the 1999 gain on sale of discontinued operations ($181 million),
o the 2000 cumulative effect of accounting change ($56 million),
o the impact of operating results from disposed businesses ($26 million),
o an increase in other charges ($25 million) and
o a reduction in Adjusted EBITDA from on-going businesses ($21 million),
partially offset by a reduction in interest expense ($34 million).
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, 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 discussion is the most informative representation of
how management evaluates performance. However, our presentation of Adjusted
EBITDA may not be comparable with similar measures used by other companies.
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
-------------------------- ------------------------------- ------------
% %
2000 1999 CHANGE 2000 1999 CHANGE 2000 1999
---- ---- ------ ---- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Travel $ 294 $ 290 1% $ 145 $ 146(2) (1)% 49% 50%
Real Estate
Franchise 166 159 4% 125 114 10% 75% 72%
Relocation 114 107 7% 38 34 12% 33% 32%
Mortgage 97 107 (9)% 30 50 (40)% 31% 47%
Individual
Membership 188 246 (24)% 45 17(3) 165% 24% 7%
Insurance/
Wholesale 145 143 1% 42 50 (16)% 29% 35%
Move.com Group 15 3 * (29) (6) * * *
Diversified Services 118 230 (49)% 8 (1) 12(4) (33)% 7% 5%
Fleet - 106 - 41 * * 39%
------- ------- ------- -------
Total $ 1,137 $ 1,391 $ 404 $ 458
======= ======= ======= =======
</TABLE>
--------------
* Not meaningful.
(1) Excludes $5 million of investigation-related costs, partially offset by $4
million of gains related to the dispositions of businesses.
(2) Excludes $23 million of additional charges to fund an irrevocable
contribution to an independent technology trust responsible for completing
the transition of our lodging franchisees to a property management system
sponsored by us.
(3) Excludes $34 million of net gains related to the dispositions of businesses.
(4) Excludes $716 million of net gains related to the dispositions of
businesses, partially offset by $6 million of investigation-related costs.
18
<PAGE>
TRAVEL
Revenues increased $4 million (1%) while Adjusted EBITDA decreased $1 million
(1%) in second quarter 2000 compared with second quarter 1999. Royalties from
our franchise business increased approximately $2 million principally due to a
3% increase in available rooms within our lodging businesses. Timeshare
subscription revenues grew $3 million primarily due to a 2% growth in
memberships. The increase in timeshare subscription revenues was net of a $2
million reduction in subscription revenues attributable to the January 1, 2000
implementation of SAB No. 101. Contributing to the Adjusted EBITDA reduction in
second quarter 2000 was $2 million related to the timing of cost allocations to
the lodging brands' national advertising funds and an additional $3 million of
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. Additionally, a $3 million gain was recognized in second
quarter 1999 associated with the sale of a portion of our common equity interest
in Avis Group Holdings Inc. ("Avis") and $5 million of recurring dividend income
was recognized in second quarter 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 $6
million and $5 million for the three months ended June 30, 2000 and 1999,
respectively. Excluding the impact of non-recurring items, comprised of SAB No.
101, the increase in corporate allocations and the 1999 gain on sale of our
common equity interest in Avis, revenues and Adjusted EBITDA increased $9
million (3%) and $9 million (6%), respectively, in second quarter 2000 compared
with second quarter 1999.
REAL ESTATE FRANCHISE
Revenues and EBITDA increased $7 million (4%) and $11 million (10%),
respectively, in second quarter 2000 compared with second quarter 1999. Royalty
fees for the CENTURY 21(R), COLDWELL BANKER(R) and ERA(R) franchise brands
collectively increased by $15 million (12%). Through the five months ended May
31, 2000, the National Association of Realtors, a provider of real estate
industry statistics, has reported a 5% year-over-year decrease in the number of
United States existing home sales and an average price increase of 5%. We have
significantly outperformed such industry statistics as home sales remained
constant over the comparable periods while our average price of homes sold by
our franchisees improved by 12%. This was accomplished through a combination of
home sales through existing franchised brokerages and new franchises added
during the period. Through our continued franchise sales efforts, we have
effectively increased our year-to-date market share of homes sold by 1%.
Beginning in second quarter 1999, the financial results of the national
advertising funds for the COLDWELL BANKER(R) and ERA(R) brands (the "Advertising
Funds") were consolidated into the segment's financial results. Accordingly in
1999, the year-to-date financial results of the Advertising Funds for six months
were consolidated as compared with three months of activity in second quarter
2000. As a result, second quarter 1999 reflected $7 million more revenues and
corresponding expenses than second quarter 2000 with no impact on EBITDA. On a
comparable basis, had only three months of financial results from the
Advertising Funds been consolidated in second quarter 1999, revenues would have
increased 9% and the EBITDA margin would have remained constant at 75%.
RELOCATION
Revenues and EBITDA increased $7 million (7%) and $4 million (12%),
respectively, in second quarter 2000 compared with second quarter 1999. The
EBITDA margin grew from 32% in second quarter 1999 to 33% in second quarter
2000. Revenues and EDITDA reflect increases in service based fees for second
quarter 2000 versus second quarter 1999 including increases in: (i) outsourcing
fees of $2 million as a result of expanded service; (ii) international service
fees of $3 million as a result of increased marketing and sales efforts; and
(iii) other ancillary service fees of $3 million. The increase in service fee
revenues reflects a continuing trend in our business from asset based to service
based revenues. Also contributing to increases in revenues and EBITDA was $4
million of favorable net interest income in second quarter 2000 compared with
second quarter 1999. Partially offsetting the growth in revenue and EBITDA was a
$7 million gain recognized in second quarter 1999 on the sale of a minority
interest in an insurance subsidiary. On a comparable basis, excluding the
non-recurring gain, revenues and EBITDA increased $14 million (14%) and $11
million (41%), respectively, in second quarter 2000 compared with second quarter
1999.
MORTGAGE
Revenues and EBITDA decreased $10 million (9%) and $20 million (40%),
respectively, in second quarter 2000 compared with second quarter 1999. Revenues
from mortgage loans closed declined $10 million. Mortgage closings for the
quarter of $5.9 billion consisted of $5.5 billion in purchase mortgages and $400
19
<PAGE>
million in refinancing mortgages. Closings for the quarter declined by $1.9
billion (24%) primarily because of a $1.4 billion reduction in mortgage
refinancing volume. Purchase mortgage closings declined by $500 million overall
from second quarter 1999 while retail purchase mortgages, which are loans where
we interact directly with the consumer, decreased $100 million to $4.6 billion.
Retail mortgage lending has been our primary focus and accounted for more than
80% of loan volume in the first six months of 2000. Moreover, we ranked as the
sixth largest retail mortgage lender in first quarter 2000, the latest period
for which data is available, as provided by the National Mortgage News. Our
closing volume in second quarter 2000 exceeded first quarter 2000 levels by $2.0
billion (54%), of which $1.7 billion were retail mortgages. Mortgage closings
from our Internet business, known as Log-In, Move-In, amounted to $244 million
in second quarter 2000, compared with $64 million in second quarter 1999. The
quarter-over-quarter collective decrease in closing volume was partially offset
by lower direct costs per loan. Revenues generated by our servicing portfolio
remained constant with last year despite a $14.5 billion (33%) increase in the
average servicing portfolio, principally because of higher servicing
amortization expenses. The EBITDA margin decreased from 47% in second quarter
1999 to 31% in second quarter 2000. The decline in EBITDA and the EBITDA margin
resulted principally from reduced volume of refinancings and increased spending
for technology, infrastructure and teleservices costs to support capacity
anticipated in future periods. Although no assurances can be made, we expect
that market conditions will improve in the second half of the year to produce
more positive comparisons as the year progresses. However, we currently expect
full year 2000 EBITDA to be slightly lower than 1999.
INDIVIDUAL MEMBERSHIP
Revenues decreased $58 million (24%) in second quarter 2000 compared with second
quarter 1999, while Adjusted EBITDA increased $28 million (165%) over the same
period. The Adjusted EBITDA margin improved to 24% in second quarter 2000 from
7% in second quarter 1999. The 1999 dispositions of certain business units and
the formation of Netmarket Group, Inc. ("Netmarket") as an independent company
in 1999 (resulting in no future consolidation), collectively contributed $59
million to the quarter-over-quarter decrease in revenues and $8 million to the
increase in Adjusted EBITDA. On a comparable basis, excluding the operations of
such divested businesses, revenues remained relatively constant, while Adjusted
EBITDA increased $20 million (80%). Contributing to the revenue and Adjusted
EBITDA increase was $8 million of fees received from the sale of certain
referral agreements with car dealers during second quarter 2000. The Adjusted
EBITDA margin increased substantially while the number of individual memberships
declined in second quarter 2000 compared with second quarter 1999, reflecting
our strategy to focus principally on profitability by targeting our marketing
efforts. We reduced our solicitation spending by $14 million in second quarter
2000 compared with second quarter 1999. The impact of lower new membership
volume was substantially offset by a favorable mix of products and programs with
marketing partners.
INSURANCE/WHOLESALE
Revenues increased $2 million (1%) in second quarter 2000 compared with second
quarter 1999. The increase in revenues was principally attributable to
international expansion. EBITDA decreased $8 million (16%) quarter-over-quarter.
The decrease in EBITDA was primarily due to costs of consolidating and
relocating a business unit in California with another business unit located in
Tennessee. The consolidation of such domestic operations is expected to generate
significant expense savings in future periods.
MOVE.COM GROUP
Move.com is our Internet real estate services portal which was launched in
January 2000. Revenues increased $12 million to $15 million in second quarter
2000, while EBITDA decreased $23 million to a loss of $29 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 EBITDA
reflects our increased investment in marketing and development of the move.com
network. We expect Move.com Group to continue to report EBITDA losses in the
foreseeable future as we invest in the growth of the business.
DIVERSIFIED SERVICES
Revenues decreased $112 million while Adjusted EBITDA decreased $4 million in
second quarter 2000 compared with second quarter 1999. Revenues decreased 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 second
quarter 2000 operations resulted in a reduction in revenues of $113 million with
no impact on Adjusted EBITDA. Adjusted EBITDA in
20
<PAGE>
second quarter 2000 includes $6 million of costs incurred to pursue Internet
initiatives through our Cendant Internet Group.
FLEET
Revenues and EBITDA for the three months ended June 30, 1999 were $106 million
and $41 million, respectively.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
-------------------------- ------------------------------ ---------------
% %
2000 1999 CHANGE 2000 (1) 1999 CHANGE 2000 1999
---- ---- ------ -------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Travel $ 565 $ 562 1% $ 271(2) $ 291(4) (7)% 48% 52%
Real Estate
Franchise 286 256 12% 209 185 13% 73% 72%
Relocation 206 198 4% 56 52 8% 27% 26%
Mortgage 174 200 (13)% 42 94 (55)% 24% 47%
Individual
Membership 393 487 (19)% 96 29(5) 231% 24% 6%
Insurance/
Wholesale 290 283 2% 90 88 2% 31% 31%
Move.com Group 26 6 * (55) (6) * * *
Diversified Services 325 509 * 107(3) 77(6) * * *
Fleet - 207 * - 81 * * 39%
------- ------- ------- -------
Total $ 2,265 $ 2,708 $ 816 $ 891
======= ======= ======= =======
</TABLE>
--------------
* Not meaningful.
(1) Excludes a charge of $106 million in connection with restructuring and
other initiatives focused principally on improving the overall level of
organizational efficiency, consolidating and rationalizing existing
processes, reducing cost structures in our underlying businesses and other
related efforts ($60 million, $1 million, $1 million, $23 million, $9
million, $1 million and $11 million of charges were recorded within the
Travel, Relocation, Mortgage, Individual Membership, Insurance/Wholesale,
Move.com Group and Diversified Services segments, respectively).
(2) Excludes $4 million of losses related to the dispositions of businesses.
(3) Excludes a non-cash credit of $41 million in connection with a change to
the original estimate of the number of Rights to be issued in connection
with the PRIDES settlement resulting from unclaimed and uncontested
Rights. Such changes were partially offset by $6 million of losses related
to the disposition of businesses and $8 million of investigation-related
costs.
(4) Excludes $23 million of additional charges to fund an irrevocable
contribution to an independent technology trust responsible for completing
the transition of our lodging franchisees to a property management system
sponsored by us.
(5) Excludes $34 million of net gains related to the dispositions of
businesses.
(6) Excludes $716 million of net gains related to the dispositions of
businesses and a $1 million unusual credit recorded in connection with the
sale of a subsidiary, partially offset by $8 million of
investigation-related costs and a $7 million charge related to the
termination of a proposed acquisition.
TRAVEL
Revenues increased $3 million (1%) while Adjusted EBITDA decreased $20 million
(7%) in six months 2000 compared with six months 1999. Royalties from our
franchise business increased approximately $4 million (2%) principally due to a
4% increase in available rooms within our lodging business. Timeshare exchange
revenues grew $2 million primarily due to a 2% increase in memberships.
Timeshare subscription revenues increased $1 million period-over-period despite
the impact of SAB No. 101, which resulted in a $5 million reduction in timeshare
subscription revenues. Contributing to the Adjusted EBITDA reduction in six
months 2000 was $5 million related to the timing of cost allocations to the
lodging brands' national advertising funds and an additional $7 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 six months 2000 of $3 million of obligations
relating to a prior acquisition and $6 million of initial franchise fees
received during six months 1999 in connection with the generation of a master
license agreement and joint venture within our timeshare business. Additionally,
$10 million of gains was recognized in six months 1999 associated with the sale
of a portion of our common equity interest in Avis and recurring dividend income
of $9 million was recognized in six 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
$6 million and $8 million for the six months ended June 30, 2000 and 1999,
respectively. Excluding the impact of non-recurring items, comprised of SAB No.
101, the increase in corporate allocations and the 1999 gain on sale of our
common equity interest in Avis, revenues and Adjusted EBITDA increased $18
million (3%) and $7 million (2%), respectively, in six months 2000 compared with
six months 1999.
21
<PAGE>
REAL ESTATE FRANCHISE
Revenues and EBITDA increased $30 million (12%) and $24 million (13%),
respectively, in six months 2000 compared with six months 1999. Royalty fees for
the CENTURY 21(R), COLDWELL BANKER(R) and ERA(R) franchise brands collectively
increased $28 million (14%). Through our continued franchise sales efforts, we
have effectively increased our year-over-year market share of homes sold by 1%.
As a result of the revenue increase, with only marginal increases in expenses,
the EBITDA margin increased from 72% in six months 1999 to 73% in six months
2000.
RELOCATION
Revenues and Adjusted EBITDA increased $8 million (4%) and $4 million (8%),
respectively, in six months 2000 compared with six months 1999. The Adjusted
EBITDA margin increased from 26% in six months 1999 to 27% in six months 2000.
Revenues and Adjusted EBITDA reflect increases in service based fees for six
months 2000 versus six months 1999 including increases in: (i) outsourcing fees
of $5 million as a result of expanded services; (ii) international fees of $4
million as a result of increased marketing and sales efforts and; (iii) other
ancillary service fees of $5 million. The increase in service fee revenues
reflects a continuing trend in our business from asset based to service based
revenues. Also contributing to increases in revenues and Adjusted EBITDA was $4
million of favorable net interest income in six months 2000 compared with six
months 1999. The aforementioned increases in service based fees was partially
offset by lower corporate and government home sale closings. In addition, a $7
million gain was recognized in six 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 $15 million (8%) and
$11 million (24%), respectively, in six months 2000 compared with six months
1999.
MORTGAGE
Revenues and Adjusted EBITDA decreased $26 million (13%) and $52 million (55%),
respectively, in six months 2000 compared with six months 1999, caused primarily
by a $28 million decline in revenues from mortgage loans closed. Mortgage loan
closings for six months 2000 were $9.7 billion, consisting of $9.0 billion in
purchase mortgages and $700 million in refinancing mortgages. Loans closed
declined by $4.8 billion (33%), primarily because of a $4.3 billion reduction in
mortgage refinancing volume. Purchase mortgage closings in our retail lending
business amounted to $7.6 billion in both six months 2000 and 1999. Mortgage
closings from our Internet business, known as Log-In, Move-In, amounted to $404
million in six months 2000, compared with $91 million in six months 1999. Loan
servicing revenues increased $2 million (4%) in six months 2000 versus six
months 1999. Loan servicing revenues in 1999 included a $9 million gain on the
sale of servicing rights. The average servicing portfolio grew approximately $10
billion (24%) in six months 2000 versus the prior year period. The Adjusted
EBITDA margin decreased from 47% in six months 1999 to 24% in six months 2000.
The declines in Adjusted EBITDA and the Adjusted EBITDA margin resulted
principally from the reduced volume of refinancings and increased spending for
technology, infrastructure and teleservices costs incurred to support capacity
for volume anticipated in future periods. Although no assurances can be made, we
expect that market conditions will improve in the second half of the year and
produce more positive comparisons as the year progresses. However, we currently
expect full year 2000 Adjusted EBITDA to be slightly lower than 1999.
INDIVIDUAL MEMBERSHIP
Revenues decreased $94 million (19%) in six months 2000 compared with six months
1999, while Adjusted EBITDA increased $67 million over the same period. The
Adjusted EBITDA margin improved to 24% in six months 2000 from 6% in six months
1999. The 1999 dispositions of certain business units and the formation of
Netmarket as an independent company in 1999 (resulting in no future
consolidation), collectively contributed $110 million to the period-over-period
decrease in revenues and $16 million to the increase in Adjusted EBITDA.
Excluding the six months 1999 operating results of Netmarket and the divested
businesses, revenues increased $16 million (4%) and Adjusted EBITDA increased
$51 million (113%). Contributing to the revenue and Adjusted EBITDA increase was
$8 million of fees received from the sale of certain referral agreements with
car dealers during second quarter 2000. The Adjusted EBITDA margin increased
substantially while the number of individual memberships declined in six months
2000 compared with six months 1999, reflecting our strategy 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 six months 2000 compared
with six months 1999. In addition, we experienced a favorable mix of
22
<PAGE>
products and programs with marketing partners which further contributed to the
revenue and Adjusted EBITDA growth in six months 2000 compared with the prior
year period.
INSURANCE/WHOLESALE
Revenues increased $7 million (2%) in six months 2000 compared with six months
1999. Adjusted EBITDA increased $2 million (2%) over the same period. The
increase in revenues was principally attributable to international expansion.
International revenues and Adjusted EBITDA increased $6 million and $2 million,
respectively, primarily due to an increase in customers. The increase in
Adjusted EBITDA was primarily due to a decrease in marketing expense resulting
from longer amortization periods for certain customer acquisition costs,
substantially offset by costs incurred during six months 2000 related to a
consolidation of domestic operations in Nashville, Tennessee. The Adjusted
EBITDA margin remained constant at 31% for the comparable six month periods. The
Adjusted EBITDA margin for domestic operations was 36% in six months 2000 versus
37% in six months 1999 and the Adjusted EBITDA margin for international
operations was 16% for six months 2000 versus 15% in six months 1999. Domestic
operations, which represented 73% of segment revenues in six months 2000 and 75%
in the six months 1999, generated higher Adjusted EBITDA margins than
international operations as a result of continued expansion costs incurred
internationally to penetrate new markets.
MOVE.COM GROUP
Revenues increased $20 million to $26 million in six months 2000, while Adjusted
EBITDA decreased $49 million to a loss of $55 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. We expect Move.com will continue to report Adjusted EBITDA losses as
we invest in the growth of the business.
DIVERSIFIED SERVICES
Revenues decreased $184 million and Adjusted EBITDA increased $30 million in six
months 2000 compared with six 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 six
months 2000 operations resulted in a reduction in revenues of $219 million but
improved Adjusted EBITDA by $5 million. Excluding the impact of divested
businesses on six months 1999 operating results, revenue and Adjusted EBITDA
increased $35 million and $25 million, respectively, in six months 2000. Revenue
and Adjusted EBITDA increases were partially due to a 26% increase in tax return
volume, a 6% increase in the average fee per return and improved collections by
our Jackson Hewitt tax preparation franchise business which contributed an
incremental $14 million and $18 million of revenue and Adjusted EBITDA,
respectively. In addition, our National Car Parks business experienced revenue
and Adjusted EBITDA growth of $9 million and $6 million, respectively. Also, the
favorable impact on revenue and Adjusted EBITDA of $12 million of incremental
income recognized from financial investments was principally offset by $11
million of expenses incurred during six months 2000 to pursue Internet
initiatives through our Cendant Internet Group.
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 six months
ended June 30, 1999, were $207 million and $81 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We have sufficient liquidity, 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. 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. 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
23
<PAGE>
be paid in cash, through the issuance of CD common stock and/or Move.com common
stock (which would increase the number of shares of each CD common stock and
Move.com common stock outstanding) 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.
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 brought on behalf of purchasers of all
Cendant and CUC publicly traded securities, other than PRIDES, between May 1995
and August 1998. Under the agreement, we would pay the class members
approximately $2.85 billion in cash. The settlement remains subject to approval
by the court. On June 28, 2000, a hearing was held by the court to hear all
objectors to the settlement. The court has not yet returned a ruling on the
settlement. If the settlement is not approved by the court, we can make no
assurances that the final outcome or other settlement of this litigation will
not be for an amount greater than that set forth in the preliminary agreement.
Our plan to finance the settlement reflects the existence of a range of
financing alternatives, which we have considered to be potentially available. At
a minimum, these alternatives entail using various combinations of (i) available
cash generated from operations, (ii) debt securities and/or (iii) equity
securities. The choice among alternatives will depend on numerous factors,
including the time of the actual settlement payment, the relative costs of
various securities, our cash balance, our projected post-settlement cash flows
and market conditions.
The proposed 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 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 June 30, 2000, aggregate outstanding borrowings consisted of the following:
73/4% senior notes (1) $1,149
3% convertible subordinated notes (1) 548
Term loan facility 375
-------
$2,072
=======
-----------
(1) Publicly issued fixed rate debt.
We had (i) $1.8 billion of committed bank facilities, which were currently
undrawn and available, with the exception of $5 million of letters of credit and
(ii) $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
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since the debt corresponds directly with the high quality related assets. At
June 30, 2000, aggregate outstanding borrowings under management and mortgage
programs consisted of the following:
Commercial paper $ 1,383
Medium-term notes 390
Secured obligations (1) 470
Other 126
-------
$ 2,369
=======
-----
(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. Also at June 30, 2000,
PHH had approximately $375 million available for issuing medium-term notes under
an existing shelf registration statement. Proceeds from future offerings will
continue to be used to finance assets PHH manages for its clients 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 June 30, 2000, PHH maintained the
following two agreements, whereby managed assets were sold or transferred to
third parties.
Mortgage. PHH maintains a revolving sales agreement, under which an unaffiliated
buyer, Bishops Gate Residential Mortgage Trust (the "Buyer"), a bankruptcy
remote, 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 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 June 30, 2000, PHH
was servicing approximately $1.3 billion of mortgage loans owned by the Buyer.
Relocation. During the second quarter 2000, PHH entered into two 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 January 31, 2005. PHH retains a subordinated residual interest
and the related servicing rights and obligations in the relocation receivables.
At June 30, 2000, PHH was servicing approximately $738 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 June 30, 2000, PHH maintained $1.5 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 and a $750 million revolving credit facility
maturing in February 2005. The full amount of PHH's committed facilities at June
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 meet PHH's
funding
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<PAGE>
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. On May 10, 2000, Thomson
Financial Bankwatch initiated coverage of PHH and assigned ratings of A- for
senior debt and TBD-1 short-term debt. A security rating is not a recommendation
to buy, sell or hold securities and is subject to revision or withdrawal at any
time.
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 REPURCHASES
Since inception of our common stock repurchase program in October 1998 and
through June 30, 2000, we repurchased a total of approximately $2.3 billion (121
million shares) of CD common stock. As of June 30, 2000, we had approximately
$500 million remaining availability under our common stock repurchase program.
MOVE.COM COMMON STOCK
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 have filed a
registration statement with the SEC in connection with the potential issuance of
such tracking stock in a public offering. On June 16, 2000, we announced that,
in light of then-current market conditions, the public offering of Move.com
common stock would be postponed. We issued shares of Move.com common stock in
the following private financings:
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 NRT convertible preferred stock, which
is convertible 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
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<PAGE>
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.
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. Such efforts may include the creation of joint
ventures with Liberty Media and others, as well as additional equity investments
in each other's businesses. We agreed to assist Liberty Media in creating a new
venture that will seek to provide broadband video, voice, and data content to
our hotels and their guests on a worldwide basis, in consideration for which we
expect to receive an equity participation in such venture, subject to
negotiation of mutually agreeable terms. We also agreed to pursue opportunities
within the cable industry to leverage our direct marketing resources and
capabilities, subject to negotiation of mutually agreeable terms.
CASH FLOWS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities $ 385 $ 339 $ 46
Investing activities (206) 2,373 (2,579)
Financing activities (77) (1,297) 1,220
Effects of exchange rate changes on
cash and cash equivalents 23 67 (44)
------- ------- -------
Net change in cash and cash equivalents $ 125 $ 1,482 $(1,357)
======= ======= =======
</TABLE>
Cash flows from operating activities increased primarily due to higher operating
cash flows from ongoing businesses in 2000 net of a $26 million increase in
working capital.
Cash flows from investing activities decreased primarily due to the absence in
2000 of $2.6 billion of net cash proceeds received from the disposition of
businesses in 1999.
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<PAGE>
Cash flows from financing activities increased primarily due to:
o an increase in the issuances of CD common stock and the issuance of Move.com
common stock,
o a decrease in the repurchases of CD common stock,
o proceeds from the issuance of a mandatorily redeemable preferred interest
and Additional PRIDES and
o an increase in debt repayments.
MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities $(214) $ 895 $(1,109)
Investing activities 104 (990) 1,094
Financing activities 55 667 (612)
----- ----- -------
Net change in cash and cash equivalents $ (55) $ 572 $ (627)
===== ===== =======
</TABLE>
Cash flows from operating activities decreased primarily due to (i) a decrease
in cash flows from the originations of mortgage loans, which reflects larger
mortgage loan originations in proportion to mortgage loan sales and (ii) a
decrease in depreciation and amortization due to the 1999 disposition of our
former Fleet segment.
Cash flows from investing activities increased primarily due to a $324 million
net transfer of assets under the Apple Ridge financing agreements, and the
absence in 2000 of a $774 million cash use related to our former Fleet segment
in 1999.
Cash flows from financing activities decreased primarily due to changes in net
borrowing requirements for our investment in assets under management and
mortgage programs, offset by debt repayments from cash received under the Apple
Ridge financing agreements.
CAPITAL EXPENDITURES
During the six months ended June 30, 2000, we invested $115 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 $250 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
with specified intervals of time. As of June 30, 2000, the conversion conditions
had not been satisfied.
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. Completion of our implementation plan and
determination of the impact of adopting these standards is expected by the
fourth quarter of 2000. We will adopt SFAS No. 138 concurrently with SFAS No.
133 on January 1, 2001, as required.
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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 June 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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussions contained under the headings "Class Action Litigation and
Government Investigations" in Note 10 contained in PART I - FINANCIAL
INFORMATION, Item 1. Financial Statements, are incorporated herein by reference
in their entirety.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 14, 2000, pursuant to a purchase agreement dated March 28, 2000, NRT
purchased 319,591 shares of Move.com stock for $31.29 per share in cash. The
securities were issued in reliance on the private placement exemption under
Section 4(2) of the Securities Act of 1933, as amended.
On May 13, 2000, pursuant to a purchase agreement dated May 12, 2000, HouseNet,
Inc. purchased 159,795 shares of Move.com common stock for $22.58 per share for
consideration consisting of 1,000 shares of HouseNet, Inc. common stock. The
securities were issued in reliance on the private placement exemption under
Section 4 (2) of the Securities Act of 1933, as amended.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an Annual Meeting of Stockholders on May 25, 2000, pursuant to a Notice
of Annual Meeting of Stockholders and Proxy Statement dated March 28, 2000, a
copy of which has been filed previously with the Securities and Exchange
Commission, at which our stockholders approved the election of four directors
for a term of three years, the ratification for the appointment of Deloitte &
Touche LLP as the auditors of the financial statements for fiscal year 2000, and
the approval of the 2000 Move.com Employee Stock Purchase Plan.
Proposal 1: To elect four directors for a three-year term.
Results:
In Favor Withheld
Henry R. Silverman 621,021,779 9,399,157
James E. Buckman 621,466,174 8,954,762
Stephen P. Holmes 621,475,225 8,945,711
Martin L. Edelman 616,123,508 14,297,428
Proposal 2: To ratify and approve the appointment of Deloitte & Touche LLP as
our Independent Auditors for the year ending December 31, 2000.
Results:
For Against Abstain
--- ------- -------
628,640,505 1,086,730 693,801
Proposal 3: To approve the 2000 Move.com Employee Stock Purchase Plan.
Results:
For Against Abstain
--- ------- -------
578,723,214 49,785,472 1,912,350
30
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
On April 6, 2000, we filed a current report on Form 8-K to report under
Item 5 the reclassification of Cendant Corporation common stock and
changes in the composition of our Board of Directors.
On April 20, 2000, we filed a current report on Form 8-K to report
under Item 5 our first quarter 2000 financial results.
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<PAGE>
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 Johnson
David M. Johnson
Senior Executive Vice President and
Chief Financial Officer
/s/ Jon F. Danski
Jon F. Danski
Executive Vice President, Finance
and Chief Accounting Officer
Date: July 28, 2000
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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 dated July 28, 2000)
3.2 Amended and Restated ByLaws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q/A dated July 28, 2000)
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule (electronic transmission only)
33
