<PAGE>
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 Identification
organization) 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)
NOT APPLICABLE
(Former name, former address and former fiscal year, if applicable)
---------------
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 was 726,196,308 and 3,644,774 shares of CD and Move.com, respectively, as
of July 26, 2000.
--------------------------------------------------------------------------------
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three
months ended March 31, 2000 and 1999 1
Consolidated Condensed Balance Sheets as of March 31, 2000 and
December 31, 1999 2
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risks 25
PART II Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submissions of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
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 and government investigation
relating to the previously announced accounting irregularities; uncertainty as
to the Company's future profitability; the Company's ability to develop and
implement operational and financial systems to manage rapidly growing
operations; competition in the Company's existing and potential future lines of
business; the Company's ability to integrate and operate successfully acquired
and merged businesses and the risks associated with such businesses, including
the merger that created Cendant and the National Parking Corporation
acquisition; the Company's ability to consummate a public offering of Move.com
tracking stock; the Company's ability to obtain financing on acceptable terms to
finance the Company's growth strategy and for the Company to operate within the
limitations imposed by financing arrangements; and the effect of changes in
current interest rates, particularly in our mortgage and real estate segments.
Other factors and assumptions not identified above were also involved in the
derivation of these forward looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. The Company assumes no
obligation to publicly correct or update these forward looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward looking statements or if the Company later becomes aware
that they are not likely to be achieved.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
REVENUES
Membership and service fees, net $ 1,065 $ 1,253
Fleet leasing (net of depreciation and interest costs of $0 and $326) - 18
Other 63 46
---------- ----------
Net revenues 1,128 1,317
---------- ----------
EXPENSES
Operating 368 457
Marketing and reservation 215 262
General and administrative 133 165
Depreciation and amortization 85 93
Other charges (credits):
Restructuring costs and other unusual charges (credits) 106 (1)
Litigation settlement and related costs (credits) (41) -
Investigation-related costs 3 2
Termination of proposed acquisition - 7
Interest, net 26 48
---------- ----------
Total expenses 895 1,033
---------- ----------
Loss on dispositions of businesses (13) -
---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 220 284
Provision for income taxes 77 100
Minority interest, net of tax 16 15
---------- ----------
INCOME FROM CONTINUING OPERATIONS 127 169
Gain on sale of discontinued operations, net of tax - 193
---------- ----------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 127 362
Extraordinary loss, net of tax (2) -
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 125 362
Cumulative effect of accounting change, net of tax (56) -
---------- ----------
NET INCOME $ 69 $ 362
========== ==========
INCOME PER SHARE
BASIC
Income from continuing operations $ 0.18 $ 0.21
Gain on sale of discontinued operations - 0.24
Extraordinary loss - -
Cumulative effect of accounting change (0.08) -
---------- ----------
NET INCOME $ 0.10 $ 0.45
========== ==========
DILUTED
Income from continuing operations $ 0.17 $ 0.20
Gain on sale of discontinued operations - 0.23
Extraordinary loss - -
Cumulative effect of accounting change (0.08) -
---------- ----------
NET INCOME $ 0.09 $ 0.43
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
1
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 948 $ 1,164
Receivables, net 1,054 1,026
Deferred income taxes 1,405 1,427
Other current assets 887 975
------------- -------------
Total current assets 4,294 4,592
Property and equipment, net 1,332 1,347
Goodwill, net 3,233 3,271
Franchise agreements, net 1,425 1,410
Other intangibles, net 653 662
Other assets 1,161 1,141
------------- -------------
Total assets exclusive of assets under programs 12,098 12,423
------------- -------------
Assets under management and mortgage programs
Mortgage loans held for sale 1,226 1,112
Mortgage servicing rights 1,196 1,084
Relocation receivables 522 530
------------- -------------
2,944 2,726
------------- -------------
TOTAL ASSETS $ 15,042 $ 15,149
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,106 $ 1,279
Stockholder litigation settlement and related costs 2,879 2,892
Deferred income 1,063 1,039
Current portion of debt - 400
------------- -------------
Total current liabilities 5,048 5,610
Long-term debt 2,071 2,445
Deferred income 465 413
Other noncurrent liabilities 368 373
------------- -------------
Total liabilities exclusive of liabilities under programs 7,952 8,841
------------- -------------
Liabilities under management and mortgage programs
Debt 2,341 2,314
Deferred income taxes 312 310
------------- -------------
2,653 2,624
------------- -------------
Mandatorily redeemable preferred securities issued by subsidiary
holding solely senior debentures issued by the Company 1,479 1,478
Mandatorily redeemable preferred interest in a subsidiary 375 -
Commitments and contingencies (Note 10)
Stockholders' equity
Preferred stock, $.01 per value - authorized 10 million shares;
none issued and outstanding - -
CD common stock, $.01 par value - authorized 2 billion shares;
issued 896,515,498 and 870,399,635 shares 9 9
Move.com common stock, $.01 par value - authorized 500 million shares;
issued and outstanding 3,159,030 shares and none; 22,500,000
notional shares with respect to CD's retained interest - -
Additional paid-in capital 4,623 4,102
Retained earnings 1,494 1,425
Accumulated other comprehensive loss (75) (42)
CD treasury stock, at cost, 172,426,898 and 163,818,148 shares (3,468) (3,288)
------------- -------------
Total stockholders' equity 2,583 2,206
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,042 $ 15,149
============= =============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 69 $ 362
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of discontinued operations, net of tax - (193)
Extraordinary loss 4 -
Cumulative effect of accounting change 89 -
Restructuring and other unusual charges (credits) 106 (1)
Payments of restructuring, merger-related and other unusual charges (24) (5)
Litigation settlement and related costs (credits) (41) -
Loss on dispositions of businesses 13 -
Depreciation and amortization 85 93
Other, net (205) (93)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 96 163
------------- -------------
Management and mortgage programs:
Depreciation and amortization 27 312
Origination of mortgage loans (3,916) (6,819)
Proceeds on sale and payments from mortgage loans held for sale 3,802 7,280
------------- -------------
(87) 773
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9 936
------------- -------------
INVESTING ACTIVITIES
Property and equipment additions (49) (63)
Net assets acquired (net of cash acquired) and acquisition-related payments (8) (64)
Net proceeds from dispositions of businesses - 800
Other, net (25) 42
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (82) 715
------------- -------------
Management and mortgage programs:
Equity advances on homes under management (1,619) (1,462)
Repayment on advances on homes under management 1,655 1,501
Additions to mortgage servicing rights (139) (183)
Proceeds from sales of mortgage servicing rights 35 57
Investment in leases and leased vehicles, net - (384)
------------- -------------
(68) (471)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (150) 244
------------- -------------
FINANCING ACTIVITIES
Principal payments on borrowings (776) (9)
Issuances of CD common stock 464 30
Issuances of Move.com common stock 35 -
Repurchases of CD common stock (198) (1,142)
Proceeds from mandatorily redeemable preferred securities issued by subsidiaries 375 -
Other, net (4) -
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (104) (1,121)
------------- -------------
Management and mortgage programs:
Principal payments on borrowings (1,421) (2,102)
Proceeds from debt issuance or borrowings 777 1,831
Net change in short-term borrowings 672 (299)
------------- -------------
28 (570)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (76) (1,691)
------------- --------------
Effect of changes in exchange rates on cash and cash equivalents 1 23
------------- -------------
Net decrease in cash and cash equivalents (216) (488)
Cash and cash equivalents, beginning of period 1,164 1,009
------------- -------------
Cash and cash equivalents, end of period $ 948 $ 521
============= =============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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.
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. These 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.
Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.
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.
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 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 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 consolidated net revenues and consolidated income
from continuing operations.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective
date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", issued in June 1998, to fiscal years commencing after June 15,
2000. Completion of the Company's implementation plan and determination of
the impact of adopting SFAS No. 133 is expected by the fourth quarter of
2000. The Company will adopt SFAS No. 133 on January 1, 2001, as required.
4
<PAGE>
4. EARNINGS PER SHARE
Earnings per share ("EPS") is calculated using both the basic and diluted
methods. Basic EPS is computed based solely on the weighted average number
of common shares outstanding during the period. Diluted EPS further reflects
all potentially dilutive securities, including the assumed exercise of stock
options and warrants using the treasury method, convertible debt and other
common stock equivalents, if the impact is dilutive. At March 31, 2000, 79
million stock options (with a weighted average exercise price of $24.53 per
option) and 31 million stock warrants (with a weighted average exercise
price of $22.91 per warrant) were outstanding and antidilutive. At March 31,
1999, 62 million stock options (with a weighted average exercise price of
$25.36 per option) were outstanding and antidilutive. Therefore, such
options and warrants were excluded from the computation of diluted EPS. In
addition, the Company's FELINE PRIDES, which provide for the distribution of
shares of CD common stock in February 2001, were antidilutive at March 31,
2000 and 1999 and therefore excluded from the computation of diluted EPS.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Income from continuing operations $ 127 $ 169
Convertible debt interest, net of tax 2 3
------------- -------------
Income from continuing operations, as adjusted $ 129 $ 172
============= =============
Weighted average shares for basic EPS 717 800
Dilutive securities
Stock options and warrants 34 36
Convertible debt 18 18
------------- -------------
Weighted average shares for diluted EPS 769 854
============= =============
</TABLE>
5. COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net income $ 69 $ 362
Other comprehensive loss
Currency translation adjustment (21) (69)
Unrealized loss on marketable securities, net of tax (12) (2)
------------- -------------
Total comprehensive income $ 36 $ 291
============= =============
</TABLE>
The after tax components of accumulated other comprehensive loss for the
three months ended March 31, 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 (21) (12) (33)
-------------- ------------- -------------
Balance, March 31, 2000 $ (79) $ 4 $ (75)
============== ============= =============
</TABLE>
5
<PAGE>
6. OTHER CHARGES (CREDITS)
RESTRUCTURING COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
2000 Charge. During the three months ended March 31, 2000, the Company
incurred restructuring and other unusual charges ("Unusual Charges") of
$106 million. The restructuring initiatives were aimed at improving the
overall level of organizational efficiencies, consolidating and
rationalizing existing processes, reducing cost structures in the Company's
underlying businesses and other related efforts. These initiatives
primarily affect the Company's Travel, Individual Membership and
Insurance/Wholesale segments and are expected to be substantially completed
over the next twelve 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 MARCH 31, 2000
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Personnel related $ 25 $ 1 $ - $ 24
Asset impairments and
contract terminations 26 1 25 -
Facility related 9 - - 9
Other unusual charges 46 21 14 11
------------- ------------- ------------- ----------------
Total Unusual Charges $ 106 $ 23 $ 39 $ 44
============= ============= ============= ================
</TABLE>
Personnel related costs include severance resulting from the consolidation
and relocation of business operations and certain corporate functions as
well as other personnel related costs. The Company formally communicated to
971 employees, representing a wide range of employee groups, that their
separation from the Company will occur within the next twelve months. In
connection with a change in our strategic focus to an online business model,
the Company recognized asset impairments of $23 million 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 as a result
of 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 franchisees to maximize Internet
opportunities. Additionally, the Company incurred other unusual charges
associated with executive terminations of $11 million, an asset write-down
of $7 million principally related to the abandonment of certain computer
system applications, stock option contract modifications of $3 million and
other related costs of $4 million. Liabilities remaining at March 31, 2000
consisted of personnel related costs, charges associated with facility
closures and lease obligations and other unusual charges related to $7
million of executive terminations and $4 million of other related costs.
1997 Charge. During the three months ended March 31, 2000, cash outlays of
$1 million were applied against the 1997 merger-related costs and other
unusual charges reserve for severance payments. As a result, the 1997
merger-related and other unusual charges reserve of $71 million at March 31,
2000 primarily relates to future severance costs, executive termination
benefits and lease termination payments, which will be settled upon the
resolution of related contingencies and in accordance with lease installment
plans.
LITIGATION SETTLEMENT AND RELATED COSTS (CREDITS)
On March 14, 2000, the Company issued approximately 25 million Rights with a
calculated value of $11.71 per Right pursuant to a court order approving the
previously disclosed FELINE PRIDES ("PRIDES") settlement. 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 will
be 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 value equal to $17.57 more than the original PRIDES.
6
<PAGE>
This settlement also required the Company to offer to sell 4 million
additional PRIDES (having identical terms to currently outstanding PRIDES)
to holders of Rights for cash at a value based upon the valuation model that
was utilized to set the conversion rate of the New PRIDES. The additional
PRIDES were offered on May 3, 2000.
In connection with the issuance of Rights, the Company recorded a non-cash
credit of $41 million to litigation settlement and related costs (credits),
with a corresponding decrease to additional paid-in capital. The credit
represented an adjustment related to the number of Rights to be issued,
which was decreased by approximately 3 million Rights, as such Rights were
unclaimed and uncontested.
7. DEBT REDEMPTION
On January 21, 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. MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIARY
On March 20, 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 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
three-month LIBOR plus an applicable margin (1.77%) and are reflected as
minority interest in the Consolidated Condensed Statement 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 the common interest and 100%
of the junior preferred interest in the LLC. In the event of default,
holders of the Senior Preferred Interest have certain liquidation
preferences.
9. STOCKHOLDERS' EQUITY
SHARE REPURCHASES
During the three months ended March 31, 2000, the Company repurchased $198
million (approximately 10 million shares) of CD common stock under its
repurchase program.
MOVE.COM COMMON STOCK
Authorization of Tracking Stock. 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 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 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 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 the Company and all of its
businesses, assets and liabilities. The Company issued shares of Move.com
common stock through private financings and filed a registration statement
with the SEC in connection with the potential issuance of such tracking
stock in a public offering.
7
<PAGE>
Chatham Street Holdings, LLC Investment. On March 31, 2000, Chatham Street
Holdings, LLC ("Chatham") exercised a contractual right to purchase
1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash. In connection with such exercise, for
every two shares of Move.com common stock purchased, Chatham received a
warrant to purchase one share of Move.com common stock at a price equal to
$64.08 per share and a warrant to purchase one share of Move.com common
stock at a price equal to $128.16 per share. Also during March 2000, 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, 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. Liberty Digital and the Company 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.
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. Cendant owns convertible preferred stock
of NRT, which is convertible into no more than 50% of NRT's common stock.
STRATEGIC ALLIANCE
On February 7, 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, on March 20, 2000, Liberty Media's
Chairman, John C. Malone, Ph.D., purchased one million shares of CD common
stock for approximately $17 million in cash.
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 Securities and Exchange Commission ("SEC") and the United States
Attorney for the District of New Jersey are also conducting investigations
relating to the matters referenced above. The SEC advised the Company that
its inquiry should not be construed as an indication by the SEC or its staff
that any violations of law have occurred. 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. Although the
Company can provide no assurances that additional adjustments will not be
necessary as a result of the government investigations, the Company does not
expect that additional adjustments will be necessary.
8
<PAGE>
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 Corporation 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. 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 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.
11. 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 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 months ended March 31, 1999 into the Move.com Group operating segment.
SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
2000(1) 1999 1999 PRO FORMA (2)
---------------------- --------------------- ------------------
ADJUSTED ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA EBITDA
-------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
Travel $ 272 $ 126 $ 272 $ 145 $ 141
Real Estate Franchise 121 84 97 71 69
Relocation 91 18 91 18 18
Mortgage 77 12 93 44 44
Move.com Group 11 (26) 3 - -
Individual Membership 204 52 241 12 12
Insurance/Wholesale 145 48 140 38 39
Diversified Services 207 98 278 65 70
Fleet - - 102 40 40
------- ------- ------- ------- ------
Total $ 1,128 $ 412 $ 1,317 $ 433 $ 433
======= ======= ======= ======= ======
</TABLE>
9
<PAGE>
-----------------
(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 total Adjusted EBITDA for reportable
operating segments to income before income taxes and minority interest.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Adjusted EBITDA for reportable segments $ 412 $ 433
Depreciation and amortization (85) (93)
Other charges (credits):
Restructuring costs and other unusual (charges) credits (106) 1
Litigation settlement and related credits 41 -
Investigation-related costs (3) (2)
Termination of proposed acquisition - (7)
Interest, net (26) (48)
Loss on dispositions of businesses (13) -
------------- -------------
Income before income taxes and minority interest $ 220 $ 284
============= =============
</TABLE>
12. SUBSEQUENT EVENT
On April 25, 2000, the Company's relocation subsidiary entered into a
financing agreement with Apple Ridge Funding LLC ("Apple Ridge"), a
bankruptcy remote, special purpose entity. Under the terms of the agreement,
certain relocation receivables will be transferred for cash, on a revolving
basis, to Apple Ridge until January 31, 2005. On April 25, 2000, the Company
received $400 million for receivables transferred to Apple Ridge. The
Company retains a subordinated residual interest and the related servicing
rights in the relocation receivables.
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
separately 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 has provided all necessary funding
for the operations and investments of the Move.com Group since inception
and such funding has been accounted for as capital contributions from the
Cendant Group. Accordingly, no interest charges from the Cendant Group have
been 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, has 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 will be 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 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 corporate overhead
to the Move.com Group pare 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 form the Cedant Group.
10
<PAGE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 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 $ 1,117 $ 11 $ 1,128 $ 1,314 $ 3 $ 1,317
Inter-group agreements (5) 5 - - - -
------- ------- -------- ------- ------- ---------
Net revenues 1,112 16 1,128 1,314 3 1,317
------- ------- -------- ------- ------- ---------
EXPENSES
Operating:
External expenses 358 10 368 455 2 457
Inter-group allocated
expenses (5) 5 - - - -
Marketing and reservation 200 15 215 262 - 262
General and administrative 126 7 133 164 1 165
Depreciation and
amortization 84 1 85 92 1 93
Other charges, net 67 1 68 8 - 8
Interest, net 26 - 26 48 - 48
------- ------- -------- ------- ------- ---------
Total expenses 856 39 895 1,029 4 1,033
------- ------- -------- ------- ------- ---------
Loss on dispositions
of businesses (13) - (13) - - -
------- ------- -------- ------- ------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST 243 (23) 220 285 (1) 284
Provision (benefit) for
income taxes 88 (11) 77 101 (1) 100
Minority interest, net of tax 16 - 16 15 - 15
------- ------- -------- ------- ------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 139 (12) 127 169 - 169
Gain on sale of discontinued
operations, net of tax - - - 193 - 193
------- ------- -------- ------- ------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 139 (12) 127 362 - 362
Extraordinary loss, net of tax (2) - (2) - - -
------- ------- -------- ------- ------- ---------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE 137 (12) 125 362 - 362
Cumulative effect of accounting
change, net of tax (56) - (56) - - -
------- ------- -------- ------- ------- ---------
NET INCOME (LOSS) $ 81 $ (12) $ 69 $ 362 $ - $ 362
======= ======= ======== ======= ======= =========
</TABLE>
11
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 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 $ 912 $ 36 $ 948 $ 1,163 $ 1 $ 1,164
Receivables, net 1,048 6 1,054 1,018 8 1,026
Current deferred income
taxes 1,405 - 1,405 1,427 - 1,427
Other current assets 863 24 887 972 3 975
Property and equipment 1,322 10 1,332 1,344 3 1,347
Goodwill 3,228 5 3,233 3,266 5 3,271
Other noncurrent assets 3,219 20 3,239 3,211 2 3,213
Assets under management
and mortgage programs 2,944 - 2,944 2,726 - 2,726
------- ------- -------- ------- ------- ---------
TOTAL ASSETS $14,941 $ 101 $ 15,042 $15,127 $ 22 $ 15,149
======= ======= ======== ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 5,019 $ 29 $ 5,048 $ 5,589 $ 21 $ 5,610
Noncurrent liabilities 2,904 - 2,904 3,231 - 3,231
Liabilities under
management and mortgage
programs 2,653 - 2,653 2,624 - 2,624
Mandatorily redeemable
preferred securities issued
by subsidiaries 1,854 - 1,854 1,478 - 1,478
Common stock 9 - 9 9 - 9
Additional paid-in capital 4,514 109 4,623 4,083 19 4,102
Retained earnings
(accumulated deficit) 1,528 (34) 1,494 1,443 (18) 1,425
Accumulated other
comprehensive loss (72) (3) (75) (42) - (42)
Treasury stock, at cost (3,468) - (3,468) (3,288) - (3,288)
------- ------- -------- ------- ------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $14,941 $ 101 $ 15,042 $15,127 $ 22 $ 15,149
======= ======= ======== ======= ======= =========
</TABLE>
12
<PAGE>
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 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) $ 81 $ (12) $ 69 $ 362 $ - $ 362
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Gain on sale of discontinued
operations, net of tax - - - (193) - (193)
Extraordinary loss 4 - 4 - - -
Cumulative effect of
accounting change 89 - 89 - - -
Restructuring and other
unusual charges (credits) 105 1 106 (1) - (1)
Payments of restructuring,
merger-related and other
unusual charges (24) - (24) (5) - (5)
Litigation settlement and
related costs (credits) (41) - (41) - - -
Loss on dispositions of
businesses 13 - 13 - - -
Depreciation and amortization 84 1 85 92 1 93
Other, net (196) (9) (205) (93) - (93)
Management and mortgage
programs (87) - (87) 773 - 773
------ ------ ------ ------ ----- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 28 (19) 9 935 1 936
------ ------ ------ ------ ----- --------
INVESTING ACTIVITIES
Property and equipment additions (41) (8) (49) (63) - (63)
Net assets acquired (net of
cash acquired) and
acquisition-related payments (8) - (8) (64) - (64)
Net proceeds from dispositions
of businesses - - - 800 - 800
Management and mortgage
programs (68) - (68) (471) - (471)
Other, net (25) - (25) 42 - 42
------ ------ ------ ------ ----- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (142) (8) (150) 244 - 244
------ ------ ------ ------ ----- --------
FINANCING ACTIVITIES
Principal payments on borrowings (776) - (776) (9) - (9)
Issuances of Move.com common stock - 35 35 - - -
Issuances of CD common stock 464 - 464 30 - 30
Repurchases of CD common stock (198) - (198) (1,142) - (1,142)
Other, net 371 - 371 - - -
Management and mortgage
programs 28 - 28 (570) - (570)
Inter-group funding (27) 27 - - - -
------ ------ ------ ------ ----- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (138) 62 (76) (1,691) - (1,691)
------ ------ ------ ------ ----- --------
Effect of changes in exchange
rates on cash and cash
equivalents 1 - 1 23 - 23
------ ------ ------ ------ ----- --------
Net increase (decrease) in cash
and cash equivalents (251) 35 (216) (489) 1 (488)
Cash and cash equivalents,
beginning of period 1,163 1 1,164 1,009 - 1,009
------ ------ ------ ------ ----- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 912 $ 36 $ 948 $ 520 $ 1 $ 521
====== ====== ====== ====== ====== ========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED 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.
REVENUES
Revenues decreased $189 million (14%) in first quarter 2000 compared to first
quarter 1999 due to the effect of dispositions of non-strategic businesses
throughout 1999 and 2000. Excluding the operating results of 1999 and 2000
dispositions, revenues increased $70 million (7%), which primarily reflected
continued growth in our Real Estate Franchise, Individual Membership, Move.com
Group and Diversified Services segments, partially offset by a decline in
revenues in our Mortgage segment related to a decrease in mortgage loan
closings. Significant contributing factors giving rise to such revenue growth
included (i) an increase in royalty fees received from our real estate
franchised brands; (ii) an increase in the average price of a membership and a
favorable mix of products in our Individual Membership segment; (iii) our
continued investment in the marketing of the move.com Internet portal and (iv)
an increase in tax return volume and average fee per return within our Jackson
Hewitt tax franchise subsidiary.
OTHER CHARGES
RESTRUCTURING COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
2000 Charge. During the first quarter, we incurred restructuring and other
unusual charges ("Unusual Charges") of $106 million. 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 affect our Travel, Individual Membership and
Insurance/Wholesale segments and are expected to be substantially completed over
the next twelve 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
(In millions) CHARGES PAYMENTS REDUCTIONS MARCH 31, 2000
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Personnel related $ 25 $ 1 $ - $ 24
Asset impairments and
contract terminations 26 1 25 -
Facility related 9 - - 9
Other unusual charges 46 21 14 11
------------- ------------- ------------- ---------------
Total Unusual Charges $ 106 $ 23 $ 39 $ 44
============= ============= ============= ===============
</TABLE>
Personnel related costs include severance resulting from the consolidation and
relocation of business operations and certain corporate functions as well as
other personnel related costs. We formally communicated to 971 employees,
representing a wide range of employee groups, that their separation will occur
within the next twelve months. In connection with a change in our strategic
focus to an online business model, we recognized asset impairments of $23
million 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
related lease obligations as a result of 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 franchisees to maximize
Internet opportunities. Additionally, we incurred other unusual charges
associated with executive terminations of $11 million, an asset write-down of $7
million principally related to the abandonment of certain computer system
applications, stock option contract modifications of $3 million and other
related costs of $4 million. The total unusual charges will require cash
expenditures of approximately $62 million, expected to be spent primarily in
2000, and are
14
<PAGE>
anticipated to increase pre-tax income by approximately $25 million to $30
million, commencing in 2001. All cash requirements are expected to be funded
from operations. Liabilities remaining at March 31, 2000 consisted of personnel
related costs, charges associated with facility closures and lease obligations
and other unusual charges related to $7 million of executive terminations and $4
million of other related costs.
1997 Charge. During the three months ended March 31, 2000, cash outlays of $1
million were applied against the 1997 merger-related costs and other unusual
charges reserve for severance payments. As a result, the 1997 merger-related and
other unusual charges reserve of $71 million at March 31, 2000 primarily relates
to future severance costs, executive termination benefits and lease termination
payments, which will be settled upon the resolution of related contingencies and
in accordance with lease installment plans.
LITIGATION SETTLEMENT AND RELATED COSTS (CREDITS)
In connection with the issuance of Rights on March 14, 2000 pursuant to a court
order approving the previously disclosed FELINE PRIDES ("PRIDES") settlement, we
recorded a non-cash credit of $41 million, with a corresponding decrease to
additional paid-in capital. The credit represented an adjustment related to the
number of Rights to be issued, which was decreased by approximately 3 million
Rights, as such Rights were unclaimed and uncontested. For a detailed discussion
regarding Litigation Settlement and Related Costs (Credits), see Note 6 to our
Consolidated Condensed Financial Statements.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense decreased $8 million (9%) in first quarter
2000 compared to first quarter 1999 primarily as a result of the impact of the
1999 dispositions of non-strategic businesses, partially offset by capital
spending to support growth and enhance marketing opportunities in our
businesses.
INTEREST EXPENSE, NET AND MINORITY INTEREST, NET OF TAX
Interest expense, net decreased $22 million (46%) primarily as a result of a
decrease in the average debt balance outstanding. Minority interest, net of tax
increased slightly due to the issuance of a mandatorily redeemable preferred
interest in a subsidiary in March 2000. For a detailed discussion regarding the
mandatorily redeemable preferred interest, see Note 8 to our Consolidated
Condensed Financial Statements.
PROVISION FOR INCOME TAXES
Our effective tax rate was reduced to 35.0% in 2000 from 35.2% in 1999, due to a
reduction of nondeductible expenses.
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 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 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 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
15
<PAGE>
approximately $89 million ($56 million, after tax) on January 1, 2000 to account
for the cumulative effect of the accounting change.
NET INCOME
Net income decreased $293 million in first quarter 2000 compared to first
quarter 1999 primarily as a result of (i) other charges, net ($46 million and $4
million in 2000 and 1999, respectively); (ii) loss on dispositions of businesses
($8 million in 2000); (iii) gain on sale of discontinued operations ($193
million in 1999); (iv) extraordinary loss ($2 million in 2000); (v) cumulative
effect of accounting change ($56 million in 2000) and (vi) the operating results
of disposed businesses ($1 million loss in 2000 and $8 million income in 1999),
which was partially offset by continued growth in our on-going businesses.
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 MARCH 31,
(Dollars in millions)
<TABLE>
<CAPTION>
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
----------------------------------- ----------------------------------- -----------------
% %
2000 1999 CHANGE 2000(1)(2) 1999 CHANGE 2000 1999
---- ---- ------ ---------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Travel $ 272 $ 272 -% $ 126(3) $ 145 (13)% 46% 53%
Real Estate
Franchise 121 97 25% 84 71 18% 69% 73%
Relocation 91 91 - 18 18 * 20% 20%
Mortgage 77 93 (17)% 12 44 (73)% 16% 47%
Move.com Group 11 3 * (26) - * * *
Individual
Membership 204 241 (15)% 52 12 333% 25% 5%
Insurance/
Wholesale 145 140 4% 48 38 26% 33% 27%
Diversified Services 207 278 (26)% 98(4) 65(5) 51% 47% 23%
Fleet - 102 * - 40 * * 39%
--------- --------- -------- ---------
Total $ 1,128 $ 1,317 $ 412 $ 433
========= ========= ======== =========
</TABLE>
--------------
* Not meaningful.
(1) As of January 1, 2000, we refined our 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. We
determined the refinement in the corporate allocation method to be
appropriate subsequent to the completion of our divestiture plan and based
on the composition of our business units. See Note 11 to the Consolidated
Condensed Financial Statements for the pro forma effect had the 2000
corporate overhead allocation method been applied in 1999.
(2) Excludes restructuring and other unusual charges of $106 million in
connection with initiatives aimed at improving the overall level of
organizational efficiencies, 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).
(3) Excludes $4 million of losses related to the dispositions of businesses.
(4) Excludes charges of $9 million for losses related to the dispositions of
businesses and $3 million for investigation-related costs. Such charges
were partially offset by 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.
(5) Excludes charges of $7 million in connection with the termination of a
proposed acquisition and $2 million for investigation-related costs. Such
charges were partially offset by a $1 million credit for the net gain on
the sale of a Company subsidiary.
16
<PAGE>
TRAVEL
Revenues remained constant while Adjusted EBITDA decreased $19 million (13%) in
first quarter 2000 compared to first quarter 1999. Royalties from our franchise
business increased approximately $2 million principally due to a 4% increase in
available rooms within our lodging business. Timeshare exchange revenues grew $4
million due to membership and price increases. The implementation of SAB No. 101
resulted in a $2 million reduction in timeshare subscription revenues.
Contributing to the Adjusted EBITDA reduction in first quarter 2000 was $3
million related to the timing of cost allocations to the franchise funds and an
additional $4 million of corporate overhead allocations resulting from a
refinement of allocation methods. Another contributing factor to the Adjusted
EBITDA reduction was the recognition of $3 million of obligations relating to a
prior acquisition. Additionally, contributing to a reduction of quarter over
quarter revenue and Adjusted EBITDA growth was a gain, recognized in first
quarter 1999, associated with the sale of a portion of our equity investment in
Avis Group Holdings, Inc. ("Avis"). Excluding the impact of non-recurring items,
including SAB No. 101, the increase in corporate allocations and the gain on
sale of Avis stock, revenues increased 3% and Adjusted EBITDA remained unchanged
in first quarter 2000 compared to first quarter 1999.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $24 million (25%) and $13 million (18%),
respectively, in first quarter 2000 compared to first quarter 1999. Royalty fees
for the CENTURY 21(Registered Trademark), COLDWELL BANKER(Registered Trademark)
and ERA(Registered Trademark) franchise brands collectively increased by $14
million (17%) primarily as a result of an 11% increase in the average price of
homes sold. Beginning in second quarter 1999, the financial results of the
national advertising funds for the COLDWELL BANKER and ERA brands (the
"Advertising Funds") were consolidated into the segment's financial results. The
consolidation of the Advertising Funds contributed $7 million to the first
quarter 2000 increase in revenues and increased expenses by a like amount, with
no corresponding impact on Adjusted EBITDA. The Advertising Funds utilize most
of their revenues on marketing and advertising expenses for their respective
franchise brands. On a comparable basis, had the Advertising Funds been
consolidated in first quarter 1999, the Adjusted EBITDA margin would have
increased from 68% in first quarter 1999 to 69% in first quarter 2000.
RELOCATION
Revenues, Adjusted EBITDA and the Adjusted EBITDA margin remained unchanged in
first quarter 2000 compared to first quarter 1999. An increase in revenues from
fee-based services, referral fees and international services offset a reduction
in corporate and government home sale revenue, reflecting a continuing trend
from asset-based to service-based fees.
MORTGAGE
Revenues and Adjusted EBITDA decreased $16 million (17%) and $32 million (73%),
respectively, in first quarter 2000 compared to first quarter 1999. Revenues
from mortgage loans closed declined $18 million, partially offset by a $2
million increase in loan servicing revenues. The average servicing portfolio
grew $6.6 billion (14%). Mortgage loan closings for the quarter were $3.8
billion, consisting of $3.5 billion in purchase mortgages and $0.3 billion in
refinancing mortgages. Total loans closed declined by $2.9 billion (43%),
primarily because of a $2.8 billion reduction in mortgage refinancing volume.
Purchase mortgage closings in our teleservices business ("Phone-In, Move-In")
amounted to $2.4 billion in first quarter 2000 (6% above first quarter 1999). We
anticipate that enhanced product offerings, particularly variable rate products
that contributed 25% of mortgage volume, will increase closing volume in future
quarters. Mortgage closings from our Internet business ("Log-In, Move-In")
amounted to $160 million in first quarter 2000 compared with $28 million in
first quarter 1999. The Adjusted EBITDA margin decreased to 16% in first quarter
2000 from 47% in first quarter 1999. The decline in Adjusted EBITDA and the
Adjusted EBITDA margin resulted from the reductions in net revenue, increased
expenses to service a larger servicing portfolio and the impact of higher
technology, infrastructure and teleservices costs incurred to support capacity
for volume
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anticipated in future periods. As anticipated, Adjusted EBITDA for first quarter
2000 was below the prior year period; however, we continue to expect that market
conditions will improve in the second half of the year and will produce more
positive comparisons as the year progresses. We expect full year 2000 Adjusted
EBITDA to be lower than 1999.
MOVE.COM GROUP
Revenues increased $8 million to $11 million in first quarter 2000, while
Adjusted EBITDA decreased $26 million to a loss of $26 million for the same
period. These results reflect our increased investment in marketing and
development of the Internet portal. We expect the Move.com Group will continue
to report EBITDA losses in the foreseeable future due to our continued
investment in growth of the business.
INDIVIDUAL MEMBERSHIP
Revenues decreased $37 million (15%) in first quarter 2000 compared to first
quarter 1999, while Adjusted EBITDA increased $40 million over the same period.
The Adjusted EBITDA margin improved to 25% in first quarter 2000 from 5% in
first quarter 1999. Beginning in September 1999, certain of Individual
Membership's online businesses were no longer consolidated into our operations
as the result of the Netmarket Group, Inc. transaction. The exclusion of the
online membership businesses from our first quarter 2000 operations (and
inclusion in the operating results for first quarter 1999) resulted in a $13
million reduction in revenues and a $7 million increase in Adjusted EBITDA.
Additionally, during the second and third quarters of 1999, we completed the
disposition of two business units. Disposed business units' operating results
during first quarter 1999 accounted for revenues of $38 million and an Adjusted
EBITDA loss of $1 million for such period. Excluding the first quarter 1999
operating results of our former online businesses and the disposed business
units, revenues increased $14 million (7%) and Adjusted EBITDA increased $32
million (160%) in first quarter 2000 compared to first quarter 1999. The impact
on revenues and Adjusted EBITDA from an increase in the average price of a
membership was partially offset by higher cancellation rates. However, revenues
and Adjusted EBITDA benefited $14 million and $8 million, respectively, as a
result of a favorable mix of products. The increase in Adjusted EBITDA and the
Adjusted EBITDA margin was also impacted by a $16 million reduction in
solicitation spending, as we continue to refine the targeted audiences for our
marketing efforts and experience greater efficiencies in reaching potential new
members.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $5 million (4%) and $10 million (26%),
respectively, in first quarter 2000 compared to first quarter 1999. The increase
in revenues was principally attributable to international expansion, while the
Adjusted EBITDA improvement was due to improved profitability in international
markets and a decrease in marketing expense resulting from longer amortization
periods for certain customer acquisition costs. International revenues and
Adjusted EBITDA increased $4 million (13%) and $2 million (42%), respectively,
primarily due to a 21% increase in customers. The Adjusted EBITDA margin
increased to 33% in first quarter 2000 from 27% in first quarter 1999. The
Adjusted EBITDA margin for domestic operations was 38% in first quarter 2000
versus 32% in first quarter 1999. The Adjusted EBITDA margin for international
operations was 19% for first quarter 2000 versus 15% in first quarter 1999.
Domestic operations, which represented 73% of revenues in first quarter 2000,
generated higher Adjusted EBITDA margins than international operations as a
result of continued expansion costs incurred internationally to penetrate new
markets. International operations, however, have become increasingly profitable
due to expansion over the last two years.
DIVERSIFIED SERVICES
Revenues decreased $71 million (26%) and Adjusted EBITDA increased $33 million
(51%) in first quarter 2000 compared to first quarter 1999. Revenues decreased
primarily as a result of the dispositions of certain business operations
including the Green Flag Group, the Global Refund Group and Entertainment
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Publications, Inc. The operating results of disposed businesses (revenues of $1
million and $107 million in 2000 and 1999, respectively and Adjusted EBITDA of
$1 million and $4 million in 2000 and 1999, respectively) were included through
their respective disposition dates in 1999 and 2000. The absence of such
businesses from first quarter 2000 operations resulted in a reduction in
revenues of $106 million but improved Adjusted EBITDA by $3 million. Excluding
the disposed businesses from the first quarter 1999 operating results, revenues
and Adjusted EBITDA increased $35 million and $30 million, respectively, in
first quarter 2000. Revenues and Adjusted EBITDA increases were strongly
supported by a 33% increase in tax return volume and a 9% increase in the
average fee per return received by our Jackson Hewitt franchise subsidiary,
which contributed an incremental $13 million and $10 million to revenues and
Adjusted EBITDA, respectively. Also contributing to revenue and Adjusted EBITDA
growth was $10 million of incremental income recognized from financial
investments during first quarter 2000. The remaining increases in revenues and
Adjusted EBITDA were primarily attributable to growth in the operating results
of our National Car Parks subsidiary during first quarter 2000.
FLEET
On June 30, 1999, we completed the disposition of our Fleet segment for
aggregate consideration of $1.8 billion. Revenues and Adjusted EBITDA were $102
million and $40 million, respectively, in first quarter 1999.
LIQUIDITY AND CAPITAL RESOURCES
ISSUANCE OF ADDITIONAL PRIDES
On May 3, 2000, we announced the subscription price for our offering of up to
4,000,000 additional PRIDES (the "Additional PRIDES") in connection with the
PRIDES settlement. The subscription price has been set at $23.48 per Additional
Income PRIDES and $20.98 per Additional Growth PRIDES. As a result of the offer,
we expect to issue 4,000,000 Additional Income PRIDES, of which 3,619,374 would
be immediately convertible into 3,619,374 New Income PRIDES and 380,626 would
remain Additional Income PRIDES. No Additional Growth PRIDES are expected to be
issued in such offering. A prospectus supplement relating to the Additional
PRIDES and the New PRIDES was filed with, and declared effective by, the SEC.
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 the move.com network. Our existing common
stock was reclassified as CD common stock, which reflects the performance of our
other businesses and a retained interest in the Move.com Group (collectively
referred to as the Cendant Group). In addition, our charter was amended and
restated to increase the number of authorized shares of common stock from 2.0
billion to approximately 2.5 billion, comprised of 2.0 billion shares of CD
common stock and 500 million shares of Move.com common stock. Although the
issuance of Move.com common stock is intended to track the performance of the
Move.com Group, holders are subject to all of the risks associated with an
investment in all of our businesses, assets and liabilities. We issued shares of
Move.com common stock in private financings and have filed a registration
statement with the SEC in connection with the potential issuance of such
tracking stock in a public offering.
Chatham Street Holdings, LLC Investment. On March 31, 2000, Chatham Street
Holdings, LLC ("Chatham") exercised a contractual right to purchase 1,561,000
shares of Move.com common stock for $16.02 per share or approximately $25
million in cash. In connection with such exercise, for every two shares of
Move.com common stock purchased, Chatham received a warrant to purchase one
share of Move.com common stock at a price equal to $64.08 per share and a
warrant to purchase one share of
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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 of $10 million in cash and
813,215 shares of Liberty Digital Class A common stock valued at approximately
$40 million. We 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.
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 convertible preferred stock of NRT,
which is convertible into no more than 50% of NRT's common stock.
STRATEGIC ALLIANCE
On February 7, 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, on March 20, 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.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
We have sufficient liquidity and access to liquidity through various sources,
including our ability to access public equity and debt markets and financial
institutions. In addition, we have committed bank facilities totaling $1.8
billion, which are currently undrawn and available, with the exception of $5
million of letters of credit. We also have $2.15 billion of availability under
existing shelf registration statements at March 31, 2000. Our long-term debt,
including current portion, was $2.1 billion at March 31, 2000 and consisted of
(i) approximately $1.7 billion of publicly issued fixed rate debt comprised of
$1,149 million of 7 3/4% senior notes and $547 million of 3% convertible
subordinated notes and (ii) $375 million of borrowings under a term loan
facility. On January 21, 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. 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, and
require the maintenance of certain financial ratios.
MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIARY
On March 20, 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 three-month
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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 the common interest and
100% of 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 the
term loan facility.
FINANCING RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
PHH continues to manage outstanding debt with the potential sale or transfer of
managed assets to third parties while retaining fee-related servicing
responsibility. At March 31, 2000, aggregate borrowings consisted of commercial
paper, medium-term notes, secured obligations and other borrowings of $1,291
million, $660 million, $314 million and $76 million, respectively. PHH's secured
obligations of $314 million consisted 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 and is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement.
In addition, as of March 31, 2000, PHH had approximately $375 million available
for issuing notes under a 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.
FINANCING AGREEMENTS
Mortgage. We maintain a revolving sales agreement, under which an unaffiliated
buyer, Bishops Gate Residential Mortgage Trust (the "Buyer"), a special purpose
entity, committed to purchase, at our option, mortgage loans originated by us on
a daily basis, up to the Buyer's asset limit of $2.1 billion. Under the terms of
this sale agreement, we retain the servicing rights on the mortgage loans sold
to the Buyer and arrange 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 March 31, 2000, we were servicing
approximately $633 million of mortgage loans owned by the Buyer.
Relocation. On April 25, 2000, we entered into a financing agreement with Apple
Ridge Funding LLC ("Apple Ridge"), a bankruptcy remote, special purpose entity.
Under the terms of the agreement, certain relocation receivables will be
transferred for cash, on a revolving basis, to Apple Ridge until January 31,
2005. On April 25, 2000, the Company received $400 million for receivables
transferred to Apple Ridge. We will retain a subordinated residual interest and
the related servicing rights in the relocation receivables.
OTHER CREDIT FACILITIES
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 March 31, 2000, PHH maintains $1.5 billion
of unsecured committed credit facilities, which are provided by domestic and
foreign banks. The facilities consist of a $750 million revolving credit
maturing in February 2001 and a $750 million revolving credit maturing in
February 2005. We closely evaluate not only the credit of the banks but also the
terms of the various agreements to ensure ongoing availability. The full amount
of PHH's committed facilities at March 31, 2000 was undrawn and available. 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 PHH asset growth and to provide further protection from volatility
in the financial markets.
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In the event that the public debt market is unable to meet PHH's funding needs,
we believe that PHH has appropriate alternative sources to provide adequate
liquidity, including current and potential future secured obligations and its
revolving credit facilities.
CREDIT RATING
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.
COMMON SHARE REPURCHASES
As of March 31, 2000, we repurchased a total of $2.2 billion (114 million
shares) of CD common stock under our common share repurchase program. From April
1, 2000 to May 1, 2000, we repurchased an additional $74 million (5 million
shares) of CD common stock under the program.
In April 2000, in connection with our share repurchase program, we sold to a
third party 3.0 million CD common stock put options, with a weighted average
exercise price of $15.51 and exercise dates in May 2000. These put options are
exercisable only on the exercise date and can be net share or net cash settled
at our option.
CASH FLOWS
We generated $9 million of cash flows from operations during first quarter 2000,
representing a $927 million decrease from first quarter 1999, which consisted of
a $67 million decrease from cash flows excluding management and mortgage
programs ("Programs") and an $860 million decrease from cash flows from
Programs. The decrease in cash flows from operations excluding Programs was
attributable to increases in working capital. Cash flows from Programs decreased
due to a $575 million net decrease in cash inflows from the originations of
mortgage loans, which reflects larger mortgage loan originations in proportion
to mortgage loan sales. Depreciation and amortization attributable to Programs
decreased $285 million due to the 1999 disposition of our Fleet segment.
We used $150 million of cash flows in investing activities during first quarter
2000 compared to cash provided from investing activities of $244 million during
first quarter 1999. The net change in cash flows was a year over year use of
$394 million and consisted of a $797 million decrease in cash flows excluding
Programs and a $403 million increase in cash flows from Programs. The change in
investing cash flows excluding Programs was primarily attributable to $800
million of net proceeds in 1999 from the disposition of our software business.
The increase in cash flows from Programs was due to the absence of a $384
million cash use in 1999 related to our former Fleet segment.
We used $76 million of cash in financing activities in first quarter 2000,
representing a $1.6 billion decrease from first quarter 1999, which consisted of
a $1.0 billion decrease in cash used excluding Programs and a $598 million
increase in cash flow from Programs. The decrease in uses of cash flow excluding
Programs was attributable to the following:
(1) a $434 million increase in issuances of CD common stock;
(2) a $944 million decrease in repurchases of CD common stock;
(3) proceeds of $375 million from the first quarter 2000 issuance of a
mandatorily redeemable preferred interest, and
(4) a $767 million increase in repayments of debt.
Cash flows provided by Programs in first quarter 2000 was $28 million compared
to a $570 million use in first quarter 1999. The net change of $598 million was
due to changes in net borrowings on fundings of our investments in assets under
Programs.
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CAPITAL EXPENDITURES
During first quarter 2000, we invested $49 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 investing approximately $250 million in capital expenditures in 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", issued in June
1998, to fiscal years commencing after June 15, 2000. Completion of our
implementation plan and determination of the impact of adopting SFAS No. 133 is
expected by the fourth quarter of 2000. We will adopt 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 March 31, 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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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussions contained under the headings "Class Action Litigation
Settlement 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 March 31, 2000, pursuant to a purchase agreement dated March 22, 2000,
Liberty Digital, Inc. purchased 1,598,030 shares of Move.com stock for $31.29
per share for consideration consisting of $10 million in cash and 813,215 shares
of Liberty Digital Class A 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.
On March 31, 2000, pursuant to a letter agreement dated September 30,
1999, Chatham Street Holdings, LLC exercised a contractual right to purchase
1,561,000 shares of Move.com stock for $16.02 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 June 4, 1998, in connection with the purchase of National Car Parks,
the Company issued warrants to purchase up to 683,304 shares of CD common stock
to each of Martin J. Raynes and Adrian Nash and warrants to purchase up to
196,600 shares of CD common stock to Arthur Becker. The warrants may be
exercised at any time until 5:00 pm on June 3, 2008 at an exercise price of $21
5/16 per share. The securities were issued in reliance on the private placement
exemption under Section 4(2) of the Securities Act of 1933, as amended. As of
May 1, 2000, none of such warrants have been exercised.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a Special Meeting of Stockholders on March 21, 2000, pursuant to a
Notice of Special Meeting of Stockholders and Proxy Statement dated February 10,
2000, a copy of which has been filed previously with the Securities and Exchange
Commission, at which our stockholders approved the amendment and restatement of
our certificate of incorporation to authorize a new series of common stock
called Move.com common stock, the assumption by Cendant of the stock option plan
of Move.com, Inc., and an adjournment proposal. Our stockholders did not approve
a proposal to amend the certificate of incorporation and by-laws to eliminate
the provisions for classification of Cendant's board of directors.
Proposal 1. The amendment and restatement of our certificate of incorporation to
authorize a new series of common stock called Move.com common stock
Results: For Against Abstain
--- ------- -------
503,294,535 16,378,541 3,800,041
Proposal 2. The assumption by Cendant of the stock option plan of Move.com, Inc.
Results: For Against Abstain
--- ------- -------
379,400,499 140,883,957 3,188,661
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Proposal 3. Amendment to our Certificate of Incorporation and Bylaws to
Declassify the Board of Directors (80% of outstanding shares
required to approve)
Results: For Against Abstain
--- ------- -------
511,497,999 8,597,711 3,371,403
Proposal 4. Proposal to Adjourn or Postpone Special Meeting
Results: For Against Abstain
--- ------- -------
365,787,546 152,665,209 5,014,359
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company
(electronic transmission only)
3.2 Amended and Restated By-Laws of the Company (electronic
transmission only)
12 Computation of ratio of earnings to fixed charges
27 Financial data schedule (electronic transmission only)
99 Supplemental Franchising and Marketing/Reservation Activities
Information (electronic transmission only)
Reports on Form 8-K
On February 3, 2000, we filed a current report on Form 8-K to report
under Item 5 our fourth quarter 1999 financial results.
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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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
By: /s/ David M. Johnson
-------------------------------
David M. Johnson
Senior Executive Vice President and
Chief Financial Officer
By: /s/ Jon F. Danski
-------------------------------
Jon F. Danski
Executive Vice President, Finance
and Chief Accounting Officer
Date: July 28, 2000
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