UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
Form 10-Q
For the quarterly period ended June 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-10308
Cendant Corporation(Exact name of registrant as specified in its charter)
(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 by 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the issuer’s common stock was 1,046,323,989 shares as of June 30, 2005.
Table of Contents
FORWARD-LOOKING STATEMENTS
Forward-looking statements in our public filings or other public statements are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “believes”, “expects”, “anticipates”, “intends”, “projects”, “estimates”, “plans”, “may increase”, “may fluctuate” and similar expressions or future or conditional verbs such as “will”, “should”, “would”, “may” and “could” are generally forward-looking in nature and not historical facts. You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:
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Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
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PART I – FINANCIAL INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholdersof Cendant CorporationNew York, New York
We have reviewed the accompanying consolidated condensed balance sheet of Cendant Corporation and subsidiaries (the “Company”) as of June 30, 2005, the related consolidated condensed statement of stockholders’ equity for the six-month period ended June 30, 2005, the related consolidated condensed statements of income for the three-month and six-month periods ended June 30, 2005 and 2004, and the related consolidated condensed statements of cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated condensed interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2005 (May 4, 2005 as to the effects of the discontinued operations and revised segment reporting structure described in Notes 1 and 23), we expressed an unqualified opinion (which included an explanatory paragraph with respect to the revised earnings per share calculations for all prior periods presented to include the dilutive effect of certain contingently convertible debt securities, the adoption of the fair value method of accounting for stock-based compensation and the adoption of the consolidation provisions for variable interest entities in 2003, as discussed in Note 2 to the consolidated financial statements; and an explanatory paragraph with respect to the classification of certain subsidiaries as discontinued operations, as discussed in Note 1 to the consolidated financial statements) on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLPNew York, New YorkJuly 29, 2005
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Cendant Corporation and Subsidiaries
See Notes to Consolidated Condensed Financial Statements.
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Cendant Corporation and SubsidiariesNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Unless otherwise noted, all amounts are in millions, except per share amounts)
In presenting the Consolidated Condensed Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgments and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Condensed Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These financial statements should be read in conjunction with the Company’s 2004 Annual Report on Form 10-K filed on March 1, 2005 and Current Report on Form 8-K filed on May 5, 2005.
The Company adopted the above segment reporting structure in 2005 as a result of a reevaluation performed subsequent to (i) the completion of an initial public offering (“IPO”) of Jackson Hewitt Tax Service Inc. (“Jackson Hewitt”) in June 2004, for which the Company raised approximately $770 million in proceeds; (ii) the completion of a spin-off of the Company’s mortgage, fleet leasing and appraisal businesses in January 2005 in a distribution of the common stock of PHH Corporation (“PHH”) to the Company’s stockholders (a more detailed description of this transaction can be found in Note 16—Spin-off of PHH Corporation); (iii) the completion of an IPO of Wright Express Corporation (“Wright Express”) in February 2005, for which the Company raised approximately $965 million of proceeds; and (iv) the formal approval by the Company’s Board of Directors in March 2005 to dispose of its Marketing Services division, which is comprised of the Company’s individual membership and loyalty/insurance marketing businesses and of which the Company anticipates a sale will be completed during the fall of 2005.
Discontinued Operations. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the account balances and activities of Wright Express, the Company’s fleet leasing and appraisal businesses, the Marketing Services division and Jackson Hewitt have been segregated and reported as discontinued operations for all periods presented. The Company’s mortgage business cannot be classified as a discontinued operation due to the Company’s participation in a mortgage origination venture that was established with PHH in connection with the spin-off. Summarized financial data for the aforementioned disposed businesses are provided in Note 2—Discontinued Operations.
Management Programs. The Company presents separately the financial data of its management programs. These programs are distinct from the Company’s other activities as the assets are generally funded through the issuance of debt that is collateralized by such assets. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of management programs. The Company
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believes it is appropriate to segregate the financial data of its management programs because, ultimately, the source of repayment of such debt is the realization of such assets.
Recently Issued Accounting Pronouncements
Conditional Asset Retirement Obligations. On March 30, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), which clarifies that conditional asset retirement obligations are within the scope of SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 requires the Company to recognize a liability for the fair value of conditional asset retirement obligations if the fair value of the liability can be reasonably estimated. The Company expects to adopt the provisions of FIN 47 in fourth quarter 2005, as required, and is currently assessing the impact of its adoption.
Timeshare Transactions. In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions,” in connection with the previous issuance of the American Institute of Certified Public Accountants’ Statement of Position No. 04-2, “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). The Company expects to adopt the provisions of SFAS No. 152 and SOP 04-2 effective January 1, 2006 and anticipates recording an after tax charge in the range of $60 million to $90 million on such date as a cumulative effect of an accounting change. The Company is evaluating actions that may mitigate such impact. There is no expected impact to cash flow from the adoption.
Stock-Based Compensation. In December 2004, the FASB issued SFAS No. 123R, “Share Based Payment,” which eliminates the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by APB Opinion No. 25 and by SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company will adopt SFAS No. 123R on January 1, 2006, as required by the Securities and Exchange Commission. Although the Company has not yet completed its assessment of adopting SFAS No. 123R, it does not believe that such adoption will significantly affect its earnings, financial position or cash flows since the Company does not use the alternative intrinsic value approach.
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Three Months Ended June 30, 2004 (*)
Six Months Ended June 30, 2005 (*)
Six Months Ended June 30, 2004 (*)
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Summarized balance sheet data for discontinued operations are as follows:
Summarized statement of cash flow data for discontinued operations are as follows:
The following table sets forth the computation of basic and diluted earnings per share (“EPS”).
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The following table summarizes the Company’s outstanding common stock equivalents that were antidilutive and therefore excluded from the computation of diluted EPS.
Assets acquired and liabilities assumed in business combinations were recorded on the Company’s Consolidated Condensed Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Company’s Consolidated Condensed Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives final information, including appraisals and other analyses. Revisions to the fair values, which may be significant, will be recorded by the Company as further adjustments to the purchase price allocations. The Company is also in the process of integrating the operations of its acquired businesses and expects to incur costs relating to such integrations. These costs may result from integrating operating systems, relocating employees, closing facilities, reducing duplicative efforts and exiting and consolidating other activities. These costs will be recorded on the Company’s Consolidated Condensed Balance Sheets as adjustments to the purchase price or on the Company’s Consolidated Condensed Statements of Income as expenses, as appropriate.
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2005 Acquisitions
Gullivers Travel Associates. On April 1, 2005, the Company completed the acquisition of Donvand Limited, which operates under the names Gullivers Travel Associates and Octopus Travel Group Limited (collectively, “Gullivers”). Gullivers is a wholesaler of hotel rooms, destination services, travel packages and group tours and a global online provider of lodging and destination services. Management believes that this acquisition positions the Company as a worldwide leader in the global online travel intermediary space. The preliminary allocation of the purchase price is summarized as follows:
The fair value adjustments included in the preliminary allocation of the purchase price above primarily consisted of:
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in connection with the Company’s acquisition of Gullivers:
The goodwill, none of which is expected to be deductible for tax purposes, was assigned to the Company’s Travel Distribution Services segment. As previously discussed, the preliminary allocation of the purchase price is subject to revision as analyses are finalized. The Company continues to gather information and consult with third party experts concerning the valuation of its assets acquired and liabilities assumed (including the identified intangible assets and their associated lives). This acquisition was not significant to the Company’s results of operations, financial position or cash flows.
ebookers plc. On February 28, 2005, the Company acquired ebookers plc (“ebookers”), a travel agency with Web sites servicing 13 European countries offering a wide range of discount and standard price travel products including airfares,
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hotels, car rental, cruises and travel insurance. Management believes that this acquisition enhances the Company’s role in the global online travel intermediary space. The preliminary allocation of the purchase price is summarized as follows:
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in connection with the Company’s acquisition of ebookers:
The goodwill, all of which is expected to be deductible for tax purposes, was assigned to the Company’s Travel Distribution Services segment. As previously discussed, the preliminary allocation of the purchase price is subject to revision as analyses are finalized. The Company continues to gather information and consult with third party experts concerning the valuation of its assets acquired and liabilities assumed (including the identified intangible assets and their associated lives). This acquisition was not significant to the Company’s results of operations, financial position or cash flows.
Other. During 2005, the Company also acquired 13 real estate brokerage operations through its wholly-owned subsidiary, NRT Incorporated (“NRT”), for approximately $60 million in cash, which resulted in goodwill (based on the preliminary allocation of the purchase price) of $51 million that was assigned to the Company’s Real Estate Services segment. The acquisition of real estate brokerages by NRT is a core part of its growth strategy. In addition, the Company acquired 22 other individually non-significant businesses during 2005 for aggregate consideration of approximately
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$88 million in cash, which resulted in goodwill (based on the preliminary allocation of the purchase price) of $14 million that was assigned to the Company’s Travel Distribution Services ($8 million), Hospitality Services ($4 million) and Real Estate Services ($2 million) segments. These acquisitions were not significant to the Company’s results of operations, financial position or cash flows.
2004 Acquisition
Orbitz, Inc. On November 12, 2004, the Company acquired Orbitz, Inc. (“Orbitz”), an online travel company. Management believes that the addition of Orbitz to the Company’s portfolio of travel distribution businesses placed the Company in a leading position in the domestic online travel distribution business.
The preliminary allocation of the purchase price as of June 30, 2005 is summarized as follows:
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The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in connection with the Company’s acquisition of Orbitz:
Acquisition and Integration Related CostsDuring the three and six months ended June 30, 2005, the Company incurred acquisition and integration related costs of $13 million and $27 million, respectively, of which $3 million and $6 million, respectively, represented amortization of its contractual pendings and listings intangible assets acquired in connection with the acquisitions of real estate brokerages. The remaining costs during the three and six months ended June 30, 2005 of $10 million and $21 million, respectively, were incurred principally to combine the Internet booking technology of the Company’s Orbitz, ebookers, Gullivers and Cheap Tickets businesses into one common platform and to merge certain booking and distribution functionality within the Company’s recently acquired travel distribution businesses.
During the three and six months ended June 30, 2004, the Company incurred acquisition and integration related costs of $6 million and $13 million, respectively, of which $4 million and $8 million, respectively, represented amortization of its contractual pendings and listings intangible assets acquired in connection with the acquisitions of real estate brokerages. The remaining costs during the three and six months ended June 30, 2004 of $2 million and $5 million, respectively, primarily related to the integration of Budget’s information technology systems with the Company’s platform and the integration of real estate brokerages acquired by NRT.
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Amortization expense relating to all intangible assets was as follows:
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Based on the Company’s amortizable intangible assets as of June 30, 2005, the Company expects related amortization expense for the remainder of 2005 and the five succeeding fiscal years to approximate $50 million, $100 million, $90 million, $80 million, $80 million and $70 million, respectively.
Total restructuring charges are expected to be recorded as follows:
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The components of vehicle depreciation, lease charges and interest, net are summarized below:
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Aggregate maturities of debt are as follows:
At June 30, 2005, the committed credit facilities and commercial paper program available to the Company at the corporate level were as follows:
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As of June 30, 2005, the Company also had $400 million of availability for public debt or equity issuances under a shelf registration statement.
Certain of the Company’s debt instruments and credit facilities contain restrictive covenants, including restrictions on indebtedness of material subsidiaries, mergers, limitations on liens, liquidations and sale and leaseback transactions, and also require the maintenance of certain financial ratios. At June 30, 2005, the Company was in compliance with all restrictive and financial covenants. The Company’s debt instruments permit the debt issued thereunder to be accelerated upon certain events, including the failure to pay principal when due under any of the Company’s other debt instruments or credit facilities subject to materiality thresholds. The Company’s credit facilities permit the loans made thereunder to be accelerated upon certain events, including the failure to pay principal when due under any of the Company’s debt instruments subject to materiality thresholds.
The following table provides the contractual maturities for debt under management programs (including related party debt due to Cendant Rental Car Funding (AESOP) LLP) at June 30, 2005 (except for notes issued under the Company’s
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timeshare program where the underlying indentures require payments based on cash inflows relating to the corresponding assets under management programs and for which estimates of repayments have been used):
As of June 30, 2005, available funding under the Company’s asset-backed debt programs (including related party debt due to Cendant Rental Car Funding (AESOP) LLC related to the Company’s management programs) consisted of:
Certain of the Company’s debt instruments and credit facilities related to its management programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and indebtedness of material subsidiaries, mergers, limitations on liens, liquidations, and sale and leaseback transactions, and also require the maintenance of certain financial ratios. At June 30, 2005, the Company was in compliance with all financial covenants of its debt instruments and credit facilities related to management programs.
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Effective March 31, 2005, the Company no longer considered its investments in certain foreign subsidiaries to be essentially permanent in duration. Accordingly, the Company recorded deferred tax liabilities of approximately $32 million related to the currency translation adjustments of these subsidiaries. Currency translation adjustments of foreign subsidiaries not affected by this change continue to exclude income taxes related to indefinite investments in such foreign subsidiaries. All other components of accumulated other comprehensive income are net of tax.
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The following table illustrates the effect on net income and earnings per share for 2004 as if the fair value based method had been applied by the Company to all employee stock awards granted (including those granted prior to January 1, 2003 for which the Company has not recorded compensation expense):
As of January 1, 2005, the Company records compensation expense for all outstanding employee stock awards; accordingly, pro forma information is not presented for any period subsequent to December 31, 2004.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2004 Annual Report on Form 10-K filed with the Commission on March 1, 2005 and our Current Report on Form 8-K filed with the Commission on May 5, 2005. Unless otherwise noted, all dollar amounts are in millions.
We are one of the foremost providers of travel and real estate services in the world. We operate our businesses within three divisions: Real Estate, Travel Content and Travel Distribution. Our Real Estate division has two segments: Real Estate Services and Mortgage Services; our Travel Content division has three segments: Hospitality Services, Timeshare Resorts and Vehicle Rental; and our Travel Distribution division has only one segment, Travel Distribution Services. This segment reporting structure was adopted in first quarter 2005 in connection with our strategic realignment, which is discussed in detail below, and now reflects our renewed focus on our travel and real estate services businesses. Following is a brief description of the services provided by each of our operating segments:
In first quarter 2005, we began the final phase of our strategic realignment, which was commenced in early 2004 and undertaken to simplify our business model through exiting non-core businesses or businesses that produce volatility to our earnings inconsistent with our business model and the remainder of our core businesses. We began this strategic realignment in 2004 by completing the initial public offering of Jackson Hewitt Tax Service Inc., raising approximately $770 million of cash, and acquiring Orbitz, Inc., an online travel company. We completed the spin-off of our former mortgage, fleet leasing and appraisal businesses in a tax-free distribution of the common stock of PHH Corporation to our stockholders in January 2005. In February 2005, we completed an initial public offering of Wright Express Corporation, raising approximately $965 million of cash, and acquired ebookers plc, a travel agency. In March 2005, our Board of Directors formally approved a plan to dispose of our Marketing Services division, which is comprised of our individual membership and loyalty/insurance marketing businesses. We then completed the acquisition of Gullivers Travel Associates, a wholesaler and global online provider of hotel rooms, destination services, travel packages and group tours, in April 2005. In July 2005, we entered into a definitive agreement to sell the Marketing Services division for approximately $1.83 billion (See Note 17 to our Consolidated Condensed Financial Statements). The completion of the sale of the Marketing Services division, which we anticipate will occur during the fall of 2005, will mark the culmination of our strategic realignment.
Our management team remains committed to building long-term value through operational excellence and we are steadfast in our commitment to deploy our cash to increase stockholder value. To this end, the proceeds from the aforementioned divestitures will be or have already been reinvested to acquire strategic assets in our core travel and real estate verticals, as well as to increase our quarterly dividend and to continue to repurchase our common stock, both of which return value to our shareholders.
In the first six months of 2005, we have already used $269 million of cash, net of proceeds from option exercises, to repurchase our common stock and concurrent with the closing of the sale of our Marketing Services division, we intend to increase our repurchase target from $1.0 billion during 2005 to $2.0 billion to be completed by the end of 2006. Through the first six months of 2005, we have made dividend payments aggregating $192 million and for the third quarter of 2005, our Board has declared a quarterly cash dividend of 11 cents per share, which will reflect an increase of 22% from the first and second quarter 2005 amounts and an increase of 57% from the initial dividend payment made in first quarter 2004. While no assurances can be given, we expect to continue to periodically increase our dividend at a rate at least equal to our earnings growth.
In connection with the strategic realignment discussed above, we also performed a comprehensive review of our businesses to isolate opportunities for cost reductions and organizational efficiencies. As a result, we undertook significant restructuring activities during 2005 and incurred charges of $48 million, or $30 million net of tax (see Note 6 to our Consolidated
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Condensed Financial Statements for a detailed description of these activities). We expect to incur additional restructuring charges of $3 million throughout 2005 in connection with these activities.
RESULTS OF OPERATIONS
Discussed below are our consolidated results of operations and the results of operations for each of our reportable segments. Generally accepted accounting principles require us to segregate and report as discontinued operations for all periods presented the account balances and activities of Jackson Hewitt, our fleet leasing and appraisal businesses, Wright Express, and our Marketing Services division. Although we no longer own our former mortgage services operations, we cannot classify such business as a discontinued operation due to our participation in a mortgage origination venture that was established with PHH in connection with the spin-off.
Management evaluates the operating results of each of our reportable segments based upon revenue and “EBITDA,” which is defined as income from continuing operations before non-program related depreciation and amortization, non-program related interest, amortization of pendings and listings, income taxes and minority interest. Our presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.
Three Months Ended June 30, 2005 vs. Three Months Ended June 30, 2004
Our consolidated results of operations comprised the following:
Net revenues and total expenses increased $331 million (8%) and $376 million (10%), respectively, in second quarter 2005 as compared with the same period in 2004. Such increases reflect the acquisitions of the following several strategic businesses during or subsequent to second quarter 2004, as well as organic growth and other items discussed below:
The remaining revenue increase reflects organic growth (on a comparable basis) across all our segments with the most significant contributions from our Vehicle Rental and Real Estate Services segments. Such growth also contributed to the increase in total expenses primarily to support additional volume, higher vehicle costs and additional marketing investments. Partially offsetting these revenue and expense increases was the absence of $217 million in revenue generated and $167 million in expenses incurred by our former mortgage business during second quarter 2004 (this business was disposed on January 31, 2005). Our effective tax rate for continuing operations was 33.2% and 33.5% for second quarter 2005 and 2004, respectively. As a result of the above-mentioned items, income from continuing operations decreased $28 million (7%).
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Income (loss) from discontinued operations decreased $82 million, which primarily reflects (i) a decrease of $53 million of net income generated by our Marketing Services division primarily due to a $28 million charge recorded during 2005 in connection with a breach of contract claim, (ii) a decrease of $15 million in net income generated by our former fleet leasing and appraisal businesses (since their results were included for second quarter 2004 but not in second quarter 2005) and (iii) a decrease of $14 million in net income generated by Wright Express (since its results were included for second quarter 2004 but not in second quarter 2005). We also recognized a net gain of $198 million on the disposal of Jackson Hewitt Tax Service, Inc. in second quarter 2004. As a result of the above-mentioned items, net income decreased $304 million.
Following is a discussion of the results of each of our reportable segments during second quarter:
Real Estate ServicesRevenues and EBITDA increased $135 million (7%) and $10 million (3%), respectively, in second quarter 2005 compared with second quarter 2004 reflecting revenue growth across our real estate franchise, real estate brokerage and relocation services businesses, although EBTIDA margin comparisons were negatively impacted by a gain on the 2004 sale of non-core assets within our settlement services business and the timing of marketing campaigns and certain other expenses at our real estate brokerage business, which are discussed in greater detail below.
Royalty revenue within our real estate franchise business increased $16 million (13%) in second quarter 2005 as compared with second quarter 2004. Such growth was primarily driven by a 14% increase in the average price of homes sold and a 2% increase in the number of homesale transactions from our third-party franchisees. Royalty increases in our real estate franchise business are generally recognized with little or no corresponding increase in variable operating expenses due to the significant operating leverage within the franchise operations. In addition to royalties received from our third-party franchisees, NRT Incorporated, our wholly-owned real estate brokerage firm, continues to pay royalties to our real estate franchise business. However, these intercompany royalties, which approximated $106 million and $100 million during second quarter 2005 and 2004, respectively, are eliminated in consolidation and therefore have no impact on this segment’s revenues or EBITDA. Our strategy for continued growth in the real estate franchise business is to expand our global franchise base by aggressively marketing our Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA and Sotheby’s International Realty brands.
Revenues within our real estate brokerage business increased $102 million (7%) in second quarter 2005 as compared with second quarter 2004. Such increase is partially attributable to significant acquisitions made by NRT during or subsequent to second quarter 2004, which together contributed incremental revenues and EBITDA of $55 million and $5 million, respectively, to second quarter 2005 operating results. Excluding the impact of these acquisitions, NRT’s revenues increased $47 million (3%) in second quarter 2005 compared with second quarter 2004. This increase was substantially comprised of higher commission income earned on homesale transactions, which was primarily driven by a 13% increase in the average price of homes sold and partially offset by an 8% decline in the number of homesale transactions. The 13% quarter-over-quarter increase in average price is reflective of the supply of, and demand for, homes resulting in an overall increase in the sales prices of homes across the nation. We believe that the reduction in homesale transactions and, in part, the increase in
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price, is reflective of low inventories of homes available for sale in the coastal regions that NRT serves, which experienced unusually high levels of activity in second quarter 2004, and increased competition. EBITDA further reflects an increase of $34 million in commission expenses paid to real estate agents as a result of the incremental revenues earned on homesale transactions, as well as a higher average commission rate paid to real estate agents in second quarter 2005 due to the progressive nature of revenue-based agent commission schedules. Our strategy for continued growth in this business includes strategic acquisitions of real estate brokerages, the continued recruitment and retention of real estate agents and to maintain our commission rates in an increasingly competitive market through the delivery of industry-leading sales support technology and customer service.
NRT has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts. The real estate franchise business has franchised offices that are more widely dispersed across the United States than our NRT real estate brokerage operations. Accordingly, operating results and homesale statistics may differ between NRT and the real estate franchise business based upon geographic presence and the corresponding homesale activity in each geographic region.
Revenues from our relocation services business increased $21 million (18%) in second quarter 2005 as compared with second quarter 2004, which was primarily driven by $9 million (47%) of higher government homesale revenues and $8 million (17%) of increased referral fees. The increase in government homesale revenues is attributable to increased home values and a higher volume of government home acquisition and closing transactions. The increase in referral fees was due to higher referral rates and transaction volume.
Revenues from our settlement services business decreased $8 million (8%) in second quarter 2005 as compared with second quarter 2004 primarily due to the absence of a $7 million gain recognized in second quarter 2004 as a result of the sale of certain non-core assets by our settlement services business.
EBITDA further reflects an increase of approximately $40 million (3%) in operating, marketing and administrative expenses (apart from NRT’s significant acquisitions and real estate agent commission expenses, both of which are discussed separately above) principally resulting from (i) a $12 million increase in staffing and other personnel-related costs incurred within our relocation business to support increases in current and anticipated future volume, (ii) $7 million of higher marketing expenses primarily reflecting changes in seasonal spending patterns and the implementation of certain Internet-based strategic marketing initiatives within our brokerage operations, (iii) a $7 million increase in government homesale direct expenses incurred within our relocation services business primarily in connection with higher volume, (iv) $6 million of incremental incentive expenses at our real estate brokerage operations due to an anticipated increase in year-over-year profitability and (v) $1 million of expenses resulting from restructuring actions at our settlement services and real estate brokerage businesses.
Hospitality ServicesRevenues increased $47 million (15%), while EBITDA declined $20 million (17%), in second quarter 2005 compared with second quarter 2004. Key revenue drivers increased across all our Hospitality Services businesses reflecting positive industry-wide dynamics but the period-over-period EBITDA comparison was negatively impacted by the absence of a settlement recorded in second quarter 2004 related to a lodging franchisee receivable, as well as increased marketing-related expenses across all our Hospitality Services businesses and the timing of acquisitions in our vacation rental business, all of which are discussed in greater detail below.
Subscriber related revenues within our RCI timeshare exchange business increased $11 million (8%) during second quarter 2005 primarily due to a $6 million (6%) increase in exchange and subscription fee revenues and a $5 million (19%) increase in other timeshare points and rental transaction revenues. The increase in exchange and subscription fee revenues in second quarter 2005 was primarily driven by a 5% increase in the average number of worldwide subscribers and a 9% increase in the average exchange fee, partially offset by a 3% reduction in exchange transaction volume. Revenue trends reflect the continued shift in the RCI timeshare membership base toward a greater mix of points members from traditional one-week timeshare members. The increase in other timeshare points and rental transaction revenues during second quarter 2005 was principally driven by a 29% increase in points and rental transaction volume, partially offset by a 10% decrease in the average price per rental transaction. Other timeshare points transactions are those executed by points members for other than a standard, one-week stay at an RCI timeshare property. Timeshare rental transactions are rentals of unused timeshare inventory to RCI members and non-members.
Royalty, marketing and reservation fund revenues within our lodging franchise operations increased $6 million (6%) in second quarter 2005 partially due to our purchase of the exclusive rights to the Ramada International trademark in December 2004, which contributed $4 million of incremental revenues to second quarter 2005 results. The Ramada International properties also added approximately 26,000 rooms, which is approximately 5% of the total weighted average rooms available within our lodging franchise system. Apart from this acquisition, royalty, marketing and reservation fund revenues increased $2 million (2%) primarily resulting from a 7% increase in revenue per available room (“RevPAR”), partially offset by a 5% decrease in weighted average rooms available. The RevPAR increase reflects (i) increases in both price and occupancy principally
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attributable to an overall improvement in the economy lodging segment in which our hotel brands primarily operate, (ii) the termination of underperforming properties throughout 2004 that did not meet our required quality standards or their financial obligations to us and (iii) the strategic assignment of personnel to field locations designed to assist franchisees in improving their hotel operating performance. The decrease in weighted average rooms available reflects our termination of underperforming properties, as discussed above, and the timing of new additions and terminations to our franchise system. Additionally, our Trip Rewards loyalty program contributed $3 million of incremental revenue during second quarter 2005.
We acquired Landal GreenParks and Canvas Holidays Limited, which are both European vacation rental businesses, in May 2004 and October 2004, respectively. The operating results of Landal have been included in our results for the entire second quarter of 2005 but only for two months during second quarter 2004. The operating results of Canvas have been included in our results for the entire second quarter 2005 but for none of second quarter 2004. Accordingly, Landal and Canvas contributed incremental revenues of $14 million and $5 million, respectively, (with no incremental contributions to EBITDA) during second quarter 2005. The operations of Landal and Canvas are seasonally weakest in the first half of each calendar year and begin to improve moderately toward the latter part of the second quarter and more significantly into third quarter. Apart from these acquisitions, revenues at our European vacation rental companies increased $4 million (6%) primarily as a result of a 4% increase in cottage weeks sold, which partially reflects a shift in booking volumes from first quarter into the latter half of second quarter. European consumers’ appear to be booking their vacations closer to their eventual departure dates, which are heavily concentrated during the latter half of the second quarter and throughout the third quarter of each year, corresponding to the peak vacation season. As a result, we expect a greater volume of bookings during third quarter 2005 as compared with third quarter 2004.
EBITDA further reflects an increase of approximately $45 million (24%) in operating, marketing and administrative expenses (excluding the incremental expenses generated by Landal and Canvas Holidays) principally resulting from (i) $18 million of higher quarter-over-quarter bad debt expense primarily due to the absence of a $15 million settlement recorded in second quarter 2004 related to a lodging franchisee receivable, (ii) $11 million of increased marketing-related expenses across all our Hospitality Services businesses primarily to encourage bookings within our vacation rental business and to increase brand recognition within our lodging franchise business, (iii) $5 million of increased volume-related costs within our timeshare exchange and vacation rental businesses and (iv) $3 million of additional costs resulting from infrastructure expansion to support acquisition growth.
Timeshare ResortsRevenues and EBITDA increased $55 million (14%) and $15 million (26%), respectively, in second quarter 2005 compared with second quarter 2004. The operating results reflect organic growth in timeshare sales, a gain on the sale of land and increased consumer finance income.
Net sales of vacation ownership interests (“VOIs”) at our timeshare resorts business increased $33 million (10%) in second quarter 2005 principally driven by a 10% increase in tour flow and a 2% increase in revenue per guest. Tour flow, as well as revenue per guest, benefited in second quarter 2005 from our expanded presence in premium destinations such as Hawaii, Las Vegas and Orlando. Tour flow was also positively impacted by the opening of new sales offices, our strategic focus on new marketing alliances and increased local marketing efforts.
Revenues and EBITDA also increased $14 million and $15 million, respectively, in second quarter 2005 as a result of incremental net interest income earned on our contract receivables primarily due to growth in the portfolio and reduced net borrowing costs. Revenue and EBITDA comparisons were further impacted by $11 million of income recorded in second quarter 2005 in connection with the disposal of a parcel of land that was no longer consistent with our development plans.
EBITDA further reflects an increase of approximately $40 million (13%) in operating, marketing and administrative expenses primarily resulting from (i) $12 million of increased cost of sales and $10 million of additional commission expense, both of which are primarily associated with increased VOI sales, (ii) $11 million of additional costs incurred to fund additional staffing needs to support continued growth in the business, improve existing properties and integrate the Trendwest and Fairfield contract servicing systems and (iii) $5 million of incremental marketing spend to support sales efforts and anticipated growth in the business.
Vehicle RentalRevenues increased $105 million (9%), while EBITDA decreased $12 million (9%), in second quarter 2005 compared with second quarter 2004. We experienced strong demand for vehicle rentals throughout the quarter and expect rental volumes to continue to grow in the foreseeable future, while EBITDA margin comparisons were negatively impacted by lower domestic rental car pricing and comparatively higher fleet costs.
Revenues generated by our domestic car rental operations increased $69 million (8%) during second quarter 2005, which was comprised of a $56 million (7%) increase in car rental time and mileage (“T&M”) revenue and a $13 million (12%) increase
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in ancillary revenues. The increase in domestic T&M revenues was principally driven by a 14% increase in the number of days a car was rented, partially offset by a 6% decrease in T&M revenue per day. The increase in rental days and the reduction in pricing reflects, in part, our strategic decision to reposition the Budget car rental brand by reducing the cost structure and pricing to be more competitive with other leisure-focused car rental brands. In addition, pricing at our car rental brands was negatively impacted by competitive conditions in the domestic car rental industry resulting from higher industry-wide fleet levels, which we believe were caused by enhanced incentives offered by car manufacturers in prior periods. EBITDA also reflects an increase of $56 million in fleet depreciation and related costs primarily due to (i) an increase of 13% in the average size of our domestic rental fleet and (ii) reductions to manufacturer incentives received on our 2005 model year inventory (which was in utilization during second quarter 2005) as compared with those received on our 2004 model year inventory (which was in utilization during second quarter 2004). The $13 million increase in ancillary revenues was due primarily to a $7 million increase in counter sales of insurance and other items and a $5 million increase in gasoline revenues. EBITDA from our domestic car rental operations was also negatively impacted by (i) $19 million of additional expenses primarily associated with increased car rental volume, including vehicle maintenance and damage costs, vehicle license and registration fees, airport commissions and shuttling costs and (ii) $7 million of increased expenses associated with higher gasoline costs and a lower profit margin on the sale of gasoline.
Revenues generated by our international car rental operations increased $28 million (26%) primarily due to a $21 million (24%) increase in car rental T&M revenue and a $7 million (33%) increase in ancillary revenues. The increase in T&M revenues was principally driven by a 17% increase in the number of days a car was rented and a 7% increase in T&M revenue per day. The favorable effect of incremental T&M revenues was partially offset in EBITDA by $13 million of increased vehicle depreciation and related costs and $16 million of higher operating expenses, both principally resulting from increased car rental volume and an increase of 20% in the average size of our international rental fleet to support such volume. The increase in revenue generated by our international car rental operations includes the effect of favorable foreign currency exchange rate fluctuations of $10 million, which was principally offset in EBITDA by the opposite impact of foreign currency exchange rate fluctuations on expenses.
We are currently negotiating the purchase of our 2006 model year inventory and, based upon preliminary discussions, expect to incur increased fleet depreciation costs throughout the remainder of 2005 and 2006. Accordingly, our ability to maintain profit margins consistent with prior periods will be dependent on our ability to obtain more favorable customer pricing in response to increases in fleet costs. We implemented such a pricing program during third quarter 2005.
Budget truck rental revenues increased $8 million (6%) in second quarter 2005 primarily representing a $6 million (5%) increase in T&M revenue, which reflects a 6% increase in T&M per day. The favorable impact on EBITDA of increased T&M revenue was principally offset by $10 million of incremental vehicle depreciation and related costs resulting from a 14% increase in the average size of our truck rental fleet in anticipation of increased demand.
Travel Distribution ServicesRevenues and EBITDA increased $213 million (48%) and $25 million (21%), respectively, in second quarter 2005 compared with second quarter 2004, reflecting the inclusion of revenues and expenses from recent acquisitions as well as integration costs associated with those acquisitions. Subsequent to second quarter 2004, we completed the acquisitions of Orbitz (November 2004), Gullivers (April 2005) and ebookers (February 2005). The operating results of these companies have been included in our results from their respective acquisition dates forward and therefore were incremental to our results during second quarter 2005. Accordingly, Orbitz, Gullivers and ebookers contributed incremental revenues of $101 million, $68 million and $33 million, respectively, and EBITDA earnings (losses) of $22 million, $13 million and ($10) million, respectively. EBITDA for second quarter 2005 also includes $8 million of acquisition and integration related costs, the majority of which are reflected in the EBITDA results of such acquired businesses. In addition, effective January 1, 2005, we transferred our membership travel business to the discontinued Marketing Services segment. As a result, revenue and EBITDA of $16 million and $4 million, respectively, generated by such operations in second quarter 2004 were absent from this segment’s results in second quarter 2005. Apart from these acquisitions and the transfer of the membership travel business, revenue and EBITDA increased $27 million (6%) and $4 million (4%), respectively.
Our strategic focus has been to grow our business and enhance profitability by further penetrating corporate and consumer online channels, which we are accomplishing, in part, through our recent strategic acquisitions and ongoing integration efforts. We believe that combining our existing travel businesses with the acquisitions of Orbitz, Gullivers and ebookers will strengthen our position as a global travel intermediary. We have expanded our operations within the travel industry such that in addition to our role as an “order taker,” or transaction processor, primarily serving offline travel agencies via their use of our Galileo branded electronic global distribution system (“GDS”) services, we have also grown our presence as an “order maker,” or transaction generator, where we directly serve the end customer.
To execute our strategy, we will continue to integrate our businesses. We have already completed the migration of Cheaptickets.com and Orbitz to a common technology platform and have made progress in developing the migration plans for
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the ebookers platform. We are also merging certain booking and distribution functionality within our ebookers, Gullivers and our Travel 2/Travel 4 brands. In the United States, we will continue to promote the Orbitz, Cheap Tickets and Travelport businesses as differentiated travel brands in the leisure and corporate travel sectors. With the recent acquisitions of Orbitz, ebookers and Gullivers, we expect our integration efforts to continue through 2006, with the most significant cost savings synergies to be recognized beginning in early 2006.
Galileo, our “order taker” subsidiary that provides GDS services to the travel industry, experienced an overall $13 million (4%) increase in worldwide air booking fees in second quarter 2005. Such increase was comprised of a $17 million (8%) increase in international air booking fees, partially offset by a $4 million (5%) decrease in domestic air booking fees. The increase in international air booking fees was principally driven by 6% higher booking volumes, which totaled 46.1 million segments in second quarter 2005 and which primarily resulted from an increase in travel demand within the Middle East and Asia/Pacific regions. The $4 million decrease in domestic air booking fees was driven by a 9% decline in the effective yield on such bookings, partially offset by a 5% increase in booking volumes, which totaled 22.5 million segments in second quarter 2005. The domestic volume increase and effective yield decline are consistent with our pricing program with major U.S. carriers, which was designed to gain access to all public fares made available by the participating airlines. International air bookings represented approximately two-thirds of our total air bookings during second quarter 2005. Additionally, revenue at our Galileo subsidiary was further impacted by an $8 million reduction in subscriber fees resulting from fewer travel agencies leasing computer equipment from us during second quarter 2005 compared with second quarter 2004, which was substantially offset by $8 million of additional ancillary revenue, including higher fees earned on outsourcing arrangements where we provide technology services for certain airline carriers.
Revenues generated from our online “order maker” related businesses grew $14 million (40%) organically (excluding the impact of the aforementioned acquisitions) in second quarter 2005 compared with second quarter 2004 principally driven by a 47% increase in online gross bookings substantially at our CheapTickets.com website. The growth in online gross bookings was attributable to (i) improved site functionality resulting in greater conversion rates, (ii) enhanced content including additional online hotel offerings and (iii) more visitors resulting from increased marketing efforts.
EBITDA further reflects an increase of approximately $25 million in expenses (excluding the impact of the aforementioned acquisitions and the transfer of the membership travel business) principally resulting from (i) the absence in second quarter 2005 of a $10 million expense reduction realized in second quarter 2004 in connection with a benefit plan amendment, (ii) $8 million of additional expenses associated with developing enhanced technology and other project initiatives, (iii) $5 million of higher commission expenses attributable to higher booking volumes in the Middle East and Asia/Pacific regions and (iv) $1 million of restructuring changes incurred during second quarter 2005 as a result of actions taken to reduce staff levels in some of our order-taker related businesses and the realignment of our global sales force.
Mortgage ServicesRevenues and EBITDA decreased $217 million and $58 million, respectively, in second quarter 2005 compared with the same period in 2004 due to the disposition of this business in January 2005 in connection with our spin-off of PHH.
SIX MONTHS ENDED JUNE 30, 2005 VS. SIX MONTHS ENDED JUNE 30, 2004
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Net revenues and total expenses increased $669 million (8%) and $831 million (12%), respectively, in the six months ended June 30, 2005 as compared with the same period in 2004. Such increases reflect the acquisitions of the following several strategic businesses subsequent to January 1, 2004, as well as organic growth and other items, including a non-cash valuation charge related to the PHH spin-off, discussed below:
The remaining revenue increase reflects organic growth (on a comparable basis) across all our segments with the most significant contributions from our Vehicle Rental and Real Estate Services segments. Such growth also contributed to the increase in total expenses primarily to support additional volume, higher vehicle costs and additional marketing investments. Partially offsetting these revenue and expense increases was the absence of five months of revenues generated and expenses incurred by our former mortgage business, which was disposed on January 31, 2005. Our former mortgage business contributed $326 million and $274 million of revenues and expenses during the period February 1, 2004 through June 30, 2004. The increase in total expenses also reflects the following transaction-related charges recorded during 2005: (i) a $180 million non-cash impairment charge relating to the PHH spin-off and (ii) charges aggregating $51 million primarily relating to restructuring activities undertaken following the PHH spin-off and initial public offering of Wright Express. Partially offsetting these charges is a $112 million decrease in interest expense primarily relating to the reversal of $73 million of accrued interest associated with the resolution of amounts due under a litigation settlement reached in 1999, as well as an overall reduction in our average outstanding indebtedness period-over-period and debt extinguishment costs incurred in 2004. Our effective tax rate for continuing operations was 40.5% and 32.6% for the six months ended June 30, 2005 and 2004, respectively. The change in the effective tax rate for 2005 was primarily due to the non-deductibility of the valuation charge associated with the PHH spin-off and a one-time tax expense associated with the planned repatriation of foreign earnings, which was partially offset by a tax benefit related to asset basis differences. As a result of the above-mentioned items, income from continuing operations decreased $166 million (27%).
Income (loss) from discontinued operations decreased $329 million, which primarily reflects (i) $64 million in net income generated by Jackson Hewitt Tax Service Inc. prior to its disposition, (ii) a decrease of $50 million in net income generated by our former fleet leasing and appraisal businesses (since their results were included for six months in 2004 but only one month in 2005 and due to a $24 million tax-related charge recorded in 2005), (iii) a decrease of $29 million in net income generated by Wright Express (since its results were included for six months in 2004 but only through February 22, 2005 in 2005), and (iv) a decrease of $186 million in net income generated by our Marketing Services division, which principally reflects the reversal of a tax valuation allowance of $121 million in January 2004 and a $28 million charge recorded during 2005 in connection with a breach of contract claim. We also incurred a net loss on the disposal of discontinued operations of $133 million in 2005, which includes a $308 million non-cash impairment charge and $4 million of transaction costs relating to the PHH spin-off, partially offset by a net gain of $179 million recognized in connection with the IPO of Wright Express. As a result of the above-mentioned items, net income decreased $826 million.
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Following is a discussion of the results of each of our reportable segments during the six months ended June 30:
Real Estate ServicesRevenues and EBITDA increased $328 million (10%) and $39 million (8%), respectively, in the six months ended June 30, 2005 compared with the same period in 2004 reflecting growth across our real estate franchise, real estate brokerage and relocation services businesses.
Royalty revenue within our real estate franchise business increased $41 million (20%) in the six months ended June 30, 2005 as compared with the same period in 2004. Such growth was primarily driven by a 14% increase in the average price of homes sold and a 7% increase in the number of homesale transactions from our third-party franchisees. Royalty increases in our real estate franchise business are generally recognized with little or no corresponding increase in variable operating expenses due to the significant operating leverage within the franchise operations. In addition to royalties received from our third-party franchisees, NRT Incorporated, our wholly-owned real estate brokerage firm, continues to pay royalties to our real estate franchise business. However, these intercompany royalties, which approximated $179 million and $163 million during the six months ended June 30, 2005 and 2004, respectively, are eliminated in consolidation and therefore have no impact on this segment’s revenues or EBITDA.
Revenues within our real estate brokerage business increased $263 million (11%) in the six months ended June 30, 2005 as compared with the same period in 2004. Such increase is partially attributable to significant acquisitions made by NRT during or subsequent to the six months ended June 30, 2004 which together contributed incremental revenues and EBITDA of $113 million and $9 million, respectively, to 2005 operating results. Excluding the impact of these acquisitions, NRT’s revenues increased $150 million (6%). This increase was substantially comprised of higher commission income earned on homesale transactions, which was primarily driven by a 16% increase in the average price of homes sold and partially offset by a 7% decline in the number of homesale transactions. The 16% period-over-period increase in average price is reflective of the supply of, and demand for, homes resulting in an overall increase in the sales prices of homes across the nation. We believe that the reduction in homesale transactions and, in part, the increase in price, is reflective of low inventories of homes available for sale in the coastal regions that NRT serves, which experienced unusually high levels of activity in 2004, and increased competition. EBITDA further reflects an increase of $109 million in commission expenses paid to real estate agents as a result of the incremental revenues earned on homesale transactions, as well as a higher average commission rate paid to real estate agents in 2005 due to the progressive nature of revenue-based agent commission schedules.
Revenues from our relocation services business increased $21 million (9%) in the six months ended June 30, 2005 as compared with the same period in 2004, which was primarily driven by $14 million (18%) of increased referral fees and a $7 million increase in other service fees. The increase in referral fees was driven by higher referral rates and transaction volume.
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Revenues from our settlement services business decreased $2 million (2%) in the six months ended June 30, 2005 as compared with the same period in 2004 primarily due to the absence of a $7 million gain recognized in second quarter 2004 as a result of the sale of certain non-core assets by our settlement services business, partially offset by $5 million of increased title and closing fees generated on a higher volume of homesale transactions period-over-period.
EBITDA further reflects an increase of approximately $75 million (3%) in operating, marketing and administrative expenses (apart from NRT’s significant acquisitions and real estate agent commission expenses, both of which are discussed separately above) principally resulting from (i) an $18 million increase in staffing and other personnel-related costs incurred within our relocation business to support increases in current and anticipated future volume, (ii) $17 million of higher marketing expenses primarily reflecting changes in seasonal spending patterns and the implementation of certain Internet-based strategic marketing initiatives within our real estate brokerage and franchise businesses, (iii) $13 million of incremental incentive expenses at our real estate brokerage operations due to an anticipated increase in year-over-year profitability, (iv) $5 million of costs at our settlement services business related to developing and enhancing certain infrastructures that were previously maintained at, and leveraged from, our former mortgage business and (v) $5 million of expenses resulting from restructuring actions primarily at our settlement services and real estate brokerage businesses.
Hospitality ServicesRevenues increased $111 million (17%), while EBITDA declined $21 million (9%), in the six months ended June 30, 2005 compared with the same period in 2004. Key revenue drivers increased at our timeshare exchange and lodging franchise businesses reflecting positive industry-wide dynamics but the period-over-period EBITDA comparison was negatively impacted by the absence of a settlement recorded in the six months ended June 30, 2004 related to a lodging franchisee receivable, as well as increased marketing-related expenses across all our Hospitality Services businesses and the timing of acquisitions in our vacation rental business, all of which are discussed in greater detail below.
Subscriber related revenues within our RCI timeshare exchange business increased $20 million (7%) in the six months ended June 30, 2005 primarily due to an $11 million (5%) increase in exchange and subscription fee revenues and an $11 million (19%) increase in other timeshare points and rental transaction revenues. The increase in exchange and subscription fee revenues in the six months ended June 30, 2005 was primarily driven by a 5% increase in the average number of worldwide subscribers and a 9% increase in the average exchange fee, partially offset by a 4% reduction in exchange transaction volume. Revenue trends reflect the continued shift in the RCI timeshare membership base toward a greater mix of points members from traditional one-week timeshare members. The increase in other timeshare points and rental transaction revenues during the six months ended June 30, 2005 was principally driven by a 22% increase in points and rental transaction volume, partially offset by a 4% decrease in the average price per rental transaction.
Royalty, marketing and reservation fund revenues within our lodging franchise operations increased $13 million (8%) in the six months ended June 30, 2005 partially due to our purchase of the exclusive rights to the Ramada International trademark in December 2004, which contributed $7 million of incremental revenues to the six months ended June 30, 2005 results. The Ramada International properties also added approximately 26,000 rooms, which is approximately 5% of the total weighted average rooms available within our lodging franchise system for the six months ended June 30, 2005. Apart from this acquisition, royalty, marketing and reservation fund revenues increased $6 million (4%) primarily resulting from an 8% increase in RevPAR, partially offset by a 4% decrease in weighted average rooms available. The RevPAR increase reflects (i) increases in both price and occupancy principally attributable to an overall improvement in the economy lodging segment in which our hotel brands primarily operate, (ii) the termination of underperforming properties throughout 2004 that did not meet our required quality standards or their financial obligations to us and (iii) the strategic assignment of personnel to field locations designed to assist franchisees in improving their hotel operating performance. The decrease in weighted average rooms available reflects our termination of underperforming properties, as discussed above, and the timing of new additions and terminations to our franchise system. Revenue and EBITDA also benefited from a $7 million gain recognized on the sale of an investment within our lodging business during the six months ended June 30, 2005. Additionally, our Trip Rewards loyalty program contributed $6 million of incremental revenue during the six months ended June 30, 2005.
We acquired Landal GreenParks and Canvas Holidays Limited, which are both European vacation rental businesses, in May 2004 and October 2004, respectively. The operating results of Landal have been included in our results for the entire six months ended June 30, 2005 but only for two months during the same period in 2004. The operating results of Canvas have been included in our results for the entire six months ended June 30, 2005 but for none of the six months ended June 30, 2004. Accordingly, Landal and Canvas contributed incremental revenues of $44 million and $15 million, respectively, and EBITDA of ($5) million and $2 million, respectively, during the six months ended June 30, 2005. The operations of Landal and Canvas are seasonally weakest in the first half of each calendar year and begin to improve moderately toward the latter part of the second quarter and more significantly into third quarter. Apart from these acquisitions, revenues at our European vacation rental companies were relatively flat. European consumers’ appear to be booking their vacations closer to their eventual departure dates, which are heavily concentrated during the latter half of the second quarter and throughout the third quarter of
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each year, corresponding to the peak vacation season. As a result, we expect a greater volume of bookings during third quarter 2005 as compared with third quarter 2004.
EBITDA further reflects an increase of approximately $70 million (17%) in operating, marketing and administrative expenses (excluding the incremental expenses generated by the Landal and Canvas Holidays acquisitions) principally resulting from (i) $18 million of higher year-over-year bad debt expense primarily due to the absence of a $15 million settlement recorded in the six months ended June 30, 2004 related to a lodging franchisee receivable, (ii) $20 million of increased marketing-related expenses across all our Hospitality Services businesses primarily to encourage bookings within our vacation rental business and to increase brand recognition within our lodging franchise business, (iii) $6 million of increased volume-related costs within our timeshare exchange and vacation rental businesses, (iv) $5 million of restructuring costs incurred as a result of the consolidation of certain call centers and back-office functions and (v) $5 million of additional costs resulting from infrastructure expansion to support acquisition growth.
Timeshare ResortsRevenues and EBITDA increased $74 million (10%) and $12 million (12%), respectively, in the six months ended June 30, 2005 compared with the same period in 2004. The operating results reflect organic growth in timeshare sales, a gain on the sale of land and increased consumer finance income.
Net sales of VOIs at our timeshare resorts business increased $40 million (7%) in the six months ended June 30, 2005, principally driven by a 9% increase in tour flow and a 3% increase in revenue per guest. This revenue increase was partially offset by a $14 million decrease in higher margin upgrade sales at our Trendwest resort properties due to special upgrade promotions conducted in the first half of 2004 undertaken to mitigate the negative impact on tour flow from the Do Not Call legislation. Tour flow, as well as revenue per guest, benefited in the six months ended June 30, 2005 from our expanded presence in premium destinations such as Hawaii, Las Vegas and Orlando. Tour flow was also positively impacted by the opening of new sales offices, our strategic focus on new marketing alliances and increased local marketing efforts.
Revenue and EBITDA also increased $28 million in the six months ended June 30, 2005 as a result of incremental net interest income earned on our contract receivables primarily due to growth in the portfolio and reduced net borrowing costs. Revenue and EBITDA comparisons were further impacted by $11 million of income recorded in second quarter 2005 in connection with the disposal of a parcel of land that was no longer consistent with our development plans. The year-over-year revenue and EBITDA comparisons were further impacted by the absence of a $4 million gain recognized in first quarter 2004 in connection with the sale of a third-party timeshare financing operation and $3 million of revenue generated by such operations in 2004 prior to the sale date.
EBITDA further reflects an increase of approximately $60 million (10%) in operating, marketing and administrative expenses primarily resulting from (i) $11 million of increased cost of sales and $14 million of additional commission expense, both of which are primarily associated with increased VOI sales, (ii) $13 million of additional costs incurred to fund additional staffing needs to support continued growth in the business, improve existing properties and integrate the Trendwest and Fairfield contract servicing systems and (iii) $11 million of incremental marketing spend to support sales efforts and anticipated growth in the business.
Vehicle RentalRevenues increased $192 million (9%), while EBITDA decreased $14 million (7%), in the six months ended June 30, 2005 compared with the same period in 2004. We experienced strong demand for vehicle rentals throughout the first half of 2005 and expect rental volumes to continue to grow in the foreseeable future, although EBITDA margin comparisons have been negatively impacted by lower domestic rental car pricing and comparatively higher fleet costs.
Revenues generated by our domestic car rental operations increased $127 million (8%) during the six months ended June 30, 2005, which was comprised of a $103 million (7%) increase in car rental T&M revenue and a $24 million (12%) increase in ancillary revenues. The increase in domestic T&M revenues was principally driven by a 12% increase in the number of days a car was rented, partially offset by a 5% decrease in T&M revenue per day. The increase in rental days and the reduction in pricing reflects, in part, our strategic decision to reposition the Budget car rental brand by reducing the cost structure and pricing to be more competitive with other leisure-focused car rental brands. In addition, pricing at our car rental brands was negatively impacted by competitive conditions in the domestic car rental industry resulting from higher industry-wide fleet levels, which we believe were caused by enhanced incentives offered by car manufacturers in prior periods. EBITDA also reflects an increase of $56 million in fleet depreciation and related costs primarily due to (i) an increase of 12% in the average size of our domestic rental fleet and (ii) reductions to manufacturer incentives received on our 2005 model year inventory (which was in utilization during the six months ended June 30, 2005) as compared with those received on our 2004 model year inventory (which was in utilization during the six months ended June 30, 2004). The $24 million increase in ancillary revenues was due primarily to a $10 million increase in gasoline revenues and a $10 million increase in counter sales of insurance and other items. We also received a $6 million settlement during first quarter 2005 from an airport authority in connection with the
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mandated relocation of an Avis car rental site at such airport. EBITDA from our domestic car rental operations was also negatively impacted by (i) $60 million of additional expenses primarily associated with increased car rental volume, including vehicle maintenance and damage costs, vehicle license and registration fees, airport commissions and shuttling costs and (ii) $13 million of increased expenses associated with higher gasoline costs and a lower profit margin on the sale of gasoline.
Revenues generated by our international car rental operations increased $48 million (21%) primarily due to a $34 million (19%) increase in car rental T&M revenue and a $14 million (29%) increase in ancillary revenues. The increase in T&M revenues was principally driven by a 15% increase in the number of days a car was rented and a 3% increase in T&M revenue per day. The favorable effect of incremental T&M revenues was partially offset in EBITDA by $20 million of increased vehicle depreciation and related costs and $27 million of higher operating expenses, both principally resulting from increased car rental volume and an increase of 18% in the average size of our international rental fleet to support such volume. The increase in revenue generated by our international car rental operations includes the effect of favorable foreign currency exchange rate fluctuations of $15 million, which was principally offset in EBITDA by the opposite impact of foreign currency exchange rate fluctuations on expenses.
Budget truck rental revenues increased $18 million (8%) in the six months ended June 30, 2005 primarily representing a $15 million (7%) increase in T&M revenue, which reflects a 4% increase in T&M per day and a 3% increase in rental days. The favorable impact on EBITDA of increased T&M revenue was principally offset by (i) $18 million of incremental vehicle depreciation and related costs resulting from a 17% increase in the average size of our truck rental fleet in anticipation of increased demand and (ii) $6 million of restructuring costs incurred during first quarter 2005 in connection with the closure of a reservation center and unprofitable Budget truck rental locations.
Travel Distribution ServicesRevenues and EBITDA increased $313 million (35%) and $31 million (13%), respectively, in the six months ended June 30, 2005 compared with the same period in 2004, reflecting the inclusion of revenues and expenses from recent acquisitions as well as integration costs associated with those acquisitions. Subsequent to the six months ended June 30, 2004, we completed the acquisitions of Orbitz (November 2004), Gullivers (April 2005), ebookers (February 2005) and another online travel business (April 2004). The operating results of these companies have been included in our results from their respective acquisition dates forward and therefore were incremental to our results during the six months ended June 30, 2005. Accordingly, Orbitz, Gullivers, ebookers and the other online travel business contributed incremental revenues of $196 million, $68 million, $41 million and $11 million, respectively, and EBITDA earnings (losses) of $36 million, $13 million, ($17) million and $5 million, respectively. EBITDA for the six months ended June 30, 2005 also includes $19 million of acquisition and integration-related costs, the majority of which are reflected in the EBITDA results of such acquired businesses. In addition, effective January 1, 2005, we transferred our membership travel business to the discontinued Marketing Services segment. As a result, revenue and EBITDA of $31 million and $4 million, respectively, generated by such operations during the six months ended June 30, 2004 were absent from this segment’s results during the same period in 2005. Apart from these acquisitions and the transfer of the membership travel business, revenue increased $28 million (3%) and EBITDA declined $2 million (1%), respectively.
Galileo, our “order taker” subsidiary that provides GDS services to the travel industry, experienced an overall $9 million (1%) increase in worldwide air booking fees in the six months ended June 30, 2005 over the comparable period in 2004. Such increase was comprised of a $13 million (3%) increase in international air booking fees, partially offset by a $4 million (3%) decrease in domestic air booking fees. The increase in international air booking fees was principally driven by a 2% increase in the effective yield and 1% higher booking volumes, which totaled 90.4 million segments for the six months ended June 30, 2005 and primarily resulted from an increase in travel demand within the Middle East and Asia/Pacific regions. The $4 million decrease in domestic air booking fees was driven by an 8% decline in the effective yield on such bookings, partially offset by a 6% increase in booking volumes, which totaled 47.3 million segments for the six months ended June 30, 2005. The domestic volume increase and effective yield decline are consistent with our pricing program with major U.S. carriers, which was designed to gain access to all public fares made available by the participating airlines. International air bookings represented approximately two-thirds of our total air bookings during the six months ended June 30, 2005. Additionally, revenue at our Galileo subsidiary was further impacted by a $12 million reduction in subscriber fees resulting from fewer travel agencies leasing computer equipment from us during the six months ended June 30, 2005 compared with the six months ended June 30, 2004, which was partially offset by $5 million of additional ancillary revenue, including higher fees earned on outsourcing arrangements where we provide technology services for certain airline carriers.
Revenues generated from our online “order maker” related businesses grew $26 million (42%) organically (excluding the impact of the aforementioned acquisitions) during the six months ended June 30, 2005 compared with the same period in 2004 principally driven by a 51% increase in online gross bookings substantially at our CheapTickets.com website. The growth in online gross bookings was attributable to (i) improved site functionality resulting in greater conversion rates, (ii) enhanced content including additional online hotel offerings and (iii) more visitors resulting from increased marketing efforts.
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EBITDA further reflects an increase of approximately $30 million in expenses (excluding the impact of the aforementioned acquisitions and the transfer of the membership travel business) principally resulting from (i) the absence in 2005 of a $21 million expense reduction realized in the six months ended June 30, 2004 in connection with a benefit plan amendment, (ii) $11 million of restructuring charges incurred during the six moths ended June 30, 2005 as a result of actions taken to reduce staff levels in some of our order-taker related businesses and the realignment of our global sales force, (iii) $10 million of additional expenses associated with developing enhanced technology and other project initiatives and (iv) $5 million of higher commission expenses attributable to higher booking volumes in the Middle East and Asia/Pacific regions. Such amounts were partially offset by (i) $9 million of expense savings on network communications and equipment maintenance and installation due, in part, to reduced subscriber volume and (ii) $6 million of cost savings realized at our existing travel services businesses resulting from cost containment initiatives within our offline travel agency operations undertaken in 2004.
Mortgage ServicesRevenues and EBITDA decreased $324 million and $240 million, respectively, in the six months ended June 30, 2005 compared with the same period in 2004. As a result of the spin-off, the six months ended June 30, 2005 consists of only one month of activity while the six months ended June 30, 2004 consists of six months. Our mortgage operations generated revenue and EBITDA of $326 million and $64 million, respectively, for the five-month period ended June 30, 2004. For the month of January, revenue increased $2 million and EBITDA decreased $176 million in 2005 compared with 2004. The EBITDA reduction was primarily due to an expected non-cash impairment charge of $180 million recorded in January 2005 to reflect a portion of the difference between the carrying value and market value of PHH as a result of the spin-off.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We present separately the financial data of our management programs. These programs are distinct from our other activities as the assets are generally funded through the issuance of debt that is collateralized by such assets. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of our management programs. We believe it is appropriate to segregate the financial data of our management programs because, ultimately, the source of repayment of such debt is the realization of such assets.
FINANCIAL CONDITION
Total assets exclusive of assets under management programs decreased approximately $4.6 billion primarily due to (i) the spin-off of PHH, which reduced assets by approximately $5.6 billion, (ii) the sale of Wright Express, which (excluding proceeds received on the sale) reduced assets by $685 million and (iii) a reduction of $581 million in our net deferred tax asset principally due to utilization of our net operating loss carryforwards during 2005. These decreases were partially offset by (i) approximately $1.6 billion and $707 million of assets acquired in connection with our acquisitions of Gullivers and ebookers, respectively, (See Note 4 to our Consolidated Condensed Financial Statements) and (ii) an increase of $156 million in cash and cash equivalents (see “Liquidity and Capital Resources—Cash Flows” for a detailed discussion).
Total liabilities exclusive of liabilities under management programs decreased approximately $3.5 billion primarily due to (i) the spin-off of PHH, which reduced liabilities by approximately $4.4 billion and (ii) the sale of Wright Express, which reduced liabilities by $434 million. These decreases were partially offset by (i) net incremental borrowings of $609 million under our revolving credit facility and commercial paper program which were utilized to fund a portion of the purchase price of Gullivers (see Note 4 to our Consolidated Condensed Financial Statements) and (ii) $380 million and $256 million of liabilities that we assumed in connection with our acquisitions of Gullivers and ebookers, respectively (See Note 4 to our Consolidated Condensed Financial Statements).
Assets under management programs decreased approximately $1.8 billion primarily due to the spin-off of PHH, which had approximately $4.2 billion of assets. This decrease was partially offset by approximately $2.3 billion of net additions to our vehicle rental fleet reflecting current and projected increases in demand.
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Liabilities under management programs decreased approximately $1.5 billion primarily due to the spin-off of PHH, which had approximately $3.4 billion of liabilities. This decrease was partially offset by approximately $2.1 billion of additional borrowings to support the growth in our vehicle rental fleet described above. See “Liquidity and Capital Resources—Financial Obligations—Debt Under Management Programs” for a detailed account of the change in our debt related to management programs.
Stockholders’ equity decreased approximately $1.5 billion primarily due to (i) the $1.65 billion dividend of PHH’s equity to our shareholders, (ii) our repurchase of $522 million (approximately 24 million shares) of Cendant common stock and (iii) $192 million of cash dividend payments. Such decreases were partially offset by (i) the $488 million valuation charge associated with the PHH spin-off (which is included in both the $1.65 billion PHH dividend and in the 2005 net income), (ii) net income of $306 million for the six months ended June 30, 2005 and (iii) $242 million related to the exercise of employee stock options (including a $56 million tax benefit). See Note 16 to our Consolidated Condensed Financial Statements for a description of the effect of the PHH spin-off.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand and our ability to generate cash through operations and financing activities, as well as available funding arrangements and committed credit facilities, each of which is discussed below.
CASH FLOWS
During the six months ended June 30, 2005, we generated $672 million more cash from operating activities in comparison with the same period in 2004. This change principally reflects the spin-off of our former mortgage business, which generated $88 million of cash from program activities in 2005 and used $678 million in 2004.
We used approximately $1.1 billion more cash in investing activities during the six months ended June 30, 2005 compared with the six months ended June 30, 2004. Such change primarily reflects the use of approximately $1.3 billion more cash to fund acquisitions in 2005 (principally Gullivers and ebookers), partially offset by $139 million of additional proceeds received in 2005 in connection with dispositions. Capital expenditures, which increased by $13 million during the six months ended June 30, 2005 as compared with the six months ended June 30, 2004, are anticipated to be in the range of $450 million to $500 million for 2005.
We generated approximately $1.0 billion more cash from financing activities during the six months ended June 30, 2005 in comparison with the same period in 2004. Such change principally reflects (i) a reduction of approximately $1.0 billion in cash used to settle corporate indebtedness (including the payment of $778 million to repurchase $763 million of our 6.75% notes in 2004 that formed a portion of the Upper DECS and $345 million to retire our former 11% senior subordinated notes in 2004), (ii) net incremental short-term borrowings of $609 million under our $3.5 billion revolving credit facility and $1.0 billion commercial paper program, which were utilized to fund a portion of the purchase price of Gullivers in April 2005 and (iii) a decrease of $297 million in cash used for repurchases of Cendant common stock (net of proceeds received on the issuance of Cendant common stock), which primarily reflects our efforts in first quarter 2004 to mitigate the impact of the conversion of our former zero coupon senior convertible contingent notes. Such inflows were partially offset by activities of our management programs, which provided $615 million less cash in the six months ended June 30, 2005 due to the spin-off of our former mortgage business and greater borrowing activity in our timeshare business during the six months ended June 30, 2004. See “Liquidity and Capital Resources— Financial Obligations” for a detailed discussion of financing activities during 2005.
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DEBT AND FINANCING ARRANGEMENTS
Corporate indebtedness consisted of:
The following table summarizes the components of our debt under management programs (including related party debt due to Cendant Rental Car Funding (AESOP) LLC (formerly, AESOP Funding II L.L.C.):
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The following table provides the contractual maturities for debt under management programs (including related party debt due to Cendant Rental Car Funding (AESOP) LLC) at June 30, 2005 (except for notes issued under our timeshare program where the underlying indentures require payments based on cash inflows relating to the corresponding assets under management programs and for which estimates of repayments have been used):
At June 30, 2005, we had approximately $2.7 billion of available funding under our various financing arrangements (comprised of approximately $1.0 billion of availability at the corporate level and approximately $1.7 billion available for use in our management programs). As of June 30, 2005, the committed credit facility and commercial paper programs at the corporate level included:
As of June 30, 2005, available funding under our asset-backed debt programs related to our management programs consisted of:
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At June 30, 2005, we also had $400 million of availability for public debt or equity issuances under a shelf registration statement.
We believe that access to our existing financing arrangements is sufficient to meet liquidity requirements for the forseeable future.
LIQUIDITY RISKOur liquidity position may be negatively affected by unfavorable conditions in any one of the industries in which we operate. Additionally, our liquidity as it relates to management programs could be adversely affected by (i) the deterioration in the performance of the underlying assets of such programs and (ii) the impairment of our ability to access the principal financing program for our vehicle rental subsidiaries if General Motors Corporation or Ford Motor Company should not be able to honor its obligations to repurchase the related vehicles. Access to our credit facilities may be limited if we were to fail to meet certain financial ratios. Additionally, we monitor the maintenance of required financial ratios and, as of June 30, 2005, we were in compliance with all financial covenants under our credit and securitization facilities.
Currently our credit ratings are as follows:
Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have assigned a “stable outlook” to our senior unsecured credit ratings. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.
CONTRACTUAL OBLIGATIONSOur future contractual obligations have not changed significantly from the amounts reported within our Current Report on Form 8-K filed on May 5, 2005 with the exception of our commitment to purchase vehicles, which decreased from the amount previously disclosed by approximately $3.8 billion to approximately $1.8 billion at June 30, 2005 as a result of purchases during the six months ended June 30, 2005. Any changes to our obligations related to corporate indebtedness and debt under management programs are presented above within the section entitled “Liquidity and Capital Resources—Financial Obligations” and also within Notes 10 and 11 to our Consolidated Condensed Financial Statements.
ACCOUNTING POLICIESThe majority of our businesses operate in environments where we are paid a fee for a service performed. Therefore, the results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex. However, in presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions that we are required to make pertain to matters that are inherently uncertain as they relate to future events. Presented within the section entitled “Critical Accounting Policies” of our 2004 Annual Report on Form 10-K are the accounting policies that we believe require subjective and/or complex judgments that could potentially affect 2005 reported results (financial instruments, income taxes and goodwill). As previously discussed, our former mortgage business was spun-off with PHH in January 2005. Accordingly, our results of operations for periods subsequent to January 31, 2005 will not be subject to the uncertainty inherent in valuing the former mortgage servicing rights asset. There have been no other significant changes to those accounting policies or our assessment of which accounting policies we would consider to be critical accounting policies.
We plan to adopt the following recently issued standards as required:
For detailed information regarding any of these pronouncements and the impact thereof on our business, see Note 1 to our Consolidated Condensed Financial Statements.
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We assess our market risk based on changes in interest and foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact in earnings, fair values, and cash flows based on a hypothetical 10% change (increase and decrease) in interest and foreign currency rates. We used June 30, 2005 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
(c) Below is a summary of our Cendant common stock repurchases by month for the quarter ended June 30, 2005:
Our Board of Directors has considered the advisory severance proposal submitted by the Trowel Trades S&P Index Fund, which received majority approval at our 2005 Annual Meeting of Stockholders. Our Board determined that our existing severance agreement policy was in the best interest of all stockholders and our company. Our existing policy limits future severance arrangements to 2.99 times the sum of an executive’s base salary plus target bonus unless extraordinary circumstances exist and the arrangement is approved by our independent directors. Extraordinary circumstances exist only if we determine that it is necessary to exceed the threshold to obtain the services of an executive officer to be hired from outside of Cendant and when the benefits to our company of obtaining such individual’s services outweigh the potential harm to stockholders of exceeding the threshold. Our board determined that if it changed our policy to the proposed policy, which required stockholder approval for all future severance arrangements (including for those of people hired from outside of Cendant) exceeding 2.99 times the sum of the executive’s base salary, we could be put at a competitive disadvantage because, among other things, the proposal would create significant uncertainty and delay in finalizing severance arrangements until after the arrangement is approved by our stockholders, which could hinder our flexibility to attract, motivate and retain the best outside executive talent in today’s competitive environment and in the future.
See Exhibit Index.
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SIGNATURES
Pursuant to the requirements 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.
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Exhibit Index
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