False Profits for 3 Years at Cendant
By DIANA B. HENRIQUES -- August 14, 1998
Cendant Corp., struggling to regain investor
confidence amid an accounting scandal that has
slashed its share
price in half, had a good news, bad news story to tell
investors Thursday.
The good news was that profits for the first half of
1998 were robust. The bad news? More than $640 million
of the profits reported for the last three years were
fictional.
The company also said that a board-level investigation
of the accounting problems had been completed and will
be provided to its directors in two weeks.
That investigation, said Michael Monaco, Cendant's
chief financial officer, "uncovered much greater and
more systematic fraud than we had any conception of
when we launched this effort."
The second-quarter profits from continuing businesses
were more than 40 percent higher than last year's
figure, said Henry Silverman, chairman and chief
executive of Cendant, which was formed in December
through the merger of CUC International, a
membership-club marketing service, and HFS Inc., a
franchisor of such prominent brands as Century 21 real
estate services, and Avis car rentals.
But approximately $640 million in pre-tax operating
profits will be erased from Cendant's pro-forma ledgers
for the years 1995, 1996 and 1997 when amended
financial statements are filed with the Securities and
Exchange Commission later this month, the company
reported.
The reduction in 1997 pretax operating profits by $392
million was at the high end of the range that Wall
Street had been warned to expect, but the total impact
of the accounting fraud had not previously been
reported.
In a conference call with Wall Street analysts
Thursday, Silverman apologized to "all the people who
invested with us, and with me, over the last few years"
for the losses they have suffered as a result of the
scandal.
But the erasures announced Thursday actually were made
on the books of the businesses operated before the
merger by CUC International, which provides online and
telephone shopping services marketed directly to
consumers and indirectly, as "add-on" features for bank
credit card customers.
On July 28, in response to rising pressure from
institutional investors, the former chairman and chief
executive of CUC, Walter Forbes, and eight former CUC
directors resigned from the Cendant board. Forbes has
denied any knowledge of the accounting irregularities
at the company he ran since the early 1980s, and said
he was stepping down to allow Cendant to focus on
recovering investors' confidence.
Four other senior executives who had worked at CUC have
also left Cendant in the wake of the scandal. They,
too, have denied knowing about or participating in any
wrongdoing at the company.
"We take no joy in reporting these results," said
Monaco, the chief financial officer, as he announced
the cumulative damage uncovered by outside auditors.
But he said shareholders should "take great comfort
from the thoroughness of this investigation and the
fact that we have unflinchingly accepted and reported
its results."
After the accounting irregularities were reported to
management by former CUC finance-office employees in
April, the audit committee of Cendant's board hired the
law firm of Willkie, Farr & Gallagher and forensic
accounting specialists at Arthur Andersen to
investigate -- an effort which has taken four months
and cost between $12 million and $15 million.
Their findings will be presented to the board when it
meets on Aug. 27. The investigative report is expected
to show that deceptive accounting occurred at least as
early as 1993, according to people who have been
briefed on preliminary findings.
Separate inquiries were also begun by the SEC and the
United States attorney's office in Newark, and dozens
of shareholder lawsuits have been filed against
Cendant.
Silverman said his 1998 budget includes $75 million to
cover the various costs associated with the
investigation and litigation.
But the company's core businesses have been holding up
extremely well despite the distractions the scandal has
posed for management, Silverman said. Earnings in the
three-month period that ended June 30, were $210.9
million, or 24 cents a fully diluted share, compared
with a $92.3 million loss, equal to 11 cents a share,
in the period last year.
Thursday's news was a nice change from the script of
bad news, worse news that Cendant has been stuck with
since April 16, when the first announcement of
"accounting irregularities" at the company caused its
stock to plunge 46 percent, to $19.0625 a share.
Cendant shares fell further in mid-July, when Cendant
announced that the fraud was more extensive and of
longer duration than it had originally believed.
They traded as recently as Tuesday at $14.125 -- down
from more than $41 in early April.
"Today is the first day of the new Cendant," Silverman
told analysts during his hourlong, generally relaxed
conference call. He told them he was confident that
Cendant could produce profits of $1 a share this year
and generate 20 percent earnings growth over the next
five years, even as he refrained from the breakneck
acquisitions that marked both CUC's and HFS's prior
history.
"These results show that the growth engine is still
intact," Silverman said in an interview after the call.
That positive news helped extend a minor rally that has
already lifted Cendant's shares almost 17 percent since
Tuesday evening. The stock closed last night at $16.50,
up 37.5 cents.
Some of the gain over the last two days came on the
news that Cendant is seeking a buyer for its software
unit and is selling its Hebdo Mag International unit, a
classified advertising publisher, for about $523
million in cash and stock.
Copyright 1998 The New York Times Company |
