From the WSJ:
Cendant Says Accounting Probe
Will Take Longer Than Expected
By EMILY NELSON
Staff Reporter of THE WALL STREET JOURNAL
Cendant Corp. said an investigation of accounting problems at its
membership business will take longer than expected and force a
postponement of its May 19 annual meeting.
The marketing and franchising concern said the accounting inquiry will be
completed by midsummer rather than later this month, as had been
expected. As a result, Cendant said, it will reschedule the annual meeting
for this fall to give it time to obtain reliable audited financial statements.
Cendant said it also needs to restate earnings
and close its pending $3.1 billion acquisition
of American Bankers Insurance Group Inc.,
which is contingent upon audited financial
reports.
Henry R. Silverman, Cendant's chief executive
officer, said, "The expectation of management
was wrong," in figuring how long the
investigation will take. "We just underestimated the time it would take to
do a forensic audit," he said.
The company, based in Parsippany, N.J., and Stamford, Conn., provided
the new timetable while reporting first-quarter results that offer, for the first
time, a more accurate glimpse of its membership business.
Cendant's membership business showed cash flow, or earnings before
interest, taxes, depreciation and amortization, of 19% of sales for the first
quarter. In a previously published financial filing, that division showed cash
flow of 29% in the fourth quarter last year and cash flow in the mid-20s
range in other quarters. Those previous reports, however, will likely be
restated due to irregular accounting.
Last month, Cendant disclosed accounting problems at its membership
business and said it will lower 1997 reported results by about 11% to
13% and restate other periods. The audit committee of its board is
investigating the matter and hired Arthur Andersen LLP to conduct an
independent audit.
The membership business represents about 18% of Cendant's operations.
Tuesday, Mr. Silverman said he expects the audit committee to report and
restate past earnings in July, "give or take 30 days." He added that the
inquiry's scope remains unchanged and is limited to Cendant's membership
business, the core of the former CUC International Inc., which merged
with HFS Inc. to form Cendant last December.
Cendant shares closed Tuesday at $24.5625, down 93.75 cents, in heavy
New York Stock Exchange composite trading, and several large investors
said they were unsettled that sorting out Cendant's accounting will take
longer.
For the first quarter, Cendant said it had net income of $229.5 million, or
26 cents a diluted share, on $1.44 billion in revenue, slightly beating
expected net of 25 cents a diluted share, according to First Call.
First-quarter results may be subject to slight revisions, which the company
called immaterial, of about a penny a share, due to the continuing
investigation.
Cendant's other operations reported surprisingly high jumps in profitability,
which Mr. Silverman said reflect his efforts to lower operating costs, cut
the number of employees, and put in better computer systems. As a result,
he says, incremental increases in revenue fall straight to the bottom line.
Also, as a franchiser of hotels, real-estate offices and rental cars, Cendant
collects a cut of revenue from its franchisees. So if a Ramada hotel owner,
for example, gets more reservations, Cendant receives more money
without providing more services to the hotel.
While Mr. Silverman declined to quantify the layoffs, he said that Cendant
cut 500 of the 5,000 people at PHH, its relocation and fleet management
operations, but added 1,000 people in its mortgage business. |
