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Cendant Corporation 10-Q Summary: Period Ended June 30, 1999

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, for Cendant Corporation. The Company operates as a diversified consumer and business services provider with segments including Travel, Real Estate Franchise, Relocation, Mortgage, Individual Membership, Insurance/Wholesale, and Other Services. A defining event for this period was the strategic shift from acquisitions to divestitures of non-strategic assets, culminating in the sale of the Fleet segment on June 30, 1999.

Key Financial Metrics

Note: Net Income for the six months ended June 30, 1999, includes a significant one-time gain of $749.5 million from the disposition of businesses.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 8% ($105.0 million) for the quarter and 12% ($290.0 million) for the six months compared to the prior year periods, driven by growth in mortgage services and franchise royalty fees.
• Profitability Surge: Net income for the six months ended June 30, 1999, was $1,224.3 million, a substantial increase from $325.9 million in the prior year. This was primarily due to a $749.5 million net gain on the disposition of businesses (specifically the Fleet segment and other assets).
• Expense Trends: Interest expense, net, increased 136% for the quarter and 145% for the six months due to higher borrowing costs and increased average debt balances. Investigation-related costs decreased significantly to $6.5 million (quarter) and $8.2 million (six months) from $32.2 million in the prior year.
• Divestitures: The Company completed the sale of its Fleet segment for aggregate consideration of approximately $3.05 billion (cash and note receivable), realizing a net gain of $881.4 million. Other divestitures included Cendant Software, Match.com, and National Leisure Group.

Guidance, Outlook, and Risks

• Strategic Focus: Management has shifted focus to maximizing existing businesses and divesting non-strategic assets. Proceeds from divestitures are being used to repurchase common stock and retire indebtedness.
• Share Repurchases: The Company repurchased $1.6 billion of common stock during the first six months of 1999. In July 1999, an additional $200 million was authorized, and a Dutch Auction tender offer was executed to purchase 50 million shares.
• Litigation and Contingencies:
  • Accounting Irregularities: Ongoing investigations by the SEC and U.S. Attorney regarding former CUC International Inc. business units. A class action lawsuit regarding PRIDES securities was settled, requiring the issuance of new "Rights" to holders.
  • Other Litigation: Over 70 class action lawsuits remain pending. Management believes outcomes are uncertain but does not expect further financial statement adjustments from government investigations.
• Year 2000 Compliance: The Company is actively managing Y2K risks with an estimated total cost of $55 million. Approximately $44 million had been incurred by June 30, 1999. Risks include potential disruptions from third-party service providers.
• Forward-Looking Statements: The filing includes standard disclaimers regarding risks such as the resolution of litigation, integration of acquired businesses, and the ability to obtain financing.

Investor Verification Checklist

• Gain on Disposition: Verify the tax treatment of the $881.4 million Fleet segment gain, which was structured as a tax-free reorganization; confirm if any tax liability could be material if the transaction is deemed taxable.
• Deferred Gain: Note that $166.6 million of the Fleet segment gain was deferred at June 30, 1999, due to the Company's retained equity interest in the buyer (Avis Rent A Car, Inc.).
• PRIDES Settlement: Review the terms of the PRIDES securities settlement, specifically the issuance of new Rights and the potential dilution of approximately 18 million additional shares of common stock in February 2001.
• Debt Covenants: Monitor compliance with debt covenants, particularly the 3:1 interest coverage ratio and 0.5:1 debt-to-capitalization ratio, especially given the high volume of share repurchases.
• Y2K Contingency: Assess the status of third-party vendor compliance, as the Company relies heavily on external service providers for critical operations.