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Cendant Corporation 10-Q Summary: Period Ended June 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, for Cendant Corporation, a global provider of travel and real estate services. The filing reflects significant portfolio changes, including the acquisition of NRT Incorporated and Arvida Realty Services (Real Estate Services), Trendwest Resorts (Hospitality), and the divestiture of National Car Parks (NCP), which is reported as a discontinued operation. The financial statements are unaudited but have been reviewed by Deloitte & Touche LLP.

Key Financial Metrics

Note: Net Income for the six months ended June 30, 2002, includes a $256 million after-tax loss on the disposal of discontinued operations (NCP) and $27 million in extraordinary losses related to debt redemptions.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 72% ($2.67 billion) year-over-year, driven primarily by acquisitions (NRT, Trendwest, Galileo, Avis) contributing approximately $2.3 billion.
• Discontinued Operations: The sale of NCP resulted in a $256 million after-tax loss, significantly impacting Net Income despite strong operating performance in continuing segments.
• Acquisition Costs: The company recorded $207 million in acquisition and integration costs, primarily related to the amortization of "pendings and listings" intangible assets from the NRT and Arvida acquisitions.
• Litigation Settlement: The company fully funded its principal securities class action settlement liability ($2.85 billion total) during the period, utilizing cash reserves and extinguishing the related liability on the balance sheet.
• Debt Reduction: Corporate indebtedness decreased by $666 million due to the redemption of convertible notes and subordinated debt, partially offset by new borrowings in management and mortgage programs.

Guidance, Outlook, and Risks

Management Commentary: Management highlights strong contributions from all segments, particularly Real Estate Services and Travel Distribution. The company expects to continue reducing outstanding indebtedness and repurchasing common stock. Capital expenditures for 2002 are anticipated to be approximately $375 million.

Risks and Contingencies:

• Legal Proceedings: While the principal securities class action is resolved, the company remains involved in other litigation regarding accounting irregularities in former CUC business units. An adverse outcome could be material to earnings.
• Tax Uncertainty: The IRS has challenged the tax-free status of the 1999 fleet disposition, potentially creating a liability between $10 million and $170 million.
• Market Risks: Liquidity is sensitive to interest rate changes, foreign currency fluctuations, and the performance of underlying assets in mortgage and vehicle management programs. The company notes that credit ratings downgrades could limit access to securitization facilities.
• Integration Risks: The company faces challenges in integrating recently acquired businesses (NRT, Trendwest, Galileo) and achieving projected synergies.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the specific impact of the $256 million NCP loss on Net Income versus the underlying Adjusted EBITDA performance of continuing operations.
• Intangible Asset Amortization: Review the $185 million non-cash charge related to NRT/Arvida "pendings and listings" amortization and its effect on future earnings comparability.
• Liquidity Position: Confirm the reduction in cash from $1.9 billion to $486 million was primarily due to the litigation settlement and debt paydown, rather than operational cash flow deterioration.
• Debt Covenants: Ensure compliance with debt covenants, particularly regarding the management and mortgage programs, given the high leverage in those segments.
• Acquisition Synergies: Assess the timeline and costs associated with integrating NRT and Trendwest to determine if projected revenue and cost synergies are being realized.