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Cendant Corporation 10-Q Summary: Period Ended June 30, 2001

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2001, for Cendant Corporation. The reporting period is significantly impacted by two major acquisitions: Avis Group Holdings, Inc. (acquired March 1, 2001) and Fairfield Resorts, Inc. (acquired April 2, 2001). Additionally, the Company sold its real estate Internet portal, move.com, to Homestore.com in February 2001. The filing includes unaudited consolidated financial statements and management discussion regarding these transformative events.

Key Financial Metrics

Note: Debt figures exclude "Liabilities under management and mortgage programs" which total $11.0 billion, primarily related to vehicle and mortgage financing.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 111% ($1.3 billion) for the three months and 72% ($1.6 billion) for the six months compared to the prior year periods, driven almost entirely by the inclusion of Avis and Fairfield operations.
• Profitability: Income before extraordinary loss and cumulative effect of accounting change increased 38% ($67 million) for the quarter and 72% ($218 million) for the six months.
• Segment Performance:
  • Vehicle Services: Revenues surged from $135 million to $1,112 million (quarterly) due to the Avis acquisition.
  • Hospitality: Revenues grew 84% to $473 million, largely due to Fairfield Resorts.
  • Real Estate Services: Revenues increased 26% to $474 million, driven by record mortgage loan production and franchise royalties.
• Balance Sheet: Total assets increased from $15.1 billion (Dec 31, 2000) to $29.3 billion (June 30, 2001). Goodwill increased significantly to $5.5 billion due to acquisitions.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Management expects capital expenditures for 2001 to range between $300 million and $350 million, an increase from 2000 due to acquisitions.
• The Company announced definitive agreements to acquire Galileo International, Inc. (approx. $3.1 billion) and Cheap Tickets, Inc. (approx. $425 million), with closings expected in late 2001.
• Adoption of SFAS No. 142 (Goodwill) is expected to reduce amortization expense by approximately $164 million in 2002.

• Litigation: Ongoing litigation regarding previously discovered accounting irregularities in former CUC International business units. While management does not believe the impact will be material to consolidated financial position, an adverse outcome could be material to earnings in a given period.
• Tax: The IRS has challenged the tax-free status of certain 1999 business dispositions, potentially creating a liability between $10 million and $170 million.
• Integration: Risks associated with integrating Avis, Fairfield, and planned acquisitions, including system compatibility and cost synergies.
• Market Risks: Exposure to interest rate fluctuations, foreign currency exchange rates, and used vehicle values.

• Recorded a $435 million net gain on the disposition of move.com (recognized partially in the period).
• Incurred $185 million in restructuring and unusual charges in the first quarter, including $95 million for a technology trust and $85 million for Travel Portal creation.
• Recorded $33 million in litigation settlement costs related to accounting irregularities.

Investor Verification Checklist

• Acquisition Integration: Verify the actual cost savings and revenue synergies realized from the Avis and Fairfield acquisitions versus management projections.
• Debt Structure: Review the terms of the $10 billion in debt under management programs and the $4.9 billion in corporate debt, specifically the maturity profiles and interest rate risks.
• Litigation Exposure: Monitor developments in the CUC accounting irregularity litigation and the IRS tax dispute regarding the 1999 dispositions.
• Goodwill Impairment: Assess the impact of the upcoming SFAS No. 142 adoption on future earnings, specifically the transition from amortization to impairment testing.
• Planned Acquisitions: Confirm the regulatory approval status and financing terms for the Galileo and Cheap Tickets acquisitions.