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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
COMMISSION FILE NO. 1-10308


CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)
  06-0918165
(I.R.S. Employer
Identification Number)
9 WEST 57TH STREET
NEW YORK, NY
  10019
(Address of principal executive office)   (Zip Code)
212-413-1800
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS

 

NAME OF EACH EXCHANGE
ON WHICH REGISTERED

CD Common Stock, Par Value $.01   New York Stock Exchange
Upper DECS (sm)   New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /x/    No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2): Yes /x/    No / /

The aggregate market value of the Common Stock issued and outstanding and held by nonaffiliates of the Registrant, based upon the closing price for the Common Stock on the New York Stock Exchange on June 28, 2002 was $16,371,796,533. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant.

The number of shares outstanding of the Registrant's common stock was 1,030,114,542 as of January 31, 2003.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be mailed to stockholders in connection with our annual stockholders meeting held on May 20, 2003 (the "Annual Proxy Statement") are incorporated by reference into Part III hereof.


DOCUMENT CONSTITUTING PART OF SECTION 10(A) PROSPECTUS
FOR FORM S-8 REGISTRATION STATEMENTS

This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.





TABLE OF CONTENTS

Item

  Description
  Page

 

 

PART I

 

 
1   Business   5
2   Properties   35
3   Legal Proceedings   37
4   Submission of Matters to a Vote of Security Holders   39

 

 

PART II

 

 
5   Market for the Registrant's Common Equity and Related Stockholder Matters   40
6   Selected Financial Data   41
7   Management's Discussion and Analysis of Financial Condition and Results of Operations   42
7a   Quantitative and Qualitative Disclosures about Market Risk   78
8   Financial Statements and Supplementary Data   79
9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   79

 

 

PART III

 

 
10   Directors and Executive Officers of the Registrant   79
11   Executive Compensation   79
12   Security Ownership of Certain Beneficial Owners and Management   79
13   Certain Relationships and Related Transactions   79
14   Controls and Procedures   79

 

 

PART IV

 

 
15   Exhibits, Financial Statement Schedules and Reports on Form 8-K   80

 

 

Signatures

 

 
    Certifications    

2



FORWARD-LOOKING STATEMENTS

Forward-looking statements in our public filings or other public statements are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "projects", "estimates", "plans", "may increase", "may fluctuate" and similar expressions or future or conditional verbs such as "will", "should", "would", "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

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Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control.

You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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PART I

ITEM 1. BUSINESS

Except as expressly indicated or unless the context otherwise requires, the "Company", "Cendant", "we", "our" or "us" means Cendant Corporation, a Delaware corporation, and its subsidiaries.

We are one of the foremost providers of travel and real estate services in the world. Our businesses provide a wide range of consumer and business services and are intended to complement one another and create cross-marketing opportunities both within and among our following five business segments:

* * *

We continually review and evaluate our portfolio of existing businesses to determine if they continue to meet our business objectives. As part of our ongoing evaluation of such businesses, we intend from time to time to explore and conduct discussions with regard to joint ventures, divestitures and related corporate transactions. However, we can give no assurance with respect to the magnitude, timing, likelihood or financial or business effect of any possible transaction. We also cannot predict whether any divestitures or other transactions will be consummated or, if consummated, will result in a financial or other benefit to us.

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We intend to use a portion of the proceeds from any such dispositions and cash from operations to retire indebtedness, make acquisitions and for other general corporate purposes.

This 10-K Report includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in global economic, business, competitive, market and regulatory factors. Please refer to "Management's Discussion and Analysis of Results of Operations" for additional factors and assumptions that could cause actual results to differ from the forward-looking statements contained in this 10-K Report.

We were created through the merger of HFS Incorporated into CUC International, Inc. in December 1997 with the resultant corporation being renamed Cendant Corporation. Our principal executive office is located at 9 West 57th Street, New York, New York 10019 (telephone number: (212) 413-1800). We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, we file reports, proxy and information statements and other information with the Commission and certain of our officers and directors file statements of change in beneficial ownership on Form 4 with the Commission. Such reports, proxy statements and other information and such Form 4s can be accessed on our Web site at www.cendant.com. A copy of our Code of Ethics, as defined under Item 406 of Regulation S-K, Corporate Governance Guidelines, Director Independence Criteria and Board Committee Charters can also be accessed on our Web site. We will provide, at no cost, a copy of our Code of Ethics upon request by phone or in writing at the above phone number or address, attention: Investor Relations.

SEGMENTS

REAL ESTATE SERVICES SEGMENT (33%, 22% and 34% of revenue for 2002, 2001 and 2000, respectively)

Real Estate Franchise Business (5%, 7% and 14% of revenue for 2002, 2001 and 2000, respectively)

Our Real Estate Franchise Group is the world's largest real estate brokerage franchisor and was involved in one in four single-family homes bought or sold in the United States in 2002. We franchise real estate brokerage businesses under the following franchise systems:

Royalty and marketing fees on commissions from real estate transactions comprise the primary component of revenue for our real estate franchise business. We also offer service providers an opportunity to market their products to our brokers through our Preferred Alliancesm program. To participate in this program, service providers generally pay us an up-front fee, commissions or both.

Through NRT, we own and operate approximately 950 of the Coldwell Banker, ERA and Coldwell Banker Commercial offices referred to above. NRT pays royalty and marketing fees to our Real Estate Franchise Group in connection with its operation of these offices.

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Each of our brands has a consumer Web site that offers real estate listings, contacts and services. century21.com, coldwellbanker.com, coldwellbankercommercial.com and era.com are the official Web sites for the CENTURY 21, Coldwell Banker, Coldwell Banker Commercial and ERA real estate franchise systems, respectively. In addition, all of the aggregated listings of our CENTURY 21, Coldwell Banker and ERA national real estate franchises are available through the Realtor.com Web site.

Growth.    We market real estate brokerage franchises primarily to independent, unaffiliated owners of real estate brokerage companies as well as individuals who are interested in establishing real estate brokerage businesses. We believe that our existing franchisee base represents another source of potential growth, as franchisees seek to expand their existing business geographically. Therefore, our sales strategy focuses on maintaining the satisfaction of our franchisees by providing services such as training, ongoing support, volume discounts and increasing brand awareness by providing each brand with a dedicated marketing staff. Our real estate brokerage franchise systems employ a national franchise sales force, compensated primarily by commissions on sales, consisting of approximately 100 sales personnel.

Competition.    Competition among the national real estate brokerage brand franchisors to grow their franchise systems is intense. Our largest national competitors in this industry include the Prudential, GMAC Real Estate and RE/MAX real estate brokerage brands. In addition, a real estate broker may choose to affiliate with a regional chain or choose not to affiliate with a franchisor but to remain independent. We believe that competition for the sale of franchises in the real estate brokerage industry is based principally upon the perceived value and quality of the brand and services offered to franchisees.

The ability of our real estate brokerage franchisees to compete in the industry is important to our prospects for growth. The ability of an individual franchisee to compete may be affected by the location and real estate agent service quality of its office, the number of competing offices in the vicinity, its affiliation with a recognized brand name, community reputation and other factors. A franchisee's success may also be affected by general, regional and local economic conditions. The potential negative effect of these conditions on our results of operations is generally reduced by virtue of the diverse geographical locations of our franchisees. At December 31, 2002, the combined real estate franchise systems had approximately 8,200 franchised brokerage offices in the United States and approximately 12,600 offices worldwide. The real estate franchise systems have offices in 57 countries and territories in North and South America, Europe, Asia, Africa and Australia.

Real Estate Brokerage Business    (20% of revenue for 2002)

On April 17, 2002, we acquired the common stock of NRT Incorporated. NRT was originally organized as a joint venture between us and Apollo Management, L.P. Apollo owned 100% of the common stock of NRT and we owned all of NRT's preferred stock, a portion of which was convertible into an equal equity ownership with Apollo. The purchase price was approximately $230 million which we satisfied by delivering 11.5 million shares of CD common stock. We also repaid approximately $320 million of NRT's debt. Prior to our acquisition of the NRT common stock, NRT was the largest real estate franchisee in our brokerage system based on gross commission income and represented approximately 43% of the Real Estate Franchise Group revenue for 2002. NRT will continue to pay royalty and marketing fees to our Real Estate Franchise Group and such fees are not reflected in the percentage of revenue set forth above. Subsequent to our acquisition of NRT, NRT acquired 20 other real estate brokerage operations for approximately $399 million, including Clearwater, Florida-based Arvida Realty Services for approximately $160 million in cash and The DeWolfe Companies, Inc., based in New England, for approximately $146 million in cash. NRT converts acquired real estate brokerages to either Coldwell Banker or ERA brand names and integrates their operations as soon as practical after acquisition.

As a result of our acquisition of NRT, we now operate the largest real estate brokerage firm in the United States based on sales volume. We operate approximately 950 full service real estate brokerage offices nationwide under the COLDWELL BANKER and ERA brand names offering assistance with the sale and purchase of properties. As a full service real estate brokerage offering one-stop shopping to consumers, we promote the services of Cendant Mortgage, Cendant Mobility and Cendant Settlement Services Group.

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Sales commissions, which we generally receive at the closing of real estate transactions, usually range from approximately 5% to 7% of the sales price. In transactions in which we act as broker on one side of a transaction (either the buying side or the selling side) and a third-party is acting as broker on the other side of the transaction, we typically must share with the other broker 50% of the sales commission. Sales associates generally receive between 60% and 80% of such commissions.

Growth.    In addition to organic growth, our strategy is to grow through the acquisition of independent real estate brokerages and then convert them to one of our real estate franchise brands. We believe that approximately 80% of real estate brokerages are currently independent.

Competition.    The residential real estate brokerage industry is highly competitive, particularly in the densely populated metropolitan areas in which NRT operates. In addition, the industry has relatively low barriers to entry for new participants, including participants pursuing non-traditional methods of marketing real estate, such as internet-based listing services. Companies compete for sales and marketing business primarily on the basis of services offered, reputation, personal contacts, and to a lesser extent, brokerage commissions. NRT competes primarily with franchisees of local and regional real estate franchisors; franchisees of our brands and of other national real estate franchisors, such as the RE/MAX, GMAC Real Estate and Prudential real estate brokerage brands; regional independent real estate organizations, such as Weichert, Realtors and Long & Foster Real Estate; and smaller niche companies competing in local areas.

Mortgage Business (3%, 9% and 10% of revenue for 2002, 2001 and 2000, respectively)

Cendant Mortgagesm is a centralized mortgage lender conducting business in all 50 states. We focus on retail mortgage originations in which we issue mortgages directly to consumers as opposed to purchasing closed loans from third parties. Our originations are derived from three principal business channels: real estate brokers, financial institutions or "private label" and relocation. In the real estate brokerage channel, we originate, sell and service residential first and second mortgage loans in the United States through Cendant Mortgage Corporation, Century 21 Mortgage®, Coldwell Banker Mortgage and ERA Mortgage. Through this channel, we originated approximately 31% of our mortgages in 2002. Our financial institutions or "private label" channel, which includes outsourcing arrangements with Merrill Lynch Credit Corporation and American Express Centurion Bank, among others, generated approximately 65% of our mortgages in 2002. We believe that we are the largest provider of private label mortgage originations. The relocation channel offers mortgages to employees being relocated through Cendant Mobility and generated 4% of our originations in 2002. We receive fees in connection with our loan originations, mortgage sales and mortgage servicing.

For 2002, Cendant Mortgage was the fourth largest purchase lender of retail originated residential mortgages, the sixth largest retail lender of residential mortgages in the United States and the ninth largest overall mortgage originator.

We market our mortgage products through:

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Cendant Mortgage customarily sells all mortgages it originates to investors (which include a variety of institutional investors) generally within an average of 30-60 days, either as individual loans, mortgage-backed securities or participation certificates issued or guaranteed by Fannie Mae Corp., the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. Approximately 85% of the mortgages that we typically have available for resale conform to the standards of Fannie Mae Corp., the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Cendant Mortgage earns revenue from the sale of the mortgage loans to investors, as well as on the servicing of the loans for investors. Mortgage servicing consists of collecting loan payments, remitting principal and interest payments to investors, holding escrow funds for payment of mortgage related expenses such as taxes and insurance, and administering our mortgage loan servicing portfolio.

Growth.    Our strategy is to increase sales by expanding all of our sources of business with emphasis on our private label program and purchase mortgage volume through our teleservices and Internet programs. Purchase mortgage volume has grown from approximately $1 billion in 1990 to approximately $28.5 billion in 2002. The Phone In, Move In program was developed in 1997 and has been established nationwide. We also expect to expand our volume of mortgage originations resulting from corporate employee relocations through increased linkage with Cendant Mobility and increasing our marketing programs within NRT and our real estate brokerage franchise systems. Each of these growth opportunities is driven by our low cost teleservices platform. The competitive advantage of using a centralized, efficient and high quality teleservices platform allows us to more cost effectively capture a greater percentage of the highly fragmented mortgage marketplace.

Competition.    Competition is based on service, quality, products and price. Cendant Mortgage has increased its share of retail mortgage originations in the United States to 5% in 2002 from 4.4% in 2001. The mortgage industry is highly fragmented and, according to Inside Mortgage Finance, the industry leader for 2002 reported a 16% share in the United States. Competitive conditions can also be impacted by shifts in consumer preference for variable rate mortgages from fixed rate mortgages, depending upon the current interest rate market.

Settlement Services Business    (2% and 1% of revenue for 2002 and 2001, respectively)

Our Cendant Settlement Services Group provides settlement services for residential real estate transactions, including title and appraisal review and closing services throughout the United States. More specifically:

We derive revenue for this business through fees charged in real estate transactions for rendering the services described above.

Growth.    Our Settlement Services Business intends to grow through leveraging the cross-selling opportunities presented by our other residential real estate businesses, including through our owned brokerage operations. We plan to continue to focus on cross-selling opportunities as well as through expanded geographic coverage to capture additional business.

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Competition.    The settlement services business is highly competitive and fragmented. The number and size of competing companies vary in the different areas in which we conduct business. Generally, in metropolitan and suburban localities, we compete with other title insurers, title agents and other vendor management companies. Our largest national competitors include Fidelity National Title Insurance Company, Land America Title Insurance Company, Stewart Title Guaranty Company, First American Title Insurance Company and Old Republic Title Insurance Group. In addition, numerous agency operations provide competition on the local level.

Relocation Business (3%, 5% and 10% of revenue for 2002, 2001 and 2000, respectively)

Cendant Mobility® is the largest provider of outsourced corporate employee relocation services in the world and assists more than 112,000 affinity customers, transferring employees and global assignees annually, including over 21,000 transferring employees internationally each year in over 120 countries.

We offer corporate and government clients employee relocation services, such as the evaluation, inspection, selling or purchasing of a transferee's home, the issuance of home equity advances to employees permitting them to purchase a new home before selling their current home (these advances are generally guaranteed by the corporate client), certain home management services, assistance in locating a new home, immigration support, intercultural and language training and repatriation counseling. We also provide clients with relocation-related accounting services. Our services allow clients to outsource their relocation programs.

Clients pay a fee for the services performed and/or permit Cendant Mobility to retain referral fees collected from brokers. The majority of our clients pay interest on home equity advances and reimburse all costs associated with our services, including, if necessary, repayment of home equity advances and reimbursement of losses on the sale of homes purchased. This limits our exposure on such items to the credit risk of our corporate clients and not on the potential changes in value of residential real estate. We believe such risk is minimal due to the credit quality of our corporate clients. In addition, the holding period for U.S. homes we purchased in 2002, on behalf of our clients, was 48 days. In transactions where we assume the risk for losses on the sale of homes (primarily U.S. Federal government agency clients), which comprise less than 4% of net revenue for our relocation business, we control all facets of the resale process, thereby limiting our exposure.

Our group move management service provides coordination for moves involving a large number of employees over a short period of time. Our household goods moving service, with over 61,000 shipments annually, provides support for all aspects of moving an employee's household goods. We also handle insurance and claim assistance, invoice auditing and quality control of van line, driver and overall service.

Our affinity services provide real estate and relocation services, including home buying and selling assistance, as well as mortgage assistance and moving services, to organizations, such as insurance and airline companies that have established members. Often these organizations offer our affinity services to their members at no cost. This service helps the organizations attract new members and retain current members. Personal assistance is provided to over 58,000 individuals, with approximately 27,000 real estate transactions annually.

Growth.    Our strategy is to grow by generating business from corporations and U.S. Federal government agencies seeking to outsource their relocation function due to downsizing, cost containment initiatives and increased need for expense tracking. This strategy includes expanding our business as a lower cost provider by focusing on operational improvements and collecting fees from our supplier partners to whom we refer business. We also seek to grow our affinity services business by increasing the number of accounts as well as through higher penetration of existing accounts.

Competition.    Competition is based on service, quality and price. We are a leader in the United States, United Kingdom, and Australia/Southeast Asia for outsourced relocations. In the United States, we compete with in-house relocation solutions and with numerous providers of outsourced relocation services, the largest of which is Prudential Relocation Management. Internationally, we compete with in-house solutions, local relocation providers and the international accounting firms.

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Real Estate Services Seasonality

The principal sources of revenue for our real estate franchise, brokerage, mortgage and settlement services businesses are based upon the timing of residential real estate sales, which are generally lower in the first calendar quarter each year. The principal sources of revenue for our relocation business are based upon the timing of transferee moves, which are generally lower in the first and last quarter of each year.

Real Estate Services Trademarks and Intellectual Property

The trademarks "CENTURY 21", "Coldwell Banker", "Coldwell Banker Commercial", "ERA", "Cendant Mobility", and "Cendant Mortgage" and related trademarks and logos are material to our real estate franchise, relocation and mortgage businesses, respectively. Our franchisees and subsidiaries in our real estate services business actively use these marks and all of the material marks are registered (or have applications pending for registration) with the United States Patent and Trademark Office as well as major countries worldwide where these businesses have significant operations and are owned by us.

Real Estate Services Employees

The businesses that make up our Real Estate Services segment employed approximately 20,000 people as of December 31, 2002.

HOSPITALITY SEGMENT    (16%, 18% and 21% of revenue for 2002, 2001 and 2000, respectively)

Lodging Franchise Business (3%, 5% and 11% of revenue for 2002, 2001 and 2000, respectively)

We are the world's largest hotel franchisor, operating nine lodging franchise systems.

The lodging industry can be divided into four broad sectors based on price and services: upper upscale, with room rates above $110 per night; upscale, with room rates between $80 and $110 per night; middle market, with room rates generally between $55 and $79 per night; and economy, with room rates generally less than $55 per night. The following is a summary description of our lodging franchise systems properties that are open and operating as of December 31, 2002, including the average occupancy rate, average room rate and total room revenue divided by total available rooms for each property, in each case for 2002. We

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do not own or operate hotel properties. Information regarding such properties is derived from information we receive from our franchisees.

Brand

  Primary Domestic Sector Served
  Avg. Rooms Per Property
  # of Properties
  # of Rooms
  Location*
  Average Occupancy Rate
  Average Room Rate
  Total Room Revenue/ Available Rooms

AmeriHost

 

Middle Market

 

68

 

94

 

6,371

 

U.S. Only

 

55.8

%

$

56.98

 

$

31.79
Days Inn   Upper Economy   84   1,902   158,824   U.S. and International(1)   46.1 % $ 53.32   $ 24.58
Howard Johnson   Middle Market   97   476   45,964   U.S. and International(2)   46.1 % $ 59.37   $ 27.37
Knights Inn   Lower Economy   79   210   16,622   U.S. and International(3)   42.8 % $ 38.11   $ 16.31
Ramada   Middle Market   120   971   116,098   U.S. and International(4)   43.5 % $ 61.62   $ 26.80
Super 8 Motel   Economy   61   2,083   126,862   U.S. and International(5)   52.3 % $ 47.34   $ 24.76
Travelodge   Upper Economy   78   565   44,264   U.S. and International(6)   46.4 % $ 53.59   $ 24.87
Villager   Lower Economy   107   91   9,724   International(7)   46.6 % $ 29.51   $ 13.75
Wingate Inn   Upper Middle Market   94   121   11,368   U.S. and International(8)   57.1 % $ 71.42   $ 40.78
           
 
                   
Total           6,513   536,097   Total Average:             $ 25.28
           
 
                   

*
Description of rights owned or licensed.
(1)
73 properties located in Canada and 45 properties located in Argentina, China, Czech Republic, Egypt, England, Hungary, India, Jordan, Mexico, Philippines, South Africa and Uruguay.
(2)
41 properties located in Canada, and 37 properties located in Argentina, China, Columbia, Dominican Republic, Dutch Antilles, Ecuador, England, Ireland, Israel, Jordan, Malta, Mexico, Oman, Venezuela and United Arab Emirates.
(3)
Seven properties located in Canada.
(4)
Limited to the Continental U.S., Alaska, Hawaii and Canada.
(5)
94 properties located in Canada.
(6)
115 properties located in Canada and two properties located in Mexico.
(7)
Two properties located in Canada and one property located in Mexico.
(8)
One property located in Canada.

Our Lodging Franchise Business derives substantially all of its revenue from franchise fees, which are comprised of royalty and marketing/reservation fees and are normally charged as a percentage of the franchisee's gross room revenue. The royalty fee is intended to cover our operating expenses and the cost of the trademark, such as expenses incurred for franchise services, including quality assurance, administrative support and design and construction advice, and to provide the franchisor with operating profits. The marketing/reservation fee is intended to reimburse the franchisor for expenses associated with providing such franchise services as a central reservation system, national advertising and marketing programs and certain training programs. Since we do not own or operate hotel properties (we derive our revenue for this business from franchise fees), we do not incur renovation expenditures. Renovation costs are the obligation of each franchisee. Similar to our Real Estate Franchise Business, our Lodging Franchise Business also derives revenue through our Preferred Alliance Program.

Our lodging franchisees are dispersed geographically, which minimizes our exposure to any one hotel owner or geographic region. Of the more than 6,500 properties and approximately 4,800 franchisees in our lodging systems, no individual hotel owner accounts for more than 2% of our franchised lodging properties.

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Growth.    The sale of long-term franchise agreements to operators of existing and newly constructed hotels is the leading source of revenue and earnings growth in our lodging franchise business. We believe that 30% of hotel owners in the United States are independent.

We market franchises principally to independent hotel and motel owners, as well as to owners who have the right to terminate franchise affiliations of their properties with other hotel brands. We believe that our existing franchisees also represent a significant potential growth opportunity because many own, or may own in the future, other hotels, which can be converted to our brand names. Accordingly, a significant factor in our sales strategy is maintaining the satisfaction of our existing franchisees by providing quality services. We employ a national franchise sales force, compensated primarily through commissions, consisting of approximately 80 sales personnel.

We seek to expand our franchise systems on an international basis through license agreements with developers, franchisors and franchisees based outside the United States. As of December 31, 2002, our franchising subsidiaries (other than Ramada and AmeriHost) have entered into international licensing agreements for part or all of approximately 23 countries on five continents.

Central Reservation Systems.    The lodging business is characterized by remote purchasing through travel agencies and through the use by consumers of toll-free telephone numbers and the Internet. We maintain four reservation centers that are located in Knoxville, Tennessee; Aberdeen, South Dakota; Saint John, New Brunswick, Canada; and Cork, Ireland. In 2002, our brand Web sites had approximately 264 million page views and booked an aggregate of approximately 3.7 million roomnights from Internet booking sources, compared with approximately 222 million page views and 2.0 million roomnights booked in 2001, increases of 19% and 85%, respectively.

Competition.    Competition among the national lodging brand franchisors to grow and maintain their franchise systems is intense. Our largest national lodging brand competitors are the Holiday Inn and Best Western brands and Choice Hotels, which franchises seven brands, including the Comfort Inn, Quality Inn and Econo Lodge brands. Our Days Inn, Travelodge and Super 8 brands compete with brands, including Comfort Inn, Red Roof Inn and Econo Lodge, in the economy sector. Our Ramada, Howard Johnson, Wingate Inn and AmeriHost Inn brands compete with brands including Holiday Inn and Hampton Inn in the middle market sector. Our Knights Inn and Travelodge brands compete with Motel 6 and similar properties. In addition, a lodging facility owner may choose not to affiliate with a franchisor but to remain independent.

We believe that competition for the sale of franchises in the lodging industry is based principally upon the perceived value and quality of the brand and services offered to franchisees. We believe that prospective franchisees value a franchise based upon their view of the relationship between affiliation and conversion costs and future charges to the potential for increased revenue and profitability and the reputation of the franchisor. We also believe that the perceived value of brand names to prospective franchisees is, to some extent, a function of the success of the brand's existing franchisees.

The ability of an individual franchisee to compete may be affected by the location and quality of its property, the number of competing properties in the vicinity, its affiliation with a recognized brand name, community reputation and other factors. A franchisee's success may also be affected by general, regional and local economic conditions. The potential negative effect of these conditions on our results of operations is substantially reduced by virtue of the diverse geographical locations of our franchised properties.

Timeshare Exchange Business (4%, 6% and 10% of revenue for 2002, 2001 and 2000, respectively)

Our Resort Condominiums International LLC ("RCI") subsidiary is a leading provider of timeshare vacation exchange opportunities and services for approximately 3 million timeshare subscribers from more than 3,700 resorts in nearly 100 countries around the world. Our RCI® business consists primarily of the operation of two exchange programs for owners of condominium timeshares at affiliated resorts both in and outside the U.S., the operation of a vacation rental network consisting of vacation inventory available for rent to consumers, the publication of magazines and other periodicals related to the vacation and

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timeshare industry, travel-related services and resort management. RCI has significant operations in North America, Europe, the Middle East, Latin America, Southern Africa, Australia and the Pacific Rim. RCI charges its subscribers an annual subscription fee and an exchange fee for each exchange resulting in fees totaling approximately $425 million during 2002 and generated approximately $65 million from resort management services.

Growth.    The timeshare exchange industry has experienced significant growth over the past decade. We believe that the factors driving this growth include the demographic trend toward older, more affluent Americans who travel more frequently; the entrance of major hospitality and entertainment companies into timeshare development; a worldwide acceptance of the timeshare concept; and an increasing focus on leisure activities, family travel and a desire for value, variety and flexibility in a vacation experience. We believe that future growth of the timeshare exchange industry will be determined by general economic conditions both in the United States and worldwide, the public image of the industry, improved approaches to marketing and sales and a greater variety of products and price points. Accordingly, we cannot predict if future growth trends will continue at rates comparable to those of the recent past. RCI members are acquired through developers; as a result, the growth of the timeshare exchange business is dependent on the sale of timeshare units by affiliated resorts. RCI affiliates consist of international brand names and independent developers, owners' associations and vacation clubs.

Competition.    The global timeshare exchange industry is comprised of a number of entities, including resort developers and owners. RCI's competitors include specialized firms such as Interval International Inc., vacation club products, internal exchange programs offered by the Walt Disney Co., Marriott, Starwood, Hilton and Hyatt and regional and local timeshare exchange companies.

Timeshare Sales and Marketing Business (8% and 6% of revenue for 2002 and 2001, respectively)

We acquired our Fairfield subsidiary in April 2001. In the first quarter of 2002, we acquired our Equivest subsidiary for approximately $98 million and in the second quarter of 2002, we acquired our Trendwest subsidiary for approximately $891 million of our common stock (approximately 47.4 million shares) plus the assumption of $89 million of debt. Through these subsidiaries, we are the largest vacation ownership company in the United States in terms of property owners and vacation units constructed. Our vacation ownership business includes sales and marketing of vacation ownership interests, providing consumer financing to individuals purchasing vacation ownership interests and providing property management services to property owners' associations at our resorts. We believe we have a well balanced portfolio of properties with a high degree of geographic and customer diversity, helping to insulate our timeshare operations from regional downturns. We have integrated our Equivest subsidiary into Fairfield. While we intend to operate Fairfield and Trendwest as separate brands, we expect to cross market to all of our timeshare owners and obtain referrals from our lodging and car rental operations. We also continue to evaluate cost savings that could be achieved by consolidating certain administrative functions of our timeshare businesses. We plan to utilize a points-based sales system at all of our timeshare companies to provide our owners with flexibility as to resort location and length of stay. In addition, through Equivest Capital, we are a lender to third party resorts. In 2002, Equivest Capital made loans of $54.2 million to such resorts.

Fairfield Resorts, Inc.    Fairfield sells and markets vacation products that provide quality recreational experiences to its more than 459,000 property owners and customers. As of December 31, 2002, Fairfield's portfolio of resorts consisted of 73 resorts, nine of which are in various stages of construction, located in 21 states and the U.S. Virgin Islands. The average price of a Fairfield vacation ownership interest is $12,500. Timeshare owners pay annual maintenance fees, ranging from $300-$600 per year for the average vacation ownership interest, to a separate property owners' association. These fees are used to replace and renovate furnishings, defray maintenance and cleaning costs and cover taxes, insurance and other related costs. Typically the property owners' associations contract with Fairfield or RCI Resort Management to manage the properties.

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Trendwest Resorts, Inc.    Trendwest markets, sells and finances WorldMark®, The Club and WorldMark South Pacific Club vacation ownership interests and also acquires and develops resorts. The 52 properties Trendwest markets are located primarily in the western United States, British Columbia, Mexico, Hawaii and the South Pacific. At December 31, 2002, the Clubs had over 184,940 vacation credit owners. In 2002, the average new owner purchased approximately 6,780 vacation credits for a purchase price of approximately $9,485.

The Clubs.    Trendwest formed WorldMark, The Club and WorldMark South Pacific Club (collectively the "Clubs") in 1989 and 1999, respectively. WorldMark, The Club is a California non-profit mutual benefit corporation and WorldMark South Pacific Club is a registered managed "investment scheme" administered by Trendwest Resorts South Pacific Limited as the Responsible Entity (similar to a trustee under U.S. law) and regulated by the Australian Securities and Investments Commission ("ASIC"). The Clubs own, operate and manage the real property conveyed to the Clubs by Trendwest. Trendwest develops vacation properties and deeds them to the Clubs free and clear of monetary encumbrances in exchange for the exclusive right to sell the vacation credits associated with the properties contributed and retain the proceeds. Our continuing investment in both Clubs results from Trendwest's ownership of unsold vacation credits. The percentage of vacation credits owned by Trendwest in WorldMark, The Club is minimal.

Trendwest has management agreements with the Clubs under which Trendwest acts as the exclusive manager and servicing agent of the vacation owner programs. Trendwest oversees the property management and service levels of the resorts as well as certain administrative functions. As compensation for services, Trendwest, in general, receives a portion of budgeted annual expenses and reserves. The management agreement of WorldMark, The Club provides for automatic one-year renewals unless such renewal is denied by a majority of the voting power of the owners, which excludes Trendwest. The WorldMark South Pacific management agreement provides for automatic 5-year renewals unless such renewals are denied by a majority of the voting power of the owners, which exclude Trendwest. The revenues received by Cendant from Trendwest's management activities for the period from April 30, 2002 (acquisition date) through December 31, 2002 were $1.5 million, net of dues we paid to the Clubs on the unsold vacation credits we own.

FFD Development Company LLC.    Fairfield's timeshare resort development function, consisting of property, acquisition, planning, design and construction is conducted by FFD Development Company, LLC ("FFD"). FFD is also our primary acquirer and developer of timeshare inventory and develops new resorts or expands existing units as required by Fairfield. We acquired FFD on February 3, 2003 and it became one of our wholly owned subsidiaries in order to augment our growing timeshare business and given FFD's knowledge of Fairfield's business. Prior to our acquisition of FFD, we owned a convertible preferred interest and warrants to purchase common interests in FFD.

Customer Financing.    Both Fairfield and Trendwest offer financing to the purchasers of vacation ownership interests. Loans extended are typically securitized through qualified special purpose entities. Fairfield and Trendwest continue to service loans extended by them and therefore remain responsible for the maintenance of accounts receivable files and all billing and collection activities.

Sales and Marketing.    Fairfield sells its vacation ownership interests primarily through its points-based vacation system, FairShare Plus® at both resort locations and off-site sales centers. Trendwest's sales primarily occur at 31 off-site sales offices located in metropolitan areas in six regions, including the South Pacific. The remainder of its sales occur at 16 on-site sales offices.

Growth.    The growth strategy for our timeshare sales and marketing business is driven primarily by further development of existing and future resort locations. Numerous factors, including favorable demographic trends and low overall penetration of potential demand indicate continued potential growth in the timeshare industry. We also continually explore strategic corporate alliances and other transactions that would complement our timeshare sales and marketing business.

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Competition.    The timeshare sales and marketing industry is highly competitive and is comprised of a number of companies specializing primarily in timeshare development, sales and marketing. In addition, a number of national hospitality chains develop and sell vacation ownership interests to consumers. Our largest competitors include Disney Vacation Club, Marriott Ownership Resorts, Inc., Starwood Vacation Ownership, Inc. and Hilton Grand Vacations Company LLC.

Vacation Home Rental Business (1% and 1% of revenue for 2002 and 2001, respectively)

In 2001, we acquired Holiday Cottages Group Ltd. and Cuendet Cie SpA which market privately owned holiday properties for rent in Europe. In 2002, we acquired Novasol A.S, Welcome Holidays Limited and The International Life Group, which also market privately owned holiday properties for rent in Europe. We purchased Novasol for $66 million in cash. The acquisition of Welcome Holidays and The International Life Group were not material to Cendant. As a result of these acquisitions, we are the largest self-catering cottage and villa rental company in Europe. We market holiday properties under the brands Cuendet, Dansommer®, Novasol®, Blakes® Holidays in Britain, Ferrysavers.com®, Country Manors, Country Holidays, Country Cottages in France, Country Cottages in Ireland, English Country Cottages, Welcome Holidays, Italian Life®, French Life® and Chez Nous®. We derive revenue through commissions on the rental of the cottages which range from 25% to 35% of the gross rent. We do not own any cottages but act as an intermediary for the owners in exchange for a fee.

Our Vacation Home Rental Business has relationships with approximately 35,000 independent property owners in the United Kingdom, France, Ireland, the Netherlands, Italy, Spain, Portugal, Denmark, Norway, Sweden, Germany, Greece, Austria, Switzerland and eastern Europe. These property owners contract annually with our Vacation Home Rental subsidiaries to market their collective 40,000 rental properties. In 2002, our Vacation Home Rental Business sold approximately 390,000 rental weeks on behalf of vacation property owners. We also market camping holidays and boat rentals in the UK, the Netherlands and France, as well as ferry crossings in most European countries.

Our Vacation Home Rental subsidiaries market their properties globally through direct marketing, the Internet and through tour operators and travel agents.

Growth.    Our strategy is to provide sophisticated brand marketing and reservations for the benefit of owners of vacation home accommodations. We intend to increase our contract property portfolio and to make all contract inventory in our portfolio available to the global marketplace. Marketing strategies include establishing an optimal balance between direct partner and travel agent marketing. We also attempt to leverage other Cendant businesses to increase the marketing and distribution of our holiday property portfolio.

Competition.    Companies that are part of the European Self Catering industry, in which we operate, rent an aggregate of 18 million vacations to consumers on an annual basis. Large operators, which offer rentals of vacation parks, cottages and villas, campsites and apartments are Bourne Leisure, Holidaybreak and Interhome. We believe that competition for vacation rental properties is based principally on the number of properties offered.

Hospitality Trademarks and Intellectual Property

The service marks "Days Inn," "Ramada," "Howard Johnson," "Super 8," "Travelodge," "Wingate Inn," "Villager," "Knights Inn," "AmeriHost Inn," "RCI," "Resort Condominiums International," "Fairfield," "Worldmark" and related trademarks and logos are material to our Hospitality businesses. The subsidiaries that operate our timeshare businesses and our franchisees actively use the marks which are registered (or have applications pending) with the United States Patent and Trademark Office as well as major countries worldwide where our hospitality business has significant operations. We own all the marks listed above other than the "Ramada" and "Days Inn" domestic marks. We own the Travelodge mark only in North America and are limited to using the "Ramada" marks in the Continental U.S., Alaska, Hawaii and, since 2002, in Canada. We license the Canadian "Ramada" trademark from Marriott. We license the domestic "Ramada" and "Days Inn" marks from a venture we have with Marriott International, Inc. We

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own the "Worldmark" mark pursuant to an assignment agreement with Worldmark. If our relationship with Worldmark should terminate, such mark would revert back to Worldmark upon request.

Hospitality Seasonality

Our lodging franchise business generates higher revenue during the summer months because of increased leisure travel. Therefore, any occurrence that disrupts travel patterns during the summer period could have a greater adverse effect on our lodging franchisee's annual performance and consequently our annual performance than in other periods. A principal source of timeshare exchange revenue relates to exchange services to members. Since members have historically shown a tendency to plan their vacations in the first quarter of the year, revenues are generally slightly higher in the first quarter. In timeshare sales, we rely upon tour flow in order to generate timeshare sales; consequently, sales volume tends to increase in the summer months as increased tourist travel results in additional increased tour flow. We cannot predict whether these trends will continue in the future as the timeshare sales business expands outside of the United States and Europe, and as global travel patterns shift with the aging of the world population.

Hospitality Employees

The businesses that make up our Hospitality segment employed approximately 20,000 people as of December 31, 2002.

TRAVEL DISTRIBUTION SEGMENT (12%, 5% and 2% of revenue for 2002, 2001 and 2000, respectively)

With the acquisitions of Galileo International, Inc. and Cheap Tickets, Inc. in October 2001, we added a new Travel Distribution segment in 2001 comprised of (i) our global distribution services business through Galileo International, (ii) our travel agency business, including Cheap Tickets, and (iii) our reservations processing, connectivity and information management services business through WizCom®, TRUST Internationalsm and THOR®. For 2000, revenue included in this segment was generated from our travel agency business, which was conducted by Cendant Travel.

Our travel distribution division is one of the leading providers of travel information and transaction processing services in the world. To better service our clients, our Travel Distribution Segment was restructured in 2002 into five service functions: Galileo Client Services, Highwire Corporate Services, Hospitality and Leisure Services, Airline Services and Retail Travel Services. Our Galileo Client Services business generated approximately 92% of the revenue for the Travel Distribution Segment in 2002.

Galileo Client Services

We provide, through Galileo, electronic global distribution and computer reservation services ("GDS") for the travel industry utilizing a computerized reservation system. Through our Apollo® and Galileo® computerized reservation systems, our GDS subsidiary provides travel agencies and other subscribers at approximately 45,000 locations, numerous Internet travel sites, as well as corporations and consumers who use our self-booking products, with the ability to access schedule and fare information, book reservations and issue tickets for more than 500 airlines. Our GDS subsidiary also provides subscribers with information and booking capabilities covering approximately 30 car rental companies and more than 200 hotel companies with approximately 52,000 properties throughout the world. In 2002, Galileo completed approximately 292 million bookings. Our GDS subsidiary operates in approximately 120 countries. Approximately 63% of our distribution revenues are generated outside the United States. Under a ten-year, $1.4 billion information technology services arrangement with IBM Global Services, effective December 2001, IBM provides information technology management services such as managing our data center and operating our 1,400-plus computer servers. IBM also provides help desk and desk top support to other Cendant businesses.

Substantially all of our electronic GDS revenue is derived from booking fees paid by travel suppliers, such as airlines, car rental companies and hotel companies. Travel suppliers store, display, manage and sell their services through our systems. Airlines and other travel suppliers are offered varying levels of functionality

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at which they can participate in our systems. Our Apollo system is utilized in North America and Japan, and our Galileo system is utilized in the rest of the world. In 2002, approximately 93% of our booking fee revenues were generated from airlines. United Air Lines, Inc. is the largest single travel supplier utilizing our systems, generating revenues that accounted for approximately 11% of our total Galileo GDS revenues in 2002. In December 2002, UAL Corporation, the parent of United Air Lines, Inc., filed for bankruptcy protection. Our contracts with United have been granted the approval for payment under pre-petition and post-petition motions in connection with UAL's bankruptcy and we expect any losses due to non-payment of amounts outstanding to be immaterial. However, if UAL does not successfully emerge from bankruptcy, we would not expect to recover amounts outstanding, which could approximate $30 million, and we would expect certain components of our Travel Distribution revenue, such as revenue derived from web site and reservation hosting, to be negatively impacted. In 2002, we generated approximately $95 million of such revenue from United primarily on a cost-plus basis. We would not expect this bankruptcy to have a material impact to any of our other revenue streams.

Our airline customers have been negatively impacted by low levels of travel activity due to economic conditions and the possibility of war, hostilities and terrorist attacks. As a result, several major carriers are experiencing liquidity problems and some, such as UAL and U.S. Airways Group have sought, and others may seek, bankruptcy protection. Therefore, the risk of non-payment of GDS fees from airline suppliers has increased. In addition, war, hostilities or further terrorist attacks could further reduce travel activity.

Travel agencies access our systems using hardware and software typically provided by us or by independent national distribution companies ("NDCs"), although travel agencies can choose to purchase their own hardware and certain software. NDCs are third party distributors who receive a commission for the sale and servicing of Galileo and Apollo technology to travel agents. We, internally or through our NDCs, also provide technical support and other assistance to travel agencies. Multinational travel agencies constitute an important category of subscribers due to the high volume of business that can be generated through a single relationship. Bookings generated by our five largest travel agency customers constituted approximately 20% of the bookings made through our systems in 2002.

Product Distribution.    We distribute our products to subscribers primarily through our internal sales and marketing organization ("SMOs"). We also distribute our products through our relationships with independent NDCs. Our local SMOs distribute our products in North America, the United Kingdom, Belgium, France, Germany, Spain, Portugal, the Netherlands, Switzerland, Sweden, Finland, Norway, Russia, Australia, New Zealand, Hong Kong, Singapore, the Philippines, Brazil and Venezuela. Bookings made through SMOs collectively accounted for approximately 72% of our 2002 bookings.

In regions not supported directly by our SMOs, we provide services through our relationships with independent NDCs through distribution agreements entered into with Galileo. The NDC is responsible for cultivating the relationship with subscribers in its territory, installing subscribers' computer equipment, maintaining the hardware and software supplied to the subscribers and providing ongoing customer support. The NDC earns a share of the booking fees generated in the NDCs territory, as well as all subscriber fees billed in that marketplace. NDCs, which are typically owned or operated by the national airline of the relevant country or a local travel-related business, accounted for approximately 28% of our booking volume in 2002. In 2002, we acquired our NDCs in Italy, Ireland and Denmark for approximately $125 million in cash.

Growth.    In order to grow our GDS business, we intend to capitalize on our competitive strengths, the key elements of which are: (i) Cendant's business to business expertise and relationships, (ii) a diversified global presence, (iii) established relationships with a diverse group of travel suppliers and subscribers, (iv) a comprehensive offering of innovative products, and (v) new product initiatives with unique appeal to travel consumers, agencies and suppliers. We believe that the distribution network established through our independent NDCs provides us with a local presence in countries throughout the world. In addition, we continue to strengthen our presence in developing and emerging economies that provide future growth opportunities, such as Eastern Europe, Africa, the Middle East and Asia. We believe that in-depth knowledge of the local travel economies in which we distribute our products is essential to developing and

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strengthening our ties to travel suppliers and the local travel agencies that generate significant booking volumes.

We will continue to assess opportunities to acquire distributors in profitable, highly automated markets, where we can realize attractive economic returns and enhance our customer service. We intend to continue to pursue opportunities to further utilize our computerized reservation system to distribute travel through a variety of means and to continue to develop leading technologies, integrate additional travel content into our products, further strengthen our relationships with our agency and supplier customers and maintain our position as a leading player in the integrated electronic travel distribution marketplace.

Information Services.    We currently provide fare quotation services through our GlobalFares™ quotation system to approximately 70 airlines worldwide. GlobalFares is used in conjunction with each airline's internal reservation system and provides pricing information.

We also provide internal reservation services to United Air Lines pursuant to a computer services agreement which terminates at the end of 2004. Such services include the display of schedules and availability, the reservation, sale and ticketing of travel services and the display of other travel-related information to United Air Lines' airport offices, city ticket offices and reservation centers internationally. In addition, we provide certain other internal management services to United Air Lines, including network management, departure control, availability displays, inventory management, database management and software development.

Competition.    Our competitors include the three major traditional global distribution system companies: Sabre, Inc., Amadeus and Worldspan; the regional reservation systems including Abacus, Axess, Infini and Topas; other travel infrastructure companies such as Pegasus Systems and Datalex; and firms that operate in the virtual travel services sector such as Expedia, Travelocity, Hotels.com and Orbitz. We also compete with alternative channels by which travel products and services are distributed; for example, some low cost airline carriers do not utilize a GDS distribution channel.

Competition to attract and retain travel agency subscribers is intense. As a result, we and other computerized reservation system service providers offer incentives to travel agency subscribers if certain productivity or booking volume growth targets are achieved. Although continued expansion of the use of such incentive payments could adversely affect our profitability, our failure to continue to make such incentive payments could result in the loss of some travel agency subscribers.

New regulation has been proposed which could eliminate current rules requiring airlines that own GDS companies to participate in each GDS. If these new rules are adopted our competitive position could be weakened and our business could be adversely impacted. We do not expect the new rules, if any, to be adopted prior to 2004.

Highwire Corporate Services

We provide web based corporate travel solutions, including online, self-booking capabilities, through our Highwire subsidiary. Highwire™ allows its corporate customers to manage their numerous travel supplier agreements and extensive corporate travel policies, while offering their employees unique web based tools for making travel arrangements. Some of Highwire's clients include Microsoft, Nike and Nordstrom. Revenue is derived from our corporate clients for each booking made by their employees through our product.

Growth.    We are focused on increasing the rates of corporate bookings with our existing clients, continued penetration of the corporate travel sector by pursuing additional large corporate clients and the expansion of our product offerings through global channels.

Competition.    Our primary competition stems from major travel agencies that service the corporate travel sector and providers of self-booking tools, including Sabre, Inc.'s corporate booking product, "Get There."

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Hospitality and Leisure Services

We are a global provider of electronic reservations processing, specialized reservations and fulfillment services, connectivity and computerized reservation system services for the travel industry through our WizCom, TRUST International and THOR subsidiaries. We acquired TRUST International in July 2002. This acquisition was not material to Cendant.

WizCom and TRUST International provide hotels, car rental businesses and tour/leisure travel operators, including Internet travel companies, with electronic distribution to the Global Distribution Systems (such as our Galileo GDS), Internet or other travel reservations systems, linking customers to all the major travel networks on six continents through telephone lines and satellite communications. These products allow for real time processing for travel agents, corporate travel departments and consumers. In addition, WizCom and TRUST International offer information management services that permit customers to maintain current information on property, vehicle or tour packages (such as rental rates and room amenity descriptions) and deliver the most current data to external distribution systems.

THOR provides 24-hour travel reservation assistance to customers of its travel agency clients, assisting approximately 140,000 travelers annually. THOR also provides its travel agency clients with directories that include information regarding numerous hotel properties.

Revenues are generated from services provided by our Hospitality and Leisure Services Business to its customers, which combined include nearly all 200 major hotel chains, and primarily consist of up-front implementation fees and ongoing transaction and support fees.

Growth.    To increase revenue, we intend to increase our Internet distribution reach, allowing hotel and car rental companies to further optimize their sales mix and enhance our product and service portfolio aimed at the hospitality sector. For example, Trust International has major enhancements planned for its hotel reservation system, Trust Voyager, which was initially launched in June 2002. WizCom has also launched a program that enables hotels to reduce rate description management resources.

Competition.    In providing electronic distribution services to hotel customers, we compete with third party connectivity providers and also with supplier direct connection technology. We compete with many companies to provide computerized reservation system services to hotel customers, including other hotels that develop their own proprietary systems. Some of our competitors include Unirez Inc., Utell Limited and Lexington Services, part of My Travel Group, plc.

Airline Services

Our Airline Services business focuses on enhancing our relationship with our airline suppliers in order to pursue and obtain the most comprehensive airline rate information for our distribution channels, including travel agencies. Through our Shepherd Systems business, our Airline Services business provides airline clients with Marketing Information Data Tapes ("MIDT") which provide GDS bookings and airline reporting and sales information. Revenue is derived from fees charged for MIDT.

Growth.    We are focused on enhancing our data analysis capabilities and developing consulting services related to MIDT. We intend to expand our client base to the entire travel sector.

Competition.    Our competitors include providers of market and business intelligence information, primarily in the airline industry. Our principal competitors include Sabre, Inc. and Lufthansa Systems.

Retail Travel Services

We provide travel services, through our travel agency subsidiaries Cendant Travel, Inc., Cheap Tickets, Inc. and RCI Travel, LLC. We are a full service travel agency operation providing airline, car rental, hotel and other travel reservation and fulfillment services. Such services are provided in connection with the travel programs offered through Trilegiant Corporation, an independent affiliate of Cendant and the outsource provider for our individual membership business, and Trip Network, Inc., an independent affiliate of

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Cendant and the operator of the Cheaptickets.com and Trip.com travel Web sites. Services are also provided to members of our RCI timeshare exchange business. We also market hotel accommodations through our Lodging.com subsidiary.

We work directly with travel suppliers, such as airlines, car rental companies, hotel companies and tour and cruise operators to secure both non-published and regularly available fares, rates and tariffs to supply the best possible rates and discounted travel to our customers. Cheap Tickets' non-published fares are not available to consumers directly from the airlines. Rates are made available to customers through our call centers and through our branded Web sites, cheaptickets.com and trip.com, which are operated by Trip Network, Inc. See "Relationship with Trip Network, Inc." discussion below. Transactions are booked primarily through our Galileo GDS and fulfilled through our call center network and ticketing operations. We maintain a total of seven call centers located in: Lakeport, California; Colorado Springs, Denver-Aurora and Denver-Englewood, Colorado; Honolulu, Hawaii; Moore, Oklahoma and Nashville, Tennessee.

On August 12, 2002, we acquired Lodging.com, which allows consumers to book special discount hotel accommodations online in approximately 4,000 economy and luxury hotels and gain access to special promotions by participating hotels. Lodging.com also permits consumers to book flights, reserve rental cars and book other hotel accommodations through its Web site. In the fourth quarter of 2002, Lodging.com began accessing the Galileo GDS as its provider of published hotel rate inventory. We derive revenue from commissions on bookings from hotel and car rental companies, airlines, cruise lines, tour operators and GDS companies as well as mark-ups on travel inventory.

Competition.    We compete with a large number of leisure travel agencies, including Liberty Travel, Inc. and American Express Travel Related Services Company, Inc., and companies with Internet travel Web sites, such as Orbitz, LLC, Expedia, Inc., Travelocity.com L.P., Priceline.com Incorporated, Hotels.com, L.P. and Hotwire.

Relationship with Trip Network, Inc.    Trip Network, Inc. ("TNI") was established in 2001 to develop and launch an Internet travel portal initiative, and is expected to significantly expand the Internet presence of our travel brands for the benefit of certain of our current and future franchisees. TNI was established with a $20 million contribution of assets by us in return for all of the common stock and preferred stock of Trip Network. We transferred all the common shares of Trip Network to an independent technology trust that is controlled by three independent trustees who are not officers, directors or employees of Cendant or relatives of officers, directors or employees of Cendant. The preferred stock is convertible into approximately 80% of TNI's common stock beginning on March 31, 2003 or earlier upon a change of control of TNI. Additionally, we also funded TNI in the first quarter of 2001 with approximately $85 million, including $45 million in cash and 1.5 million shares of Homestore common stock, then valued at $34 million. Following our acquisitions of Galileo and Cheap Tickets, TNI licensed the rights for the online businesses, Trip.com and Cheaptickets.com, respectively, which combined provide access to 29 million registered users. TNI currently operates these online travel businesses and we provide TNI with call center, supplier relationship management, GDS and fulfillment services. TNI launched the Trip.com Web site on April 29, 2002. Cheap Tickets relaunched its Web site in November 2002 to include the services provided by the Galileo GDS and Trip.com's technology platform.

At December 31, 2002, TNI had no debt outstanding nor are we contingently liable for any debt which TNI may incur. Certain officers of Cendant serve on the Board of Directors of TNI.

We are currently engaged in discussions with the trustees of the independent technology trust to negotiate our acquisition of the common stock of Trip Network.

Travel Distribution Trademarks and Intellectual Property

The trademarks and service marks "Galileo," "Apollo," "Cheap Tickets," "Trip.com," "WizCom," "Lodging.com," "THOR," "Highwire," "Lodging.com" and related trademarks and logos are material to the businesses in our travel distribution segment. Galileo and our other subsidiaries in the Travel Distribution

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Segment and their licensees actively use these marks. All of the material marks used by these companies are registered (or have applications pending for registration) with the United States Patent and Trademark Office as well as major countries throughout the world where these businesses operate. We own the marks used in the travel distribution segment.

Travel Distribution Seasonality

We experience a seasonal pattern in our operating results, with the first and fourth quarters typically having lower total revenues and operating income compared to the second and third quarters due to decreased travel during the winter months.

Travel Distribution Employees

The businesses that make up our Travel Distribution segment employed approximately 5,300 people as of December 31, 2002.

VEHICLE SERVICES SEGMENT (30%, 39% and 5% of revenue for 2002, 2001 and 2000, respectively)

With our purchase on November 22, 2002 of substantially all of the domestic assets of the Budget® vehicle rental business, as well as selected international operations, the Vehicle Services Segment now consists of the vehicle rental operations business of Avis and Budget, the Avis and Budget franchise systems and our fleet management business. As a result, we believe that we are one of the largest car rental operators in the world. We plan to operate Avis and Budget separately, with separate advertising, Web sites, reservation numbers, counters, buses and other customer facing elements. Certain administrative functions such as fleet planning and treasury as well as vehicle reservation and rental systems will be provided by Cendant for the benefit of both Avis and Budget.

Car Rental Operations and Franchise Businesses (19%, 24%, 5% of revenue for 2002, 2001 and 2000, respectively)

Avis (18%, 24%, 5% of revenue for 2002, 2001 and 2000, respectively)

We operate and/or franchise portions of the Avis car rental system (the "Avis System"), which represents one of the largest car rental brands in the world, based on total revenue and number of locations. The Avis System is comprised of approximately 4,800 rental locations (of which 1,778 are operated and/or franchised by us), including locations at some of the largest airports and cities in the United States and foreign countries. We operate 964 Avis car rental locations in both airport and non-airport (downtown and suburban) locations in the United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina, Australia and New Zealand. For 2002, our Avis car rental operations had an average fleet of approximately 219,000 vehicles and generated total vehicle rental revenue of approximately $2.5 billion, of which 90% (or $2.25 billion) was derived from U.S. operations.

We also franchise the Avis System to individual business owners in approximately 814 locations including locations in the United States, Latin America, Central America, South America and the Pacific region. Approximately 94.9% of our Avis System rental revenue in the United States is generated by locations operated by us or under agency arrangements, with the remainder generated by locations operated by independent franchisees. Independent franchisees pay fees based either on total time and mileage charges or total revenue. The Avis System in Europe, Africa, part of Asia and the Middle East is operated under franchise by Avis Europe Ltd., an independent third party.

The Avis System provides franchisees and our corporate locations access to the benefits of a variety of services, including: (i) a standardized system identity for rental location presentation and uniforms; (ii) a training program, business policies, quality of service standards and data designed to monitor service commitment levels; (iii) marketing/advertising/public relations support for national consumer promotions including the avis.com site; (iv) brand awareness of the Avis System through our familiar "We Try Harder®" advertising and (v) the "Avis Cares®" driver and travel safety program. Avis System locations have access to the Wizard® System, an online computer system which provides (i) global reservations

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processing, (ii) rental agreement generation and administration and (iii) fleet accounting and control. Franchisees pay a fee for the use of the Wizard System. We also offer Avis InterActive®, which provides corporate customers real-time access to aggregated information on car rental expenses to better manage their car rental expenditures.

Growth.    The existing rental patterns of our business cause us to have excess capacity from Friday through Sunday. We intend to increase business during this period through a combination of advertising, targeted marketing programs to associations and customers of other Cendant brands and increased presence in the online arena. Our own Internet site, avis.com, as well as other Internet travel sites, including the cheaptickets. com Web site, present good opportunities to grow our business and improve our profitability through enhanced utilization of our fleet. We also intend to continue to grow our revenue within the corporate sector through normal contract negotiations and by seeking clients that may be affected by fleet constraints of certain of our competitors.

Marketing.    In 2002, approximately 75% of vehicle rental transactions generated from our owned and operated car rental locations were generated in the United States by travelers who used the Avis System under contracts between the Company and the travelers' employers or organizations of which they are members (such as AARP). Unaffiliated business and leisure travelers, a segment that contributed to our growth in 2002, are solicited by direct mail, telesales and advertising campaigns.

Travel agents can make Avis System reservations by telephone, via our Avis Web site, or through all major global distribution systems and online travel portals, and can obtain access through these systems to our rental locations, vehicle availability and applicable rate structures. An automated link between these systems and the Wizard System gives them the ability to reserve and confirm rentals directly through these systems. We also maintain strong links to the travel industry. We have arrangements with frequent traveler programs of airlines such as Delta Air Lines, Inc., American Airlines, Inc., Continental Airlines, Inc. and United Air Lines, Inc., and of hotels including the Hilton Corporation, Hyatt Corporation, Best Western International, Inc., and Starwood Hotels and Resorts Worldwide, Inc. These arrangements provide various incentives to all program participants and cooperative marketing opportunities for Avis and the partner. We also have an arrangement with our lodging brands whereby lodging customers who are making reservations by telephone may be transferred to Avis if they desire to rent a vehicle.

Internationally, we utilize a multi-faceted approach to sales and marketing throughout our global network by employing teams of trained and qualified account executives to negotiate contracts with major corporate accounts and leisure and travel industry partners. In addition, we utilize centralized telemarketing and direct mail initiatives to continuously broaden our customer base. Sales efforts are designed to secure customer commitment and support customer requirements for both domestic and international car rental needs. Our international operations maintain close relationships with the travel industry including participation in several airline frequent flyer programs, such as those operated by Air Canada, Qantas as well as participation in Avis Europe programs with British Airways, Lufthansa and other carriers.

Avis.com.    Avis has a strong brand presence on the Internet through our Web site, www.avis.com. A steadily increasing number of Avis vehicle rental customers obtain rate, location and fleet information and then reserve their Avis rentals directly on the avis.com Web site. During 2002, reservations through Internet sources increased to 13.8% of total reservations from 9.5% in the prior year for our owned operations.

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Budget (1% of revenue for 2002)

We purchased substantially all of the operating assets of the Budget® vehicle rental system (the "Budget System") on November 22, 2002 for $109 million (excluding transaction costs and expenses), plus the assumption and refinancing of approximately $2.4 billion in non-recourse vehicle debt.

Budget Rent A Car System, Inc. is one of the largest car and truck rental systems in the world, based on total revenue and number of locations. The Budget System is comprised of approximately 3,240 rental locations, including locations at some of the largest airports and cities in the United States and foreign countries. We operate 729 Budget car rental locations in both airport and non-airport (downtown and suburban) locations in the United States, Canada, Puerto Rico, Australia and New Zealand. For the period of November 22 through December 31, 2002, our Budget car rental operations had an average fleet of approximately 84,000 vehicles and generated total vehicle rental revenue of approximately $121.5 million, of which 93% (or $112.5 million) was derived from U.S. operations.

We also operate a combined truck rental fleet of approximately 34,000 trucks through a network of approximately 3,300 corporate owned, dealer and franchised locations throughout the continental United States. Our truck rental business serves both the consumer and light commercial sectors. The consumer sector primarily serves individuals who rent trucks to move household goods on either a one-way or local basis. The light commercial sector serves a wide range of businesses that rent light- to medium-duty trucks, which are trucks having a gross vehicle weight of less than 26,000 pounds, for a variety of commercial applications.

We also franchise the Budget System to individual business owners in approximately 2,511 locations including locations in the United States, Canada, Latin America, Central America, South America and the Pacific region. Approximately 81.1% of our Budget System rental revenues in the United States are generated by locations operated by us or under agency arrangements, with the remainder generated by locations operated by independent franchisees. Independent franchisees pay fees based on gross rental revenue. The Budget System in Europe, Africa, and the Middle East is operated under franchise by BRAC Rent a Car Corporation, an independent third party.

Growth.    Budget has a variety of sources for growth in both the business and leisure sectors. For business travel, we intend to utilize an extensive and expanded direct salesforce to negotiate contracts with major corporate accounts and companies in the travel industry with whom we have relationships. In addition, we will utilize telemarketing and direct marketing programs to solicit small business accounts and independent business travelers. In leisure travel, where Budget has historical strength, we will continue to use a combination of retail advertising, strong value pricing, and joint promotions with companies with whom we have relationships in the travel industry, such as Southwest Airlines, and online travel portals to increase the volume of Budget leisure business. Our own internet site, budget.com, as well as other Cendant businesses such as Cendant Travel, also offer channels for growth. Cross promotions with Cendant hotel brands, whose cost-conscious customers are good candidates for Budget's products, will be developed and expanded.

Marketing.    In 2002, retail advertising and value pricing were the drivers of improved results on budget.com and other leisure channels. In addition, proprietary marketing programs such as Fastbreak®, a counter bypass program for frequent travelers, and Unlimited Budget, a travel agent rewards program, drove increased revenues.

Travel agents can make Budget System reservations by telephone, via our Budget Web site, or through all major global distribution systems and can obtain access through these systems to our rental location, vehicle availability and applicable rate structures. An automated link between these systems and Maestro, Budget's on-line reservation system, gives them the ability to reserve and confirm rentals directly through these systems through Unlimited Budgetsm, a loyalty incentive program for travel agents. Participating travel agents earn reward points for every eligible U. S. business and leisure rental completed by their clients. As of December 31, 2002, 77,000 travel agents were enrolled in this program.

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Budget.com.    Budget has a strong brand presence on the Internet through its Web site, www.budget.com. A steadily increasing number of Budget vehicle rental customers obtain rate, location and fleet information and then reserve their Budget rentals directly on the budget.com Web site. In addition, we have agreements to promote our car rental service with major Internet portals, including, America Online, priceline.com, Southwest Airlines and Yahoo. During 2002, reservations through Internet sources increased to 16.8% of total reservations from 11.4% in the prior year for Budget owned operations.

Car Rental Fleet Management.    With respect to the car rental operations owned and operated by us, we participate in a variety of vehicle purchase programs with major domestic and foreign manufacturers. Our feature supplier for the Avis brand is General Motors Corporation. Our feature supplier for the Budget brand is Ford Motor Company. Under the terms of our agreements with GM and Ford, which expire in 2006 and 2007, respectively, we are required to purchase a certain number of vehicles from these manufacturers. Our current operating strategy is to maintain an average fleet age of approximately six months. For model year 2002, approximately 95% of our domestic fleet vehicles were subject to repurchase programs. Under these programs, subject to certain conditions, such as mileage and vehicle condition, a manufacturer is required to repurchase those vehicles at a pre-negotiated price thereby eliminating our risk on the resale of the vehicles. In 2002, approximately 3% of repurchase program vehicles did not meet the conditions for repurchase.

Car Rental Airport Rental Concession Fees.    In general, concession fees for airport locations are based on a percentage of total commissionable revenues (as determined by each airport authority), subject to minimum annual guarantee amounts. Concessions are typically awarded by airport authorities every three to five years based upon competitive bids. Our concession agreements with the various airport authorities generally impose certain minimum operating requirements, provide for relocation in the event of future construction and provide for abatement of the minimum annual guarantee in the event of extended low passenger volume.

Car Rental Competition.    The vehicle rental industry is characterized by intense price and service competition. In any given location, we and our franchisees may encounter competition from national, regional and local companies, many of which have greater resources than the Avis and Budget systems. Nationally, our principal competitor is The Hertz Corporation, however, we also compete with National Car Rental System, Inc., Alamo Rent-A-Car, LLC, Dollar Rent A Car System, Inc., Thrifty Rent-A-Car System, Inc and Enterprise Rent-A-Car Company. In addition, we compete with a large number of regional and local smaller vehicle rental companies throughout the country.

Competition in the U.S. vehicle rental operations business is based primarily upon price, reliability, national distribution, usability of booking systems, ease of rental and return and other elements of customer service. In addition, competition is influenced strongly by advertising and marketing.

Fleet Management Services Business (11% and 15% of revenue for 2002 and 2001, respectively)

Through our acquisition of Avis Group Holdings in March 2001, we acquired a portion of the fleet management business we had previously sold to Avis in June 1999. As a result, we generated no revenue in this business in 2000. PHH Vehicle Management Services LLC (d/b/a PHH Arval), the second largest provider of outsourced fleet management services, and Wright Express LLC, the largest proprietary fleet card service provider in the United States comprise our fleet management services business.

We provide corporate clients and government agencies the following services and products for which we are generally paid a monthly fee:

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Growth.    We intend to focus our efforts for growth on the large fleet segment and middle market fleets as well as fee based services to new and existing clients. We also intend to increase the cross marketing of products offered by Wright Express and PHH Arval to our customers.

Competition.    The principal factors for competition in vehicle management services are service, quality and price. We are competitively positioned as a fully integrated provider of fleet management services with a broad range of product offerings. Among providers of outsourced fleet management services, we rank second in North America in the number of leased vehicles under management and first in the number of proprietary fuel and maintenance cards for fleet use in circulation. There are four other major providers of comprehensive outsourced fleet management services in the United States, GE Capital Fleet Services, Wheels Inc. Automotive Resources International (ARI), and CitiCapital, hundreds of local and regional competitors, and numerous competitors who focus on one or two products. In the United States, it is

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estimated that only 52% of fleets are leased by third-party providers. The unpenetrated demand and the continued focus by corporations on cost efficiency and outsourcing will provide the growth platform in the future.

Discontinued Operation

Parking Facility Business.    On May 22, 2002, we announced that we had completed the sale of our National Car Parks subsidiary, a private parking operator in the United Kingdom, for total consideration of $1.2 billion in cash.

Vehicle Services Trademarks and Intellectual Property

The service marks "Avis" and "Budget", related marks incorporating the words "Avis" or "Budget", and related logos are material to our car rental business. Our subsidiaries and franchisees, actively use these marks. All of the material marks used in the Avis and Budget businesses are registered (or have applications pending for registration) with the United States Patent and Trademark Office as well as major countries worldwide where Avis and Budget franchises are in operation. We own the marks used in the Avis and Budget businesses. The service marks "Wright Express," "WEX," "PHH" and related trademarks and logos are material to our fleet services business. Wright Express, PHH Arval and their licensees actively use these marks. All of the material marks used by Wright Express and PHH Arval are registered (or have applications pending for registration) with the United States Patent and Trademark Office. All of the material marks used by PHH Arval are also registered in major countries throughout the world where the fleet management services are offered by Arval PHH. We own the marks used in Wright Express' and PHH Arval's business.

Vehicle Services Seasonality

For our Avis and Budget vehicle rental businesses, the third quarter of the year, which covers the summer vacation period, represents the peak season for vehicle rentals. Any occurrence that disrupts travel patterns during the summer period could have a greater adverse effect on Avis' and Budget's annual performance than in other periods. The fourth quarter is generally the weakest financial quarter for the Avis and Budget systems. In 2002 our average monthly Avis rental fleet, excluding franchisees, ranged from a low of approximately 194,000 vehicles in January to a high of approximately 248,000 vehicles in July. For the period of November 22 through December 31, 2002, Budget operated an average fleet of 84,000 vehicles. Rental utilization for Avis, which is based on the number of hours vehicles are rented compared to the total number of hours vehicles are available for rental, ranged from 66.1% in December to 82.1% in August and averaged 73.9% for all of 2002. Rental utilization for Budget, which is based on the number of days vehicles are rented compared to the total number of days vehicles are available for rental, was 76.3% for the period of November 22 through December 31, 2002.

The fleet management services businesses are generally not seasonal.

Vehicle Services Employees

The businesses that make up our Vehicle Services segment employed approximately 33,000 people as of December 31, 2002.

FINANCIAL SERVICES SEGMENT (9%, 15% and 32% of our revenue for 2002, 2001 and 2000, respectively)

Insurance/Wholesale Business (3%, 4% and 10% of our revenue for 2002, 2001 and 2000, respectively)

Our insurance/wholesale business provides (i) enhancement packages for financial institutions and marketing for accidental death and dismemberment insurance and certain other insurance products through our Progeny Marketing Innovations Inc. subsidiary and (ii) marketing for long term care insurance products

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through our Long Term Preferred Care, Inc. subsidiary. With approximately 38 million customers, we offer the following products and services:

Enhancement Package Service.    We sell enhancement packages for financial institution consumer and business checking and deposit account holders primarily through our Progeny subsidiary. Progeny's financial institution clients select a customized package of our products and services and then usually add their own services (such as unlimited check writing privileges, personalized checks, cashiers' or travelers' checks without issue charge, or discounts on safe deposit box charges or installment loan interest rates). With our marketing and promotional assistance, the financial institution then offers the complete package of enhancements to its checking account holders as a special program for a monthly fee. Most of these financial institutions choose a standard enhancement package, which generally includes $10,000 of accidental death and dismemberment insurance and travel discounts. Other enhancements may include Trilegiant's shopping and credit card registration services, a travel newsletter or pharmacy, eyewear or entertainment discounts. The common carrier coverage is underwritten under group insurance policies with two referral underwriters. We generally charge a financial institution client an initial fee to implement this program and monthly fees thereafter based on the number of customer accounts participating in that financial institution's program.

AD&D Insurance.    Through our Progeny subsidiary, we serve as an agent and third-party administrator for marketing accidental death and dismemberment insurance throughout the country to the customers of financial institutions. These products are primarily marketed through direct mail solicitations and telemarketing which generally offer $1,000 of accidental death and dismemberment insurance at no cost to the customers and the opportunity to choose additional coverage of up to $250,000. The annual premium generally ranges from $10 to $250 and we derive revenue primarily from commissions based on premiums received by the insurance carriers that issue the policies we market. Progeny also acts as an administrator for, and markets, term life and hospital accident insurance. Progeny's insurance products and other services are offered primarily to customers of banks, credit unions, credit card issuers and mortgage companies.

Long Term Care Insurance.    Through our LTPC subsidiary, we are one of the largest independent marketers of long term care insurance products in the United States representing six national underwriters. LTPC's sales efforts are supported by over 300 captive agents and 1,165 brokers across the United States. We derive revenue primarily from commissions based on premiums received by the insurance carriers that issue the policies we market.

Distribution Channels.    We market our products to consumers: (i) of financial institutions or other associations through direct marketing; (ii) of financial institutions or other associations through a direct sales force, participating merchants or general advertising; and (iii) through companies and various other entities.

Growth.    Primary growth drivers include expanding our customer base to include larger financial institutions and targeted non-financial partners. In addition, we are expanding the array of insurance products and services sold through the direct marketing channels to existing clients.

Competition.    Our checking account enhancement packages and services compete with similar services offered by other companies, including insurance companies and other third-party marketers. In larger financial institutions, we may also compete with a financial institution's own marketing staff. Competition for the offering of our insurance products through financial institutions is growing and intense. Our competitors include other third-party marketers and large national insurance companies with established reputations that offer products with rates, benefits and compensation similar to ours. The long term care insurance industry is highly competitive. Our competition primarily includes large national insurance companies, such as General Electric Financial Assurance Company.

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Loyalty Solutions (1%, 1% and 4% of our revenue for 2002, 2001 and 2000, respectively)

Our Cims subsidiary operates our loyalty solutions business and develops customer loyalty solutions and insurance products for the benefit of financial institutions and businesses in other industries. The primary customer loyalty solution offered to Cims clients is the loyalty package. Loyalty packages provide targeted consumers of client organizations with a "package" of benefits and services for the purpose of improving customer retention, attracting consumers to become customers of the client organization and encouraging them to buy additional services. For example, packages include discounted travel services such as discounts on vacation rentals, car rentals, travel insurance, timeshare weeks, cruises, hotels and airlines. As of December 31, 2002, Cims has expanded its clients' membership and customer base to approximately 16.3 million individuals. Cims clients include over 50 financial institutions throughout Europe, South Africa and Asia. Cims offers travel and real estate benefits and other services within its loyalty packages for the benefit of consumers. Cims also leverages its internal insurance competencies and strategic relationships to provide insurance benefits to consumers.

Growth.    The primary growth drivers for Cims are (i) to increase the number of consumers, from within our existing client base, who participate in loyalty programs for their particular financial institution, (ii) to increase the number of financial institutions we partner with for their respective loyalty marketing programs, (iii) to develop marketing relationships with clients in other industries (wireless providers for example) and (iv) to offer multiple loyalty solutions to our clients.

Competition.    Cims represents an outsourcing alternative to marketing departments of large retail organizations. Cims competes with certain other niche loyalty solution providers throughout Europe and internal marketing groups of large financial institutions.

Tax Preparation Business (1%, 1% and 1% of our revenue for 2002, 2001 and 2000, respectively)

Our Jackson Hewitt Inc. subsidiary ("Jackson Hewitt") is the second largest tax preparation service system in the United States. The Jackson Hewitt® franchise system is comprised of a 48-state network (and the District of Columbia) with over 4,100 offices operating under the trade name and service mark "Jackson Hewitt Tax Service®." Office locations range from stand-alone store front offices to kiosk offices within Wal-Mart, Kmart and other retail stores. Through the use of proprietary interactive tax preparation software, we are engaged in the preparation and electronic filing of federal and state individual income tax returns. During 2002, Jackson Hewitt prepared over 2.5 million tax returns, which represented an increase of 13% from the approximately 2.2 million tax returns prepared during 2001. To complement our tax preparation services, we also offer accelerated check refunds, assisted direct deposits, refund anticipation loans and derivative financial products to our tax preparation customers through designated banks, as well as Gold Guarantee®, our enhanced warranty product. In 2003, Jackson Hewitt launched a MasterCard branded stored-value card, the Jackson Hewitt CashCardsmwhich provides customers a convenient new payment option. Franchisees pay an initial franchise fee and royalty and marketing fees.

Growth.    We believe growth in the tax preparation industry will come primarily from organic growth in franchised and corporate-owned offices, selling new franchises, the application of proven management techniques, and new product and service offerings.

During 1999, Jackson Hewitt, in conjunction with two of its largest franchisees, created an independent joint venture, Tax Services of America, Inc. ("TSA"), to maximize Jackson Hewitt's ability to add independent tax preparation firms to its franchise system. Jackson Hewitt initially contributed approximately 80 company-owned stores and as of December 31, 2001 had an approximate 89% interest in the form of preferred stock. The two other parties to the joint venture contributed a total of 40 stores in exchange for common stock in TSA. On January 18, 2002, Jackson Hewitt purchased all of the then outstanding common stock of TSA for approximately $4.0 million. During 2002, TSA prepared over 300,000 returns. TSA currently has over 500 offices and is expected to prepare over 400,000 tax returns in 2003. TSA's objective is to grow organically and by acquiring independent tax preparation firms in areas where TSA is licensed to operate and convert them to the Jackson Hewitt system.

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Competition.    Tax preparation businesses are highly competitive. There are a substantial number of tax preparation firms and accounting firms that offer tax preparation services. Commercial tax preparers are highly competitive with regard to price, service and reputation for quality. Our largest competitor, H&R Block, is a nationwide tax preparation service with approximately 9,000 locations. As a result of H&R Block's shift to an owner/operator business model, Jackson Hewitt has become the leading franchisor of tax preparation services.

Individual Membership Business (4%, 9% and 17% of our revenue for 2002, 2001 and 2000, respectively)

The membership business markets various clubs and services to individuals through client proprietary lists (such as banks, financial institutions, retailers, oil companies and internet service providers) for a membership fee.

On July 2, 2001, we entered into an agreement with Trilegiant Corporation where we retained substantially all of the assets and liabilities of the existing membership business and licensed Trilegiant the right to market products utilizing our intellectual property to new members. Similar to our other franchise businesses, we receive a royalty from Trilegiant on all future revenue generated by any new member of Trilegiant. For the 40 year term of the license agreement, the royalty fee on revenues generated by the new members will initially be 5% and increase to approximately 16% over ten years. In addition, we continue to be obligated to provide membership benefits to our existing members as of July 2, 2001 and have entered into an arrangement with Trilegiant whereby Trilegiant provides all of the membership fulfillment services to our existing members for a fee. As a result, we continue to receive membership fees from our existing members.

As of December 31, 2002, Trilegiant had serviced approximately 21.2 million memberships, 11.4 million of which consist of our existing memberships. Trilegiant provides members with access to a variety of discounted products and services in such areas as retail shopping, travel, personal finance and auto and home improvement. Trilegiant also affiliates with business partners such as leading financial institutions, retailers, and oil companies to offer membership as an enhancement to their credit card, charge card or other customers. Participating institutions generally receive commissions on initial and renewal memberships, based on a percentage of the net membership fees. Individual membership programs offer consumers discounts on many brand categories by providing shop at home convenience in areas such as retail shopping, travel, automotive and home improvement.

Trilegiant offers the following membership programs from which we receive a royalty on sales to new members, including: Shoppers Advantage®, a discount shopping program; Travelers Advantage®, a discount travel service program; The AutoVantage® Service, a program which offers preferred prices on new cars and discounts on maintenance, tires and parts; AutoVantage Gold®, a program which provides a premium version of the AutoVantage® Service; Credit Card Guardian® and "Hot-Line", services which enable consumers to register their credit and debit cards to keep the account numbers securely in one place; The PrivacyGuard® and Credentials®, services which provide monitoring of a member's credit history, driving records and medical files; The Buyers Advantage®, a service which extends manufacturer's warranties; CompleteHome®, a service designed to save members time and money in maintaining and improving their homes; The Family FunSaver Club®, a program which provides the opportunity to purchase family travel services and other family related products at a discount; and The HealthSaversm, a program which provides discounts on prescription drugs, eyewear, eye care, dental care, selected health-related services and fitness equipment.

Investment in Trilegiant.    We own preferred stock which is currently convertible, at any time at our option, into approximately 32% of Trilegiant's common stock. In July 2001, we advanced approximately $100 million in cash and $33 million of prepaid assets to support Trilegiant's marketing activities. In addition, we have provided Trilegiant with a $35 million revolving line of credit under which advances are at our sole and unilateral discretion. At December 31, 2002, there were no advances outstanding under this line of credit. We are not obligated or contingently liable for any debt incurred by Trilegiant.

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In connection with marketing agreements entered into with a third party, we provided a $75 million loan facility to a subsidiary of Trilegiant under which we advanced funds to Trilegiant for marketing performed by Trilegiant on behalf of the third party. Under the terms of the agreements, Trilegiant will provide certain services to the third party in exchange for commissions. As part of our royalty arrangement with Trilegiant, we will participate in those commissions. Trilegiant will repay borrowings under this facility as commissions are received by Trilegiant from the third party. As of December 31, 2002, the outstanding balance under this loan facility was $57 million.

All of Trilegiant's common stock is owned by the executives and senior management of Trilegiant, many of whom are former employees of our individual membership business. Certain of our officers serve on the Board of Directors of Trilegiant to oversee our interest in Trilegiant.

Competition.    The membership services industry is highly competitive. Competitors include membership services companies, as well as large retailers, travel agencies, insurance companies and financial service institutions, some of which have financial resources, product availability, technological capabilities or customer bases that may be greater than ours.

Financial Services Trademarks and Other Intellectual Property.

The service marks "Jackson Hewitt" and "Jackson Hewitt Tax Service" and related marks and logos are material to Jackson Hewitt's business. We, through our franchisees, actively use these marks. The trademarks and logos are registered (or have applications pending for registration) with the United States Patent and Trademark Office. We own the marks used in the Jackson Hewitt business. The service mark "Progeny Marketing Innovations" is material to Progeny's business. Progeny actively uses this mark, for which an application is pending for registration in the United States Patent and Trademark Office. The individual membership business trademarks and service marks listed above and related logos are material to the individual membership business. In connection with the Trilegiant outsourcing arrangement, we license the individual membership business trademarks and service marks listed above to Trilegiant in exchange for the licensing fee mentioned above. Individual membership business trademarks and logos are registered (or have applications pending for registration) with the United States Patent and Trademark Office, unless otherwise indicated above. We own the marks used in the individual membership business.

Financial Services Seasonality.

Our direct marketing and individual membership businesses are generally not seasonal. However, since substantially all of our franchisees' customers file their tax returns during the period from January through April of each year, substantially all Jackson Hewitt franchise royalties are received during the first and second quarters of each year. As a result, Jackson Hewitt operates at a loss for the remainder of the year. Historically, such losses primarily reflect payroll of year-round personnel, the update of tax software and other costs and expenses relating to preparation for the following tax season.

Financial Services Employees

The businesses that make up our Financial Services segment employed approximately 2,800 people as of December 31, 2002.

GEOGRAPHIC SEGMENTS

Financial data for geographic segments are reported in Note 29—Segment Information to our Consolidated Financial Statements included in Item 8 of this Form 10-K.

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REGULATION

Franchise Regulation.    The sale of franchises is regulated by various state laws, as well as by the Federal Trade Commission (the "FTC"). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. Although no assurance can be given, proposed changes in the FTC's franchise rule should have no adverse impact on our franchised businesses. A number of states require registration or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our franchising operations have not been materially adversely affected by such existing regulation, we cannot predict the effect of any future federal or state legislation or regulation.

Real Estate Regulation.    The federal Real Estate Settlement Procedures Act ("RESPA") and state real estate brokerage laws restrict payments which real estate and mortgage brokers and other parties may receive or pay in connection with the sales of residences and referral of settlement services (e.g., mortgages, homeowners insurance, title insurance). Such laws may to some extent restrict preferred alliance arrangements involving our real estate brokerage franchisees, real estate brokerage operations, mortgage business and relocation business. Our mortgage business is also subject to numerous federal, state and local laws and regulations, including those relating to real estate settlement procedures, fair lending, fair credit reporting, truth in lending, federal and state disclosure and licensing. Currently, there are local efforts in certain states, which could limit referral fees to our relocation business.

In addition to RESPA and similar state law restrictions on payments which may be received by real estate brokers in connection with the sale of residences and referral of settlement services, with respect to our real estate brokerage business RESPA and similar state laws require timely disclosure of the relationships or financial interests between providers of real estate settlement services. Our real estate brokerage business is also subject to numerous federal, state and local laws and regulations that contain general standards for and prohibitions on the conduct of real estate brokers and sales associates, including those relating to licensing of brokers and sales associates, fiduciary and agency duties, administration of trust funds, collection of commissions, advertising, and consumer disclosures. Under state law, our real estate brokers have the duty to supervise and are responsible for the conduct of their sales associates.

It is a common practice for online mortgage and real estate related companies to enter into advertising, marketing and distribution arrangements with other Internet companies and Web sites, whereby the mortgage and real estate related companies pay fees for advertising, marketing and distribution services and other goods and facilities. The applicability of RESPA's referral fee prohibitions to the compensation provisions of these arrangements is unclear and the Department of Housing and Urban Development has provided no guidance to date on the subject.

Timeshare Exchange Regulation.    Our timeshare exchange business is subject to foreign, federal, state and local laws and regulations including those relating to taxes, consumer credit, environmental protection and labor matters. In addition, we are subject to state statutes in those states regulating timeshare exchange services, and must prepare and file annually certain disclosure guides with regulators in states where required. While our timeshare exchange business is not subject to those state statutes governing the development of timeshare condominium units and the sale of timeshare interests, such statutes directly affect both our timeshare sales and marketing business (see below) and the other members and resorts that participate in the RCI exchange programs. Therefore, the statutes indirectly impact our timeshare exchange business.

Timeshare Sales and Marketing Regulation.    Our timeshare sales and marketing business is subject to extensive regulation by the states in which our resorts are located and in which its vacation ownership interests are marketed and sold. In addition, we are subject to federal legislation, including without limitation, the Federal Trade Commission Act; the Fair Housing Act; the Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans; the Real Estate Settlement Procedures Act and Regulation X promulgated thereunder

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which require certain disclosures to borrowers regarding the settlement and servicing of loans; the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, the Telemarketing and Fraud and Abuse Prevention Act, and the Civil Rights Acts of 1964, 1968 and 1991. In Australia, we are regulated by the Australian Securities and Investments Commission.

Many states have laws and regulations regarding the sale of vacation ownership interests. The laws of most states require a designated state authority to approve a timeshare public report, a detailed offering statement describing the resort operator and all material aspects of the resort and the sale of vacation ownership interests. In addition, the laws of most states in which we sell vacation ownership interests grant the purchaser of such an interest the right to rescind a contract of purchase at any time within a statutory rescission period, which generally ranges from three to ten days. Furthermore, most states have other laws that regulate our timeshare sales and marketing activities, such as real estate licensing laws, travel sales licensing laws, anti-fraud laws, telemarketing laws, telephone solicitation laws, including Do Not Call legislation and restrictions on the use of predictive dialers, prize, gift and sweepstakes laws, labor laws and various regulations governing access and use of our resorts by disabled persons.

Internet Regulation.    Although our business units' operations on the Internet are not currently regulated by any government agency in the United States beyond regulations discussed above and applicable to businesses generally, it is likely that a number of laws and regulations may be adopted governing the Internet. In addition, existing laws may be interpreted to apply to the Internet in ways not currently applied. Regulatory and legal requirements are subject to change and may become more restrictive, making our business units' compliance more difficult or expensive or otherwise restricting their ability to conduct their businesses as they are now conducted.

Vehicle Rental and Fleet Leasing Regulation.    We are subject to federal, state and local laws and regulations including those relating to taxing and licensing of vehicles, franchising, consumer credit, environmental protection and labor matters. The principal environmental regulatory requirements applicable to our vehicle and rental operations relate to the ownership or use of tanks for the storage of petroleum products, such as gasoline, diesel fuel and waste oils; the treatment or discharge of waste waters; and the generation, storage, transportation and off-site treatment or disposal of solid or liquid wastes. We operate 467 Avis and Budget locations at which petroleum products are stored in underground or aboveground tanks. We have instituted an environmental compliance program designed to ensure that these tanks are in compliance with applicable technical and operational requirements, including the replacement and upgrade of underground tanks to comply with the December 1998 EPA upgrade mandate and periodic testing and leak monitoring of underground storage tanks. We believe that the locations where we currently operate are in compliance, in all material respects, with such regulatory requirements.

We may also be subject to requirements related to the remediation of, or the liability for remediation of, substances that have been released to the environment at properties owned or operated by us or at properties to which we send substances for treatment or disposal. Such remediation requirements may be imposed without regard to fault and liability for environmental remediation can be substantial.

We may be eligible for reimbursement or payment of remediation costs associated with future releases from its regulated underground storage tanks and have established funds to assist in the payment of remediation costs for releases from certain registered underground tanks. Subject to certain deductibles, the availability of funds, compliance status of the tanks and the nature of the release, these tank funds may be available to us for use in remediating future releases from its tank systems.

A traditional revenue source for the vehicle rental industry has been the sale of loss damage waivers, by which rental companies agree to relieve a customer from financial responsibility arising from vehicle damage incurred during the rental period. Approximately 3.4% of our vehicle operations revenue during 2002 was generated by the sale of loss damage waivers. Approximately 40 states have considered legislation affecting the loss damage waivers. To date, 24 states have enacted legislation which requires disclosure to each customer at the time of rental that damage to the rented vehicle may be covered by the customer's

33



personal automobile insurance and that loss damage waivers may not be necessary. In addition, in the late 1980's, New York enacted legislation which eliminated our right to offer loss damage waivers for sale and limited potential customer liability to $100. Pursuant to new legislation effective February 24, 2003, New York will permit the sale of loss damage waivers at a capped rate of $9.00 per day for cars with an MSRP of less than $30,000 and $12.00 per day for cars with an MSRP of $30,000 or more. Moreover Nevada has capped rates for loss damage waivers at $15.00 per day. California has capped these rates at either $9.00 per day for cars with an MSRP of $19,000 or less, or $15.00 per day for cars with an MSRP of $19,000 to $34,999, but there is no cap for cars with an MSRP of $35,000 or more.

We are also subject to regulation under the insurance statutes, including insurance holding company statutes, of the jurisdictions in which its insurance company subsidiaries are domiciled. These regulations vary from state to state, but generally require insurance holding companies and insurers that are subsidiaries of insurance holding companies to register and file certain reports including information concerning their capital structure, ownership, financial condition and general business operations with the state regulatory authority, and require prior regulatory agency approval of changes in control of an insurer and intercorporate transfers of assets within the holding company structure. Such insurance statutes also require that we obtain limited licenses to sell optional insurance coverage to our customers at the time of rental.

The payment of dividends to us by our insurance company subsidiaries is restricted by government regulations in Colorado, Bermuda and Barbados affecting insurance companies domiciled in those jurisdictions.

Our vehicle rental and fleet leasing businesses could be liable for damages in connection with motor vehicle accidents under the theory of vicarious liability. Under this theory, companies that lease or rent motor vehicles may be subject to liability for the tortuous acts of their lessees/renters, even in situations where the leasing/rental company has not been negligent and there is no product defect involved.

Wright Express Financial Services Corporation is subject to a variety of state and federal laws and regulations applicable to FDIC-insured, state-chartered financial institutions.

Marketing Regulation.    Primarily through our insurance/wholesale business, we market our products and services via a number of distribution channels, including direct mail, telemarketing and online. These channels are regulated on the state and federal levels and we believe that these activities will increasingly be subject to such regulation. Such regulation, including anti-fraud laws, consumer protection laws, telemarketing laws and telephone solicitation laws, may limit our ability to solicit new members or to offer one or more products or services to existing members. In addition to direct marketing, our insurance/wholesale business is subject to various state and local regulations including, as applicable, those of state insurance departments. While we have not been adversely affected by existing regulations, we cannot predict the effect of any future federal, state or local legislation or regulation.

In November 1999, the Federal Gramm-Leach-Bliley Act became law. This Act and its implementing regulations modernized the regulatory structure affecting the delivery of financial services to consumers and provided for new requirements and limitations relating to direct marketing by financial institutions to their customers. Compliance with the Act was required beginning July 1, 2001, and we have taken various steps to ensure our compliance; however, since specific aspects of the implementing regulations relating to this Act remain to be clarified, it is unclear what conclusive effect, if any, such regulations might have on our business.

We are also aware of, and are actively monitoring the status of, certain proposed privacy-related state legislation that might be enacted in the future; it is unclear at this point what effect, if any, such state legislation might have on our businesses.

Global Distribution Services Regulation.    Our global distribution services business is subject to regulation primarily in the United States, the European Union and Canada. Each jurisdiction's rules are largely based on the same set of core premises: that a computerized reservation system must treat all participating airlines equally, whether or not they are owners of the system; that airlines owning computerized

34



reservations systems must not discriminate against the computerized reservation systems they do not own; and that computerized reservation system relationships with travel agencies should not be an impediment to competition from other computerized reservation systems or to the provision of services to the traveler. The U.S. and EU rules have the greatest impact on us because of the volume of business transacted by us in those jurisdictions. Neither jurisdiction currently seeks to regulate computerized reservation system relationships with non-airline participants, such as hotel and car rental companies, although the EU rules allow computerized reservation systems to incorporate rail services into their displays and such rail services are therefore subject to certain sections of the EU rules.

The rules in both the United States and the European Union include a non-discriminatory fee provision that requires all airlines to be charged the same fees for the same level of participation. The EU rules go further and require that fees must be reasonably structured and reasonably related to the cost of the service provided and used. The rules in both jurisdictions also regulate the terms of the contracts between the systems and travel agencies for use of the systems. In this regard, the EU rules include a provision relating to productivity pricing. Pursuant to this rule, any productivity benefits payable to a travel agency by a GDS for efficient use of the system must be based on ticketed segments.

Both the United States and European Union rules include a mandatory participation provision that requires the owner airlines to provide the same data and the same functionality to all GDS's and to accept and confirm bookings with equal timeliness in all GDS's. The rules in both jurisdictions also regulate the type of marketing data sold by the systems. Regulators in the United States and the European Union have announced proposed changes to the existing rules which would eliminate rules relating to mandatory participation and non-discriminatory pricing. The United States also proposes to ban or severely limit the payment of productivity benefits to travel agencies by systems. Both jurisdictions also propose to modify the regulations relating to the sale of marketing data. The proposed U.S. rule changes are subject to a comment period during which we intend to provide our views. The proposed EU rules have not yet been issued in draft form but are expected in the first half of 2003. We have actively provided our views to the EU commission and plan to comment on the draft when issued. If promulgated, as proposed, the revised rules could adversely affect the operations of Galileo.

Travel Agency Regulation.    The products and services we provide are subject to various federal, state and local regulations. We must comply with laws and regulations relating to our sales and marketing activities, including those prohibiting unfair and deceptive advertising or practices. Our travel service is subject to laws governing the offer and/or sale of travel products and services, including laws requiring us to register as a "seller of travel," to comply with disclosure. In addition, many of our travel suppliers and global distribution systems are heavily regulated by the United States and other governments and we are indirectly affected by such regulation

EMPLOYEES

As of December 31, 2002, we employed approximately 85,000 people. Management considers our employee relations to be satisfactory.

ITEM 2.    PROPERTIES

Our principal executive offices are located in leased space at 9 West 57th Street, New York, NY 10019 with a lease term expiring in 2013. Many of our general corporate functions are conducted at leased offices at One Campus Drive, 7 Sylvan Way, 1 Sylvan Way and 10 Sylvan Way, Parsippany, New Jersey and one owned facility located at 6 Sylvan Way, Parsippany, New Jersey 07054. Executive offices are also located at Landmark House, Hammersmith Bridge Road, London, England W69EJ.

Our real estate brokerage and settlement services businesses lease over seven million square feet of domestic office space under 1,469 leases. NRT corporate headquarters are located at 339 Jefferson Road, Parsippany, NJ pursuant to a lease expiring in 2007. NRT leases approximately 31 facilities serving as regional headquarters or large individual real estate offices; over 140 facilities serving as location administration, training facilities or storage, and approximately 950 offices under multiple leases serving as

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brokerage sales offices. These offices are generally located in shopping centers and small office parks, with lease terms not in excess of five years.

Our lodging franchise business leases space for its reservations centers and data warehouse in Aberdeen, South Dakota; Knoxville, Tennessee and St. John, New Brunswick, Canada pursuant to leases that expire in 2004, 2004, and 2009 respectively. In addition, our lodging and real estate businesses share approximately four leased office spaces within the United States.

Our timeshare exchange business has three properties which we own; a 200,000 square foot call center in Carmel, Indiana; a 200,000 square foot call center in Cork, Ireland and a call center located in Kettering, UK. Our timeshare exchange business also has approximately 10 leased offices located within the United States and approximately 38 additional leased spaces in various countries outside the United States.

Our timeshare sales and marketing business owns an 80,750 square foot facility in Redmond, Washington and leases space for call center and administrative functions in Syracuse, New York, Bellevue, Washington, Las Vegas, Nevada and Orlando, Florida, pursuant to leases expiring in 2005, 2006, 2006 and 2011, respectively. In addition, approximately 90 marketing and sales offices are leased throughout the United States.

Our vacation home rental business operations are managed in two owned locations (Earby, England and Monterrigioni, Italy) and four leased locations (Embsay, England; Leeds, England; Copenhagen, Denmark and Hamburg, Germany). The owned locations are comprised of 38,000 square feet and 1,200 square feet at Earby and Monterrigioni respectively. Our leased locations are comprised of 96,615 square feet and operate pursuant to leases that expire in 2003, 2004 and 2006, respectively.

Our relocation business has its main corporate operations in two leased buildings in Danbury, Connecticut with lease terms expiring in 2005 and 2008. There are also five regional offices located in Mission Viejo and Walnut Creek, California; Chicago, Illinois; Irving, Texas and Bethesda, Maryland, which provide operation support services. We own the facility in Mission Viejo and operate the other facilities referred to in the preceding sentence pursuant to leases that expire in 2005, 2004, 2003 and 2003, respectively. International offices are located in Swindon and Hammersmith, United Kingdom; Melbourne and Brisbane, Australia; Hong Kong and Singapore pursuant to leases that expire in 2017, 2012, 2005, 2003, 2003 and 2003, respectively.

Our mortgage business has centralized its operations to one main area occupying various leased offices in Mt. Laurel, New Jersey for a total of approximately 855,000 square feet. The lease terms expire over the next five years, with one lease expiring in 2022. Our mortgage business has recently entered into a lease for a new building which was completed and occupied in the beginning of 2003. The new lease is for 175,000 square feet and expires in 2013. Regional sales offices are located in Englewood, Colorado; Jacksonville, Florida and Santa Monica, California, pursuant to leases that expire in 2003, 2005 and 2005, respectively.

Our vehicle services segment owns a 158,000 square foot facility in Virginia Beach, Virginia, which serves as a satellite administrative and reservations facility for Avis rental car operations. Office space is also leased in Lisle, Illinois; Orlando, Florida and Denver, Colorado pursuant to leases that expire in 2004, 2005, and 2007, respectively. Our vehicle services segment leases space for its car reservations at four locations in the United States and two locations in Canada pursuant to leases expiring in 2006, 2009, 2009, 2010, 2010 and 2011. In addition, there are approximately 19 leased office locations in the United States.

We lease or have vehicle rental concessions for both the Avis and Budget brands at multiple locations throughout the world. Avis operates 729 locations in the United States and 235 locations outside the United States. Of those locations, 231 in the United States and 73 outside the United States are at airports. Budget operates at 565 locations in the United States of which 138 are at airports. Budget also operates at 113 locations outside the United States. Typically, an airport receives a percentage of vehicle rental revenues, with a guaranteed minimum. Because there is a limit to the number of vehicle rental locations in an airport, vehicle rental companies frequently bid for the available locations, usually on the basis of the size of the guaranteed minimums.

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PHH Arval leases office space and marketing centers in seven locations in the United States and Canada, with approximately 88,000 square feet in the aggregate. PHH Arval maintains a 200,000 square foot headquarters office in Hunt Valley, Maryland. In addition, Wright Express leases approximately 180,000 square feet of office space in two domestic locations.

Our insurance/wholesale business leases four domestic office spaces in Franklin, Tennessee with lease terms ending in 2003, 2006 and 2009. In addition, there are ten leased locations internationally that function as sales and administrative office for Cims with the main office located in Portsmouth, United Kingdom.

Our tax preparation service leases a 27,000 square foot facility in Sarasota, Florida.

Our travel distribution business has three properties, which we own; a 256,000 square foot data center in Greenwood, Colorado; a 32,000 square foot facility in Atlanta, Georgia and a 20,000 square foot facility in Lakeport, California. The travel distribution business also leases 118,000 square feet of office space in Rosemont, Illinois; 233,000 square feet of office space among five locations in the Denver, Colorado area; 39,000 square feet of office space in Honolulu, Hawaii; approximately 18 additional properties within the United States and 45 leased spaces in various countries outside the United States.

Our travel operations have leased locations in Aurora, Colorado; Nashville, Tennessee and Moore, Oklahoma. They occupy a total of approximately 133,000 square feet pursuant to leases expiring in 2006, 2006, and 2003, respectively.

Trust International operates in three locations for call center and technical support operations in Frankfurt, Germany, Singapore and Orlando, Florida. WizCom operates out of leased space in Garden City, New York.

We believe that such properties are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.

ITEM 3.    LEGAL PROCEEDINGS

After the April 15, 1998 announcement of the discovery of accounting irregularities in the former CUC business units, and prior to the date of this Annual Report on Form 10-K, approximately 70 lawsuits claiming to be class actions and other proceedings were commenced against us and other defendants.

In re Cendant Corporation Litigation, Master File No. 98-1664 (WHW) (D.N.J.) (the "Securities Action"), is a consolidated class action consisting of over sixty constituent class action lawsuits. The Securities Action is brought on behalf of all persons who acquired securities of the Company and CUC, except our PRIDES securities, between May 31, 1995 and August 28, 1998. Named as defendants are the Company; twenty-eight current and former officers and directors of the Company, CUC and HFS; and Ernst & Young LLP, CUC's former independent accounting firm.

The Amended and Consolidated Class Action Complaint in the Securities Action alleges that, among other things, the lead plaintiffs and members of the class were damaged when they acquired securities of the Company and CUC because, as a result of accounting irregularities, the Company's and CUC's previously issued financial statements were materially false and misleading, and the allegedly false and misleading financial statements caused the prices of the Company's and CUC's securities to be inflated artificially. The Amended and Consolidated Complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act") and Sections 10(b), 14(a), 20(a), and 20A of the Securities Exchange Act of 1934 (the "Exchange Act").

On January 25, 1999, the Company answered the Amended Consolidated Complaint and asserted Cross-Claims against Ernst & Young alleging that Ernst & Young failed to follow professional standards to discover, and recklessly disregarded, the accounting irregularities, and is therefore liable to the Company for damages in unspecified amounts. The Cross-Claims assert claims for breaches of Ernst & Young's audit agreements with the Company, negligence, breaches of fiduciary duty, fraud, and contribution.

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On March 26, 1999, Ernst & Young filed Cross-Claims against the Company and certain of the Company's present and former officers and directors, alleging that any failure to discover the accounting irregularities was caused by misrepresentations and omissions made to Ernst & Young in the course of its audits and other reviews of the Company's financial statements. Ernst & Young's Cross-Claims assert claims for breach of contract, fraud, fraudulent inducement, negligent misrepresentation and contribution. Damages in unspecified amounts are sought for the costs to Ernst & Young associated with defending the various shareholder lawsuits and for harm to Ernst & Young's reputation.

On December 7, 1999, we announced that we had reached an agreement to settle claims made by class members in the Securities Action for approximately $2.85 billion in cash. This settlement has received all necessary court approvals and was fully funded by us on May 24, 2002 (see Note 17—Stockholder Litigation Settlement Liability to the Consolidated Financial Statements).

Welch & Forbes, Inc. v. Cendant Corp., et al., No. 98-2819 (WHW) (the "PRIDES Action"), is a consolidated class action filed on behalf of purchasers of the Company's PRIDES securities between February 24 and August 28, 1998. Named as defendants are the Company; Cendant Capital I, a statutory business trust formed by the Company to participate in the offering of PRIDES securities; seventeen current and former officers and directors of the Company, CUC and HFS; Ernst & Young; and the underwriters for the PRIDES offering, Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; and Chase Securities Inc.

The allegations in the Amended Consolidated Complaint in the PRIDES Action are substantially similar to those in the Securities Action. The PRIDES Action states claims under Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, and seeks damages in an unspecified amount. In January 2000, we announced a partial settlement of the PRIDES Action (see Note 22 to the Consolidated Financial Statements).

On March 17, 1999, we entered into an agreement to settle the claims of class members in the PRIDES Action who purchased PRIDES securities on or prior to April 15, 1998 ("eligible persons"). The settlement did not resolve claims based upon purchases of PRIDES after April 16, 1998 and, as of December 31, 2001, other than Welch & Forbes, Inc. v. Cendant Corp., et al., which is previously discussed, no purchasers of PRIDE securities after April 16, 1998 have instituted proceedings against us. Pursuant to the settlement, we distributed more shares of our Common Stock than we otherwise would have under the terms of the original PRIDES.

Semerenko v. Cendant Corp., et al., Civ. Action No. 98-5384 (D.N.J.), and P. Schoenfield Asset Management LLC v. Cendant Corp., et al., Civ. Action No. 98-4734 (D.N.J.) (the "ABI Actions"), were initially commenced in October and November of 1998, respectively, on behalf of a putative class of persons who purchased securities of American Bankers Insurance Group, Inc. ("ABI") between January 27, 1998 and October 13, 1998. Named as defendants are the Company, four former CUC officers and directors and Ernst & Young. The complaints in the ABI actions, as amended on February 8, 1999, assert violations of Sections 10(b), 14(e) and 20(a) of the Exchange Act. The plaintiffs allege that they purchased shares of ABI common stock at prices artificially inflated by the accounting irregularities after we announced a cash tender offer for 51% of ABI's outstanding shares of common stock in January 1998. Plaintiffs also allege that after the disclosure of the accounting irregularities, we misstated our intention to complete the tender offer and a second step merger pursuant to which the remaining shares of ABI stock were to be acquired by us. Plaintiffs seek, among other things, unspecified compensatory damages. On April 30, 1999, the United States District Court for the District of New Jersey dismissed the complaints on motions of the defendants. In an opinion dated August 10, 2000, the United States Court of Appeals for the Third Circuit vacated the District Court's judgment and remanded the ABI Actions for further proceedings. On December 15, 2000, we filed a motion to dismiss those claims based on ABI purchases after April 15, 1998, and the District Court granted this motion on May 7, 2001. The plaintiffs subsequently moved for leave to file a Second Amended Complaint to reallege claims based on ABI purchases between April 16, 1998 and October 13, 1998. That motion was denied on August 15, 2002.

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The settlements described herein do not encompass all litigation asserting claims against us associated with the accounting irregularities. We cannot give any assurance as to the final outcome or resolution of these unresolved proceedings. An adverse outcome from certain unresolved proceedings could be material with respect to earnings in any given reporting period. However, we do not believe that the impact of such unresolved proceedings should result in a material liability to us in relation to our consolidated financial position or liquidity.

In Re Homestore.com Securities Litigation, No. 10-CV-11115 (MJP) (U.S.D.C., C.D. Cal.). On November 15, 2002, Cendant and Richard A. Smith, one of our officers, were added as defendants in a purported class action. The 26 other defendants in such action include Homestore.com, Inc., certain of its officers and directors and its auditors. Such action was filed on behalf of persons who purchased stock of Homestore.com (an Internet-based provider of residential real estate listings) between January 1, 2000 and December 31, 2001. The complaint in this action alleges violations of Sections 10(b) and 20(a) of the Securities and Exchange Act based on purported misconduct in connection with the accounting of certain revenues in financial statements published by Homestore during the class period. On January 10, 2003, we, together with Mr. Smith, filed a motion to dismiss plaintiffs' claims for failure to state a claim upon which relief could be granted. A hearing on our motion to dismiss was held on February 14, 2003 and at the conclusion thereof the motion was submitted to the court for determination.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price on Common Stock

Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "CD". At January 29, 2003 the number of stockholders of record was approximately 9,562. The following table sets forth the quarterly high and low sales prices per share of CD common stock as reported by the NYSE for 2002 and 2001.

2002

  High
  Low
First Quarter   $ 19.99   $ 15.35
Second Quarter     19.03     15.15
Third Quarter     15.66     10.75
Fourth Quarter     12.88     9.04
2001

  High
  Low
First Quarter   $ 14.760   $ 9.625
Second Quarter     20.370     13.890
Third Quarter     21.530     11.030
Fourth Quarter     19.810     12.040

On March 3, 2003, the last sale price of our CD common stock on the NYSE was $12.20 per share.

Dividend Policy

We expect to retain our earnings for the development and expansion of our businesses and the repayment of indebtedness and do not anticipate paying dividends on common stock in the foreseeable future. However, we are currently analyzing the benefits of paying dividends in the future and may change this policy based on the results of our analysis.

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ITEM 6.    SELECTED FINANCIAL DATA

 
  At or For the Year Ended
December 31,

 
  2002
  2001
  2000
  1999
  1998
 
  (In millions, except per share data)

Results of Operations                              
Net revenues   $ 14,088   $ 8,613   $ 4,320   $ 5,755   $ 6,364
   
 
 
 
 
Income (loss) from continuing operations   $ 1,081   $ 342   $ 569   $ (307 ) $ 114
Income (loss) from discontinued operations, net of tax     (205 )   81     91     252     426
Extraordinary losses on early extinguishment of debt, net of tax     (30 )       (2 )      
Cumulative effect of accounting changes, net of tax         (38 )   (56 )      
   
 
 
 
 
Net income (loss)   $ 846   $ 385   $ 602   $ (55 ) $ 540
   
 
 
 
 
Per Share Data                              
CD Common Stock                              
Income (loss) from continuing operations:                              
  Basic   $ 1.06   $ 0.37   $ 0.79   $ (0.41 ) $ 0.13
  Diluted     1.04     0.36     0.77     (0.41 )   0.13
Cumulative effect of accounting changes:                              
  Basic   $   $ (0.05 ) $ (0.08 ) $   $
  Diluted         (0.04 )   (0.08 )      
Net income (loss):                              
  Basic   $ 0.83   $ 0.42   $ 0.84   $ (0.07 ) $ 0.64
  Diluted     0.81     0.41     0.81     (0.07 )   0.61
Financial Position                              
Total assets   $ 35,897   $ 33,544   $ 15,153   $ 15,412   $ 20,230
Total long-term debt, excluding Upper DECS     5,601     6,132     1,948     2,845     3,363
Upper DECS     863     863            
Assets under management and mortgage programs     15,008     11,868     2,861     2,726     7,512
Debt under management and mortgage programs     12,747     9,844     2,040     2,314     6,897
Mandatorily redeemable preferred interest in a subsidiary     375     375     375        
Mandatorily redeemable preferred securities issued by subsidiary holding solely senior debentures issued by the Company             1,683     1,478     1,472
Stockholders' equity     9,315     7,068     2,774     2,206     4,836

In presenting the financial data above in conformity with general accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported. See "Critical Accounting Policies" under Item 7 included elsewhere herein for a detailed discussion of the accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.

See Notes 4, 5 and 7 to the Consolidated Financial Statements for detailed discussions of gains and losses on dispositions of businesses, impairment of investments and other charges (credits) recorded for the years ended December 31, 2002, 2001 and 2000. During 1999, we recorded other charges of $3,032 million ($1,921 million, after tax or $2.56 per diluted share) primarily in connection with the settlement of our class action securities litigation. We also recorded net gains on the dispositions of businesses of $1,109 million ($879 million, after tax or $1.17 per diluted share) during 1999 primarily related to the disposition of our former fleet businesses. During 1998, we recorded other charges of $838 million ($545 million, after tax or $0.62 per diluted share) primarily associated with the termination of a proposed acquisition and the PRIDES litigation settlement.

During 2002 and 2001, we completed a number of acquisitions, which materially impacted our results of operations and financial position. See Note 3 to our Consolidated Financial Statements for a detailed discussion of such acquisitions and the pro forma impact thereof on our results of operations. Additionally, during 2002 we adopted the non-amortization provisions of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." Accordingly, our results of operations for 2001, 2000, 1999 and 1998 reflect the amortization of goodwill and indefinite-lived intangible assets, while our results of operations for 2002 do not reflect such amortization. See Note 12—Intangible Assets to our Consolidated Financial Statements for a pro forma disclosure depicting our results of operations during 2001 and 2000 after applying the non-amortization provisions of SFAS No. 142.

Income (loss) from discontinued operations, net of tax includes the after tax results of discontinued operations and the gain (loss) on disposal of discontinued operations. See Note 6 to our Consolidated Financial Statements for detailed information regarding discontinued operations.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Business Section and our Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein. Unless otherwise noted, all dollar amounts are in millions and those relating to our results of operations are presented before taxes.

We are one of the foremost providers of travel and real estate services in the world. Our businesses provide a wide range of consumer and business services and are intended to complement one another and create cross-marketing opportunities both within and among our business segments. We operate in five business segments:

We seek organic growth in revenues and earnings by serving our customers, applying our core competencies and managing our discretionary spending with a focus on return on investment. Such growth is expected to be augmented by, on a select basis, the acquisition and integration of complementary businesses, the purchase price of which we intend to pay with cash generated by our core operations throughout 2003. We also routinely review and evaluate our portfolio of existing businesses to determine if they continue to meet our current objectives and, from time to time, engage in discussions concerning possible divestitures, joint ventures and related corporate transactions.

During 2002, we completed a number of such transactions, as discussed below.

Acquisitions

On April 17, 2002, we acquired all of the outstanding common stock of NRT Incorporated, the largest residential real estate brokerage firm in the United States, for $230 million, including $3 million of estimated transaction costs and expenses and $11 million related to the conversion of NRT employee stock appreciation rights to CD common stock options. The acquisition consideration was funded through an exchange of 11.5 million shares of CD common stock then-valued at $216 million, which included approximately 1.5 million shares of CD common stock then-valued at $30 million in exchange for existing NRT options. As part of the acquisition, we also assumed approximately $320 million of NRT debt, which was subsequently repaid. Prior to the acquisition, NRT operated as a joint venture between us and Apollo Management, L.P. that acquired independent real estate brokerages, converted them to one of our real estate franchise brands and operated under the brand pursuant to two 50-year agreements. Management

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believes that as a wholly-owned subsidiary, NRT will be a more efficient acquisition vehicle and achieve greater financial and operational synergies. NRT is a component of the Real Estate Services segment.

On April 30, 2002, we acquired approximately 90% of the outstanding common stock of Trendwest Resorts, Inc. for $804 million in our CD common stock (approximately 42.6 million shares) plus $20 million of estimated transaction costs and expenses and $25 million related to the conversion of Trendwest employee stock options into CD common stock options. As part of the acquisition, we assumed $89 million of Trendwest debt, of which $78 million was subsequently repaid. We purchased the remaining 10% of the outstanding Trendwest shares in a merger on June 3, 2002 for approximately 4.8 million shares of our CD common stock aggregating $87 million. Trendwest markets, sells and finances vacation ownership interests. Management believes that this acquisition will provide us with significant geographic diversification and global presence in the timeshare industry. Trendwest is now a component of our Hospitality segment.

On November 22, 2002, we acquired substantially all of the domestic assets of the vehicle rental business of Budget Group, Inc., as well as selected international operations, for approximately $109 million in cash plus $44 million of transaction costs and expenses. As part of the acquisition, we also assumed approximately $2.4 billion of Budget's asset-backed vehicle related debt, which was repaid with the proceeds from our subsequent issuance of $2.0 billion of asset-backed debt and approximately $400 million of borrowings under our $2.9 billion revolving credit facility. Management believes that Budget is a complementary fit with the other leisure travel services we provide through our hotel, timeshare, and travel distribution companies. Budget is now a component of our Vehicle Services segment.

Subsequent to our acquisition of NRT, we acquired 20 other residential real estate brokerage operations through NRT for approximately $399 million, including Arvida Realty Services for approximately $160 million and The DeWolfe Companies for approximately $146 million. The acquisition of real estate brokerages by NRT is a core part of its growth strategy. We also acquired 17 other non-significant businesses during 2002 for aggregate consideration of approximately $582 million in cash, including (i) Equivest Finance, Inc., a timeshare developer, for approximately $98 million; (ii) three European distribution partners of our Galileo subsidiary for approximately $125 million; (iii) Novasol AS, a marketer of privately owned vacation properties in Europe, for approximately $66 million and (iv) 12 other businesses for approximately $256 million primarily within our Hospitality and Travel Distribution segments. None of these acquisitions were significant to our results of operations or financial position individually or in the aggregate.

The following table summarizes the preliminary estimated fair values of net assets acquired and resultant goodwill recognized in connection with the above acquisitions:

 
  Assets
Acquired

  Liabilities
Assumed

  Net
Assets
Acquired

  Goodwill
NRT   $ 2,317   $ 1,014   $ 1,303   $ 1,564
Trendwest     1,148     212     936     687
Budget     3,504     3,351     153     432
Other(*)     1,299     1,050     249     732

(*)
The goodwill resulting from the preliminary allocations of the purchase prices of these businesses aggregated $732 million, of which $241 million, $257 million, $157 million, $13 million and $64 million was allocated to the Real Estate Services, Hospitality, Travel Distribution, Vehicle Services and Financial Services segments, respectively.

The results of operations of businesses we acquired have been included in our consolidated results of operations since their respective dates of acquisition. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when we receive final information, including appraisals, and other analyses. Revisions to the fair values, which may be significant, will be recorded as further adjustments to the purchase price allocations. We are also in the process of integrating the operations of all our acquired businesses and expect to incur costs relating to such integrations. These costs may result from integrating operating

43



systems, relocating employees, closing facilities, reducing duplicative efforts and exiting and consolidating other activities. These costs will be recorded on our Consolidated Balance Sheets as adjustments to the purchase price or on our Consolidated Statements of Income as expenses, as appropriate. For more detailed information regarding the Budget, NRT and Trendwest acquisitions, see Note 3—Acquisitions to our Consolidated Financial Statements.

Dispositions

On May 22, 2002, we sold our NCP subsidiary for approximately $1.2 billion in cash. NCP operated car parking facilities within the United Kingdom and was a part of our Vehicle Services segment. We recorded an after-tax loss of approximately $256 million in the second quarter of 2002 on the sale of this business principally related to foreign currency translation, as a result of the strengthening of the U.S. dollar against the U.K. pound since our acquisition of NCP in 1998 through the date of disposition. Such loss was recorded within the loss on disposal of discontinued operations, net of tax, line item. The account balances and activities of NCP have been segregated and reported as a discontinued operation for all periods presented herein, as required by generally accepted accounting principles.


CRITICAL ACCOUNTING POLICIES

In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it will likely result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results. However, the majority of our businesses operate in environments where we are paid a fee for a service performed, and therefore the results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex.

Mortgage Servicing Rights.    A mortgage servicing right ("MSR") is the right to receive a portion of the interest coupon and fees collected from the mortgagor for performing specified mortgage servicing activities. The value of mortgage servicing rights is estimated based upon an internal valuation that reflects management's estimates of expected future cash flows considering prepayment estimates (developed using a third party model described below), our historical prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves and other economic factors. More specifically, we incorporate an Option Adjusted Spread ("OAS") model to generate and discount cash flows for the MSR valuation. The OAS model generates numerous interest rate paths then calculates the MSR cash flow at each monthly point for each interest rate path and discounts those cash flows back to the current period. The MSR value is determined by averaging the discounted cash flows from each of the interest rate paths. The interest rate paths are generated with a random distribution centered around implied forward interest rates which are determined from the interest rate yield curve at any given point of time. As of December 31, 2002, the implied forward interest rates project an increase of approximately 50 basis points in the yield of the 10-year Treasury Note over the next 12 months. Changes in the yield curve will result in changes to the forward rates implied from that yield curve.

As noted above, a key assumption in our estimate of the MSR valuation are forecasted prepayments. We use a third party model, adjusted to reflect the historical prepayment behavior exhibited by our portfolio, to forecast prepayment rates at each monthly point for each interest rate path in the OAS model. The prepayment forecast is based on historical observations of prepayment behavior in similar periods of refinance incentive. The prepayment forecast incorporates loan characteristics (e.g., loan type and note rate) and factors such as recent prepayment experience, previous refinance opportunities and estimated

44



levels of home equity to determine the prepayment forecast at each monthly point for each interest rate path.

To the extent that fair value is less than carrying value, we would consider the portfolio to have been impaired and record a related charge. Reductions in interest rates different than those predicted in our models could cause us to use different assumptions in the MSR valuation, which could result in a decrease in the estimated fair value of our MSR asset, requiring a corresponding reduction in the carrying value of the asset. To mitigate this risk, we use derivatives that generally increase in value as interest rates decline and conversely decline in value as interest rates increase. Additionally, as interest rates are reduced, we have historically experienced a greater level of refinancings, which has historically mitigated the impact on earnings of the decline in our MSR asset.

Changes in the estimated fair value of the mortgage servicing rights based upon variations in the assumptions (e.g., future interest rate levels, prepayment speeds) cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Changes in one assumption may result in changes to another, which may magnify or counteract the fair value sensitivity analysis and would make such an analysis not meaningful. Additionally, further declines in interest rates due to a weakening economy and geopolitical risks, which result in an increase in refinancing activity or change in the methodology of valuing our MSR asset, could adversely impact the valuation. The carrying value of our MSR asset was approximately $1.4 billion as of December 31, 2002 and the total portfolio that we were servicing approximated $115.8 billion as of December 31, 2002 (refer to Note 14—Mortgage Servicing Activities to our Consolidated Financial Statements for a detailed discussion of the effect of any changes to the value of this asset during 2002 and 2001). The effects of any adverse potential changes in the estimated fair value of our MSR asset are detailed in Note 20—Transfers and Servicing of Financial Assets to our Consolidated Financial Statements.

Retained Interests from Securitizations.    We sell a significant portion of our residential mortgage loans and relocation and timeshare receivables as part of our overall financing and liquidity strategy. We retain the servicing rights and, in some instances, subordinated residual interests in the mortgage loans and relocation and timeshare receivables. With the exception of specific mortgage loans that are sold with recourse, the investors have no recourse to our other assets for failure of debtors to pay when due. Gains or losses relating to the assets securitized are allocated between such assets and the retained interests based on their relative fair values on the date of sale. We estimate fair value of the retained interests based upon the present value of expected future cash flows, which is subject to the prepayment risks, expected credit losses and interest rate risks of the sold financial assets.

Changes in the estimated fair value of the retained interests based upon variations in the assumptions (e.g., prepayment risks, expected credit losses and interest rate risks) cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Changes in one assumption may result in changes to another, which may magnify or counteract the fair value sensitivity analysis and would make such an analysis not meaningful. The carrying value of our retained interests was approximately $1.9 billion at December 31, 2002, of which approximately $1.4 billion represented our mortgage servicing rights asset that was retained upon the sale of the underlying mortgage loans, as described above under "Mortgage Servicing Rights." The effects of any adverse potential changes in the estimated fair value of our retained interests are detailed in Note 20—Transfers and Servicing of Financial Assets to our Consolidated Financial Statements.

Financial Instruments.    We estimate fair values for each of our financial instruments, including derivative instruments. Most of these financial instruments are not publicly traded on an organized exchange. In the absence of quoted market prices, we must develop an estimate of fair value using dealer quotes, present value cash flow models, option pricing models or other conventional valuation methods, as appropriate. The use of these fair value techniques involves significant judgments and assumptions, including estimates of future interest rate levels based on interest rate yield curves, prepayment and volatility factors, and an estimation of the timing of future cash flows. The use of different assumptions may have a material effect on the estimated fair value amounts recorded in the financial statements, which are disclosed in Note 27—

45



Financial Instruments to our Consolidated Financial Statements. In addition, hedge accounting requires that at the beginning of each hedge period, we justify an expectation that the relationship between the changes in fair value of derivatives designated as hedges compared to changes in the fair value of the underlying hedged items be highly effective. This effectiveness assessment involves an estimation of changes in fair value resulting from changes in interest rates and corresponding changes in prepayment levels, as well as the probability of the occurrence of transactions for cash flow hedges. The use of different assumptions and changing market conditions may impact the results of the effectiveness assessment and ultimately the timing of when changes in derivative fair values and the underlying hedged items are recorded in earnings. See Item 7a. "Quantitative and Qualitative Disclosures about Market Risk" for a discussion of the effect of hypothetical changes to these assumptions.

Goodwill and Other Intangible Assets.    We have reviewed the carrying values of our goodwill and other intangible assets as required by Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," by comparing the carrying values of our reporting units to their fair values and determined that the carrying amounts of our reporting units did not exceed their respective fair values. When determining fair value, we utilized various assumptions, including projections of future cash flows. A change in these underlying assumptions will cause a change in the results of the tests and, as such, could cause fair value to be less than the respective carrying amounts. In such event, we would then be required to record a charge, which would impact earnings. We will continue to review the carrying values of goodwill and other intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred.

We provide a wide range of consumer and business services and, as a result, our goodwill and other intangible assets are allocated among many diverse reporting units. Accordingly, it is difficult to quantify the impact of an adverse change in financial results and related cash flows, as such change may be isolated to a small number of our reporting units or spread across our entire organization. In either case, the magnitude of an impairment of such assets, if any, cannot be extrapolated. However, our businesses are concentrated in a few industries and, as such, an adverse change to any of these industries will impact our consolidated results and may result in impairment of our goodwill and other intangible assets. The aggregate carrying value of our goodwill and other intangible assets was approximately $13.2 billion at December 31, 2002, of which $10.7 billion represented goodwill, $1.1 billion represented other indefinite-lived intangible assets and $1.4 billion represented intangible assets with finite lives (refer to Note 12—Intangible Assets to our Consolidated Financial Statements for more information on goodwill and other intangible assets).

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RESULTS OF OPERATIONS—2002 vs. 2001

Our consolidated results from continuing operations comprised the following:

 
  2002
  2001
  Change
 
Net revenues   $ 14,088   $ 8,613   $ 5,475  
   
 
 
 
Expenses, excluding other charges and non-program related interest, net     11,793     7,003     4,790  
Other charges     374     671     (297 )
Non-program related interest, net     262     252     10  
   
 
 
 
Total expenses     12,429     7,926     4,503  
   
 
 
 
Gains on dispositions of businesses         443     (443 )
   
 
 
 
Losses on dispositions of businesses         (26 )   26  
   
 
 
 
Impairment of investments         (441 )   441  
   
 
 
 
Income before income taxes, minority interest and equity in Homestore     1,659     663     996  
Provision for income taxes     556     220     336  
Minority interest, net of tax     22     24     (2 )
Losses related to equity in Homestore, net of tax         77     (77 )
   
 
 
 
Income from continuing operations   $ 1,081   $ 342   $ 739  
   
 
 
 

Net revenues and total expenses increased $5.5 billion and $4.5 billion, respectively, during 2002 primarily due to the acquisitions of the following businesses, which contributed incremental revenues and expenses aggregating $5.4 billion and $4.9 billion, respectively:

Acquired Business

  Date of Acquisition
  Incremental
Contribution to
Net Revenues

  Incremental
Contribution to
Total Expenses

 
Avis Group Holdings, Inc.   March 2001   $ 562   $ 569  
Fairfield Resorts, Inc.   April 2001     137     123  
Galileo International, Inc.   October 2001     1,199     852  
NRT   April 2002     3,034     2,881 (a)
Trendwest   April 2002     348     289 (b)
Budget   November 2002     161     159  
       
 
 
Total Contributions       $ 5,441   $ 4,873  
       
 
 

(a)
Excludes $235 million of non-cash amortization of the pendings and listings intangible asset and $27 million of acquisition and integration related costs.
(b)
Excludes $21 million of non-cash amortization of the pendings and listings intangible asset and $1 million of acquisition and integration related costs.

In addition to the contributions made by acquired businesses, net revenues were favorably impacted by growth in our Real Estate Services and Vehicle Services segments (exclusive of acquisitions). For a detailed discussion of revenue trends, see below.

Partially offsetting the increase in total expenses recorded during 2002 was a decrease of $297 million in other charges as follows:

 
  2002
  2001
  Change
 
Acquisitions and integration related(a)   $ 285   $ 112   $ 173  
Litigation and related(b)     103     86     17  
Restructuring and other unusual(c)     (14 )   379     (393 )
Mortgage servicing rights impairment(d)         94     (94 )
   
 
 
 
Total other charges(e)   $ 374   $ 671   $ (297 )
   
 
 
 

(a)
The 2002 charges represent (i) the non-cash amortization of the pendings and listings intangible asset ($256 million) primarily resulting from our acquisition of NRT and (ii) other acquisition and integration-related costs ($29 million) also primarily resulting from our acquisition of NRT. The 2001 charges primarily related to (i) outsourcing our information technology operations to IBM in connection with the acquisition of Galileo ($78 million), (ii) integrating our existing travel agency

47


(b)
The 2002 and 2001 charges were incurred in connection with settlements or investigations relating to the 1998 discovery of accounting irregularities in the former business units of CUC International, Inc. The 2002 charge was partially offset by a credit of $42 million related to the recovery under our directors' and officers' liability insurance policy in connection with derivative actions arising from former CUC related litigation, while the 2001 charge was partially offset by a non-cash credit of $14 million to reflect an adjustment to the PRIDES class action litigation settlement charge recorded by the Company in 1998.
(c)
The 2002 amount represents non-cash credits related to changes in the original estimates of costs to be incurred in connection with our restructuring initiatives undertaken during 2001 as a result of the September 11, 2001 terrorist attacks. The 2001 amount primarily represents charges related to (i) the restructuring initiatives undertaken in response to the September 11, 2001 terrorist attacks ($192 million), (ii) the funding of an irrevocable contribution to the Real Estate Technology Trust ($95 million), (iii) the funding of Trip Network, Inc. ($85 million) and (iv) a contribution to the Cendant Charitable Foundation ($7 million). The activity and ending balance of the 2001 restructuring accrual can be found in Note 7—Other Charges (Credits) to our Consolidated Financial Statements.
(d)
The 2001 charge was incurred in connection with unprecedented rate reductions subsequent to the September 11, 2001 terrorist attacks that we deemed not to be in the ordinary course of business. The 2002 impairments were recorded as reductions to net revenues.
(e)
See Note 7—Other Charges (Credits) to our Consolidated Financial Statements for a detailed description of each charge.

Additionally, our 2001 operating results were impacted by gains and losses related to the dispositions of businesses, as well as by losses related to the impairment of investments, while our 2002 results were not impacted by such events. During 2001, these events resulted in (i) $443 million of gains primarily related to the sale of our real estate Internet portal ($436 million), (ii) $26 million of losses related to the dispositions of non-strategic businesses and (iii) $441 million of losses related to the impairment of our investments in Homestore, Inc. ($407 million) and lodging and Internet-related businesses ($34 million).

Our overall effective tax rate was 33.5% and 33.2% for 2002 and 2001, respectively. The effective rate for 2002 was higher from the negative impact of a reduction in the amount of foreign tax credits and state net operating losses that were utilized, which was only partially offset by the benefit from the impact on the tax provision from the elimination of goodwill amortization.

Our 2001 operating results were also negatively impacted by after-tax losses of $77 million related to our equity ownership in Homestore, which was received in connection with the sale of our Internet real estate portal to Homestore in February 2001. Our investment in Homestore has been recorded at zero since fourth quarter 2001 and, as such, we are no longer required by generally accepted accounting principles to record a proportionate share of Homestore's losses. Therefore, during 2002, our operating results were not impacted by our investment in Homestore. We have no future obligations relating to our investment in Homestore. For a detailed discussion regarding the sale of our real estate Internet portal and our investment in Homestore, refer to Notes 5 and 6 to our Consolidated Financial Statements.

As a result of the above-mentioned items, income from continuing operations increased $739 million, or 216%, during 2002.

Discussed below are the operating results for each of our segments, which focuses on revenues and Adjusted EBITDA. Adjusted EBITDA is defined as earnings before non-program related interest, income taxes, non-program related depreciation and amortization, minority interest and, in 2001, equity in Homestore. Such measure is then adjusted to exclude items that are of a non-recurring or unusual nature and are also not measured in assessing segment performance. In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," our management believes such discussions are the most informative representation of how management evaluates performance. However, our presentation of Adjusted EBITDA may not be comparable with similar measures used by other companies. The footnotes to the table presented below describe the items that have been excluded from Adjusted EBITDA.

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  Revenues
  Adjusted EBITDA
 
 
  2002
  2001
  % Change
  2002(a)
  2001(b)
  % Change
 
Real Estate Services(c)   $ 4,687   $ 1,859   152 % $ 853   $ 939   (9 %)
Hospitality(d)     2,180     1,522   43 %   625     513   22 %
Travel Distribution(e)     1,695     437   288 %   524     108   385 %
Vehicle Services(f)     4,175     3,322   26 %   408     290   41 %
Financial Services     1,325     1,402   (5 %)   449     310   45 %
   
 
     
 
     
Total Reportable Segments     14,062     8,542         2,859     2,160      
Corporate and Other(g)     26     71   *     (98 )   (73 ) *  
   
 
     
 
     
Total Company   $ 14,088   $ 8,613         2,761     2,087      
   
 
                     
Less: Non-program related depreciation and amortization                     466     477      
Less: Other charges:                                  
  Acquisition and integration related costs                     285     112      
  Litigation and related costs                     103     86      
  Restructuring and other unusual charges                     (14 )   379      
  Mortgage servicing rights impairment                         94      
Less: Non-program related interest, net                     262     252      
Plus: Gains on dispositions of businesses                         443      
Less: Losses on dispositions of businesses                         26      
Less: Impairment of investments                         441      
                   
 
     
Income before income taxes, minority interest and equity in Homestore                   $ 1,659   $ 663      
                   
 
     

*
Not meaningful.
(a)
Adjusted EBITDA excludes non-cash credits of $14 million related to changes in the original estimates of costs to be incurred in connection with restructuring initiatives undertaken during 2001 as a result of the September 11, 2001 terrorist attacks ($6 million, $1 million and $7 million of credits were recorded within Real Estate Services, Vehicle Services and Corporate and Other, respectively).
(b)
Adjusted EBITDA excludes charges of $192 million incurred primarily in connection with restructuring and other initiatives undertaken as a result of the September 11, 2001 terrorist attacks ($31 million, $51 million, $58 million, $7 million, $10 million and $35 million of charges were recorded within Real Estate Services, Hospitality, Vehicle Services, Travel Distribution, Financial Services and Corporate and Other, respectively).
(c)
Adjusted EBITDA for 2002 excludes a charge of $27 million principally related to the acquisition and integration of NRT and other real estate brokerage businesses. Adjusted EBITDA for 2001 excludes charges of $95 million related to the funding of an irrevocable contribution to the Real Estate Technology Trust and $94 million related to the impairment of our mortgage servicing rights asset.
(d)
Adjusted EBITDA for 2002 excludes $1 million of acquisition and integration related costs. Adjusted EBITDA for 2001 excludes a charge of $11 million related to the impairment of investments due in part to the September 11, 2001 terrorist attacks.
(e)
Adjusted EBITDA for 2001 excludes charges of $23 million related to the acquisition and integration of Galileo and Cheap Tickets.
(f)
Adjusted EBITDA for 2001 excludes charges of $5 million related to the acquisition and integration of Avis and $2 million related to the impairment of investments due to the September 11, 2001 terrorist attacks.
(g)
Represents the results of operations of our non-strategic businesses, unallocated corporate overhead and the elimination of transactions between segments. Adjusted EBITDA for 2002 excludes $145 million of litigation and related costs and $1 million of acquisition and integration related costs. Such charges were partially offset by a credit of $42 million related to the recovery under our directors' and officers' liability insurance policy in connection with derivative actions arising from former CUC related litigation. Adjusted EBITDA for 2001 excludes charges of (i) $427 million primarily related to the impairment of our investment in Homestore, (ii) $100 million for litigation and related costs, (iii) $85 million related to the funding of Trip Network, (iv) $78 million related to the outsourcing of our information technology operations to IBM in connection with the acquisition of Galileo, (v) $26 million related to losses on the dispositions of non-strategic businesses in 1999, (vi) $7 million related to a non-cash contribution to the Cendant Charitable Foundation and (vii) $4 million related to the acquisition and integration of Avis. Such charges were partially offset by (i) a gain of $436 million related to the sale of our real estate Internet portal, (ii) a gain of $7 million related to the dispositions of non-strategic businesses and (iii) a credit of $14 million to reflect an adjustment to the settlement charge recorded in the fourth quarter of 1998 for the PRIDES class action litigation.

49


Real Estate Services

Revenues increased $2.8 billion (152%) while Adjusted EBITDA declined $86 million (9%) during 2002. The increase in revenues was principally driven by the contribution of approximately $3.0 billion in revenues from the acquisition of NRT (the operating results of which have been included in our consolidated results since April 17, 2002). The NRT acquisition also contributed $194 million to Adjusted EBITDA during 2002. Prior to our acquisition of NRT, we received royalty and marketing fees of $220 million, real estate referral fees of $37 million and termination fees of $16 million from NRT during 2001. For the period from January 1, 2002 through April 17, 2002, NRT paid us royalty and marketing fees of $66 million, real estate referral fees of $9 million and a termination fee of $16 million. We also had a preferred stock investment in NRT prior to our acquisition that generated dividend income of $10 million and $27 million during 2002 and 2001, respectively.

On a comparable basis, including post-acquisition intercompany royalties paid by NRT, our real estate franchise brands generated incremental royalties of $92 million in 2002, an increase of 18% over 2001. The increase in royalties from our real estate franchise brands primarily resulted from a 10% increase in home sale transactions by franchisees and NRT, and a 10% increase in the average price of homes sold. Royalty increases in the real estate franchise business are recognized with little or no corresponding increase in expenses due to the significant operating leverage within our franchise operations. Industry statistics provided by the National Association of Realtors for the twelve months ended December 31, 2002 indicate that the number of single-family homes sold increased 5% versus the prior year, while the average price of those homes sold increased approximately 9%. Through our continued franchise sales efforts, we have grown our franchised operations and in conjunction with NRT acquisitions of real estate brokerages, we have increased market share as our transaction volume has significantly outperformed the industry.

Revenues and Adjusted EBITDA in 2002 were negatively impacted by a $275 million non-cash provision for impairment of our mortgage servicing rights ("MSR") asset, which is the value of expected future cash flows. As noted above in "Critical Accounting Policies," the valuation of our MSR asset is generated by numerous estimates and assumptions, the most noteworthy being future prepayment rates, which represent the borrowers' propensity to refinance their mortgage. Today's mortgage industry enables homeowners to more easily refinance than they could in the past producing a change in consumer behavior that results in a greater likelihood to refinance in periods of declining interest rates, as experienced in the third quarter of 2002. During such period, interest rates on ten-year Treasury notes and 30-year mortgages declined by 120 basis points and 80 basis points, respectively, which resulted in the lowest interest rate levels in 41 years. As a result, we recognized that steep declines in interest rates experienced throughout the quarter and the related impact on current borrower prepayment behavior necessitated an increase to our estimate of future prepayment rates. Therefore, we updated the third party model we use to value our MSR asset to one that had recently become available in the marketplace, and revised our assumptions in order to better reflect more current borrower prepayment behavior. The combination of these factors resulted in increases to our estimated future loan prepayment rates, which negatively impacted the value of our MSR asset, hence requiring the provision for impairment of our MSR asset. Further declines in interest rates due to a weakening economy and geopolitical risks, which result in an increase in refinancing activity or changes in the methodology of valuing our MSR asset, could adversely impact the valuation.

Excluding the $275 million non-cash provision for impairment of MSRs, revenues from mortgage-related activities increased $28 million in 2002 compared with 2001 as revenue growth from mortgage production was principally offset by a decline in net revenues from mortgage servicing activities. Revenues from mortgage loan production increased $228 million (35%) in 2002 compared with the prior year due to substantial growth in our outsourced mortgage origination and broker business (explained below) and a 6% increase in the volume of loans that we packaged and securitized (sold by us). In 2002, revenues generated from our fee-based outsourcing and broker origination business grew at a faster rate than revenues generated from packaging and selling mortgage loans to the secondary market ourselves. Production fee income on outsourced and brokered loans is generated at the time of closing, whereas originated mortgage loans held for sale generate revenues at the time of sale (typically 30-60 days after closing). Accordingly, our production revenue is now driven by more of a mix in both mortgage loans closed and mortgage loans sold (as opposed to just loans sold). Production loans sold increased $2.1 billion

50


(6%), generating incremental production revenues of $83 million. Mortgage loans closed increased $14.8 billion (33%) to $59.3 billion, comprised of a $14.0 billion (206%) increase in closed loans which were outsourced or brokered, and a $750 million (2%) increase in closed loans to be securitized. The increase in outsourced and brokered loan volume contributed incremental production revenues of $145 million in 2002 compared with 2001. Purchase mortgage closings grew 14% to $28.7 billion, and refinancings increased 58% to $30.6 billion. Additionally, in connection with our securitized loans we realized an increase in margin which is consistent with the mortgage industry operating at a higher percentage of loan production capacity.

Net revenues from servicing mortgage loans declined $199 million, excluding the $275 million non-cash provision of MSRs. However, recurring servicing fees (fees received for servicing existing loans in the portfolio) increased $59 million (17%) primarily due to a 20% year-over-year increase in the average servicing portfolio. Such recurring activity was more than offset by $361 million of increased mortgage servicing rights amortization and valuation adjustments due to the high levels of refinancings and related loan prepayments, resulting from the lower interest rate environment, partially offset by $112 million of incremental net gains from hedging and other derivative activities to protect against changes in the fair value of MSR's due to fluctuations in interest rates.

Revenues and Adjusted EBITDA of this segment were also negatively impacted by a reduction of $44 million in revenue generated from relocation activities as a result of a decline in relocation-related homesale activity and lower interest rates charged to our clients. Excluding the acquisition of NRT, operating and administrative expenses within this segment increased $74 million. Higher expenses incurred to operate the mortgage business to support the continued high levels of mortgage loan production and related servicing activities were partially offset by a reduction in relocation-related costs, adjusting to a weaker corporate spending environment.

Hospitality

Revenues and Adjusted EBITDA increased $658 million (43%) and $112 million (22%), respectively, primarily due to the acquisitions of Fairfield Resorts, Inc. in April 2001, Trendwest in April 2002 and Equivest in February 2002 and certain other vacation rental companies abroad in 2002 and 2001. Fairfield, for the first quarter of 2002 (the period in which no comparable results were included in 2001), Trendwest, Equivest and the other acquired vacation rental companies, contributed incremental revenues of $137 million, $348 million, $107 million, and $41 million, respectively, and incremental Adjusted EBITDA of $18 million, $62 million, $24 million and $5 million, respectively, in 2002 compared with 2001.

Excluding the impact from these acquisitions, revenues increased $18 million, while Adjusted EBITDA declined $4 million, respectively, year-over-year. Growth within our Vacation Rental Group (exclusive of acquisitions) contributed incremental revenues of $13 million in 2002 due to an increase in vacation weeks sold, primarily attributable to improved marketing efforts. Timeshare subscription and transaction revenues within our timeshare exchange business increased $29 million (7%) primarily due to increases in exchange transactions and the average exchange fee. During 2002, we recognized an incremental $14 million of income from providing the financing on timeshare unit sales at our Fairfield subsidiary. The additional financing income was generated as a result of a 9% increase in the volume of contracts sold and a greater margin realized on contract sales as we benefited from a lower interest rate environment in 2002 compared with 2001.

Results within our lodging franchise operation continued to be suppressed during 2002, subsequent to the September 11, 2001 terrorist attacks and their impact on an already weakening travel industry. Accordingly, royalties, marketing fund and reservations revenues within our lodging franchise operations were down $10 million (3%) in 2002 compared with 2001 and initial franchise fees were down $7 million over the same periods. However, comparable year-over-year occupancy levels in our franchised lodging brands have shown improvement during 2002. In addition, Preferred Alliance revenues and Adjusted EBITDA declined $9 million in 2002 compared with 2001, primarily from contract expirations and a contract termination payment received in the prior year. Adjusted EBITDA increased $20 million from a venture master license agreement with Marriott International, Inc. entered into during 2002 which converted the ownership of a third party license agreement. Upon the change in ownership, the license fee, formerly

51


included within operating expenses, is now recorded as a minority interest expense. Excluding acquisitions, operating and administrative expenses within this segment increased approximately $47 million in 2002 principally to support continued volume-related growth in our timeshare exchange business throughout 2002 compared to 2001.

Travel Distribution

Revenues and Adjusted EBITDA increased $1.3 billion and $416 million, respectively, in 2002 compared with 2001, due to the October 2001 acquisitions of Galileo and Cheap Tickets. The Galileo acquisition for the nine months ended September 30, 2002 (the period in which no comparable results were included in 2001) contributed incremental revenues and Adjusted EBITDA of $1.2 billion and $410 million, respectively, while Cheap Tickets contributed incremental revenues of $36 million and Adjusted EBITDA losses of $7 million over the same period. In addition, during the summer of 2002, we acquired Lodging.com and Trust International, two companies that supply reservation and distribution solution services to the hospitality industry. Lodging.com and Trust International's operating results were included from the acquisition dates forward and collectively contributed revenue of $16 million with no contribution to Adjusted EBITDA during 2002. Excluding the incremental contributions from the above-mentioned acquisitions, revenues and Adjusted EBITDA of this segment increased $7 million and $13 million, respectively, in 2002 compared with 2001.

Galileo subscriber fees and Adjusted EBITDA increased $26 million and $3 million, respectively, during 2002 due to the acquisition of national distribution companies (NDC's) in Europe. NDC's are independent organizations that market and sell Galileo global distribution and computer reservation services to travel agents and other subscribers. Partially offsetting this increase was a decline of $15 million in revenues generated from our travel agency business due to reductions in commission rates paid by the airlines, available net rate air inventory and members of travel-related clubs which are serviced by us.

Beginning with the fourth quarter 2002, all quarterly periods became comparable in terms of being subsequent to the acquisitions of Galileo and Cheap Tickets and the September 2001 terrorist attacks. In fourth quarter 2002, Galileo air travel booking fees were relatively constant, compared with fourth quarter 2001, as a 5% increase in booking volumes was substantially offset by a 4% decline in the effective yield per booking. The decline in effective yield was heavily influenced by unusually high cancellation and re-booking activity in the fourth quarter of 2001 due to the September 11, 2001 terrorist attacks. Adjusted EBITDA in fourth quarter 2002 (the period comparable with 2001) includes cost savings of approximately $10 million that were realized in connection with the integration of the Galileo and Cheap Tickets businesses, including cost reduction efforts that were initiated during fourth quarter 2001 to reflect expected business volumes subsequent to the September 11, 2001 terrorist attacks. Despite a rebound in travel post September 11, 2001, our travel-related booking volumes have not yet reached pre-September 11, 2001 levels.

Approximately 11% of Galileo's GDS (global distribution services) revenue is generated by United Air Lines, Inc., the largest single travel supplier utilizing Galileo's systems. In December 2002, UAL Corporation, the parent of United Air Lines, filed for bankruptcy protection. We do not expect to incur any material losses due to non-payment by United Air Lines of amounts outstanding as our contracts were granted approval for payment. However, if UAL does not successfully emerge from this bankruptcy, we would not expect to recover amounts outstanding, which could approximate $30 million, and we would expect that certain of Galileo's contributions to revenues (such as revenue derived from Web site and reservation hosting) would be negatively impacted in future periods. During 2002, we generated approximately $95 million of such revenues (primarily on a cost-plus basis) from these activities with United Air Lines. We would not expect this bankruptcy to have a material impact to any of our other revenue streams.

Vehicle Services

Revenues and Adjusted EBITDA increased $853 million (26%) and $118 million (41%), respectively, in 2002 versus the comparable prior year. Principally driving these increases were the incremental contributions made by Avis Group Holdings, Inc. (comprised of the Avis rental car business and our fleet management operations), which we acquired on March 1, 2001. Prior to the acquisition of Avis, revenues

52


and Adjusted EBITDA of this segment consisted of franchise royalties received from Avis and earnings (losses) from our equity investment in Avis. Avis' operating results were included from the acquisition date forward and therefore included ten months of results in 2001 (March through December). Accordingly, the Avis acquisition for January and February of 2002 (the period for which no comparable results were included in 2001) contributed incremental revenues and Adjusted EBITDA of $562 million and $5 million, respectively. Additionally, the operating results of Budget were also included from the acquisition date of November 22, 2002 forward and contributed revenues and Adjusted EBITDA of $161 million and $6 million, respectively, in 2002.

On a comparable basis, post acquisition (ten months ended December 31, 2002 versus the comparable prior year period), revenues and Adjusted EBITDA increased $131 million and $106 million, respectively. For the ten months ended December 31, 2002, Avis car rental revenues increased $164 million (8%) over the comparable period in 2001, primarily due to a 7% increase in time and mileage revenue per rental day. A majority of the increase in time and mileage revenue per rental day was supported by an increase in pricing, the impact of which substantially flows to Adjusted EBITDA, and an increased share of domestic airport revenue generated by car rental companies. The increase in Adjusted EBITDA was principally supported by the gross margin on the revenue growth. Avis' revenues are primarily derived from car rentals at airport locations. Through November 2002 (the last period for which information is available), approximately 84% of Avis' revenues were generated from car rental locations at airports. Avis increased its share of total car rental revenues generated at domestic airports through November 2002 to 23.7% compared with a 22.5% share over the same eleven month period last year and has recognized airport revenue share gains in consecutive months since February 2002. For the eleven months ended November 30, 2002, Avis realized a 3.5% increase in its comparable year-over-year domestic airport revenues versus a total market segment decline of 1.6% over the same periods. Based on our accumulation of data thus far pertaining to December 2002, we do not expect any significant change in this favorable trend of increased market share for December 2002, once industry data for December 2002 is complete.

In our vehicle leasing and fleet management program businesses, revenues collectively declined $25 million (2%) during the comparable ten months ended December 31, 2002 compared with 2001, principally due to lower interest expense on vehicle funding, which is substantially passed through to clients and therefore results in lower revenues but has minimal Adjusted EBITDA impact. This was partially offset by an increase in depreciation on leased vehicles which is also passed through to clients.

Financial Services

Adjusted EBITDA increased $139 million (45%) in 2002 compared with 2001, despite a $77 million (5%) decrease in revenue. Adjusted EBITDA was favorably impacted by the outsourcing of our individual membership business, in which a net decline of $143 million in membership-related revenues (net of $6 million of royalty income from Trilegiant) due to a lower membership base was more than offset by a net reduction in expenses from servicing fewer members and not directly incurring the cost of marketing to solicit new members (see "Liquidity and Capital Resources—Trilegiant Corporation" for a detailed discussion of our outsourcing arrangement with Trilegiant). Marketing expenses decreased by $122 million in 2002 compared with 2001 due to a reduction in new member marketing costs in 2002. In addition, during fourth quarter 2001, Trilegiant increased its solicitation efforts and incurred $56 million of marketing costs that we were contractually required to fund and, as such, expense. In addition, membership operating expenses decreased by approximately $110 million due to cost savings from servicing fewer members. In connection with the Trilegiant transaction, during the third quarter of last year, we incurred $41 million of transaction-related expenses, the absence of which in the current year also contributed to the increase in Adjusted EBITDA.

Jackson Hewitt generated incremental revenues of $81 million in 2002. In January 2002, we acquired our largest tax preparation franchisee, Tax Services of America ("TSA"). TSA contributed incremental revenues of $42 million and Adjusted EBITDA of approximately $4 million (net of intercompany royalties) to Jackson Hewitt's 2002 results. Jackson Hewitt also generated incremental revenues of $33 million in 2002 from various financial products. Additionally, on a comparable basis, including post-acquisition intercompany royalties paid by TSA, Jackson Hewitt franchise royalties increased $14 million (30%). The

53


increase in Jackson Hewitt royalties was driven by a 13% increase in tax return volume, and a 15% increase in the average price per return. Additional operating and overhead costs were incurred in 2002 due to an expansion of Jackson Hewitt's infrastructure to support increased business activity and a reorganization and relocation of the Jackson Hewitt technology group.

Our domestic insurance/wholesale businesses generated $14 million less revenue in 2002 compared with 2001 from a lower profit share from insurance companies as a result of higher than expected claims. This was offset by growth within our international loyalty solutions operations.

Corporate and Other

Revenue and Adjusted EBITDA decreased $45 million and $25 million, respectively, in 2002 compared with 2001. In February 2001, we sold our real estate Internet portal, move.com, and certain ancillary businesses, which collectively accounted for a year-over-year decline in revenues of $14 million and an improvement in Adjusted EBITDA of $8 million. In addition, revenues recognized from providing electronic reservation processing services to Avis prior to the acquisition of Avis resulted in a $15 million revenue decrease with no Adjusted EBITDA impact as Avis paid royalties but was billed for reservation services at cost. Revenues also included incremental inter-segment revenue eliminations in 2002 due to increased intercompany business activities, principally resulting from acquisitions. Adjusted EBITDA also includes higher unallocated corporate overhead costs due to increased administrative expenses and infrastructure expansion to support company growth.

RESULTS OF OPERATIONS—2001 vs. 2000

Our consolidated results from continuing operations comprised the following:

 
  2001
  2000
  Change
 
Net revenues   $ 8,613   $ 4,320   $ 4,293  
   
 
 
 
Expenses, excluding other charges and non-program related interest, net     7,003     3,056     3,947  
Other charges     671     111     560  
Non-program related interest, net     252     152     100  
   
 
 
 
Total expenses     7,926     3,319     4,607  
   
 
 
 
Gains on dispositions of businesses     443     37     406  
   
 
 
 
Losses on dispositions of businesses     (26 )   (45 )   19  
   
 
 
 
Impairment of investments     (441 )       (441 )
   
 
 
 
Income before income taxes, minority interest and equity in Homestore     663     993     (330 )
Provision for income taxes     220     341     (121 )
Minority interest, net of tax     24     83     (59 )
Losses related to equity in Homestore, net of tax     77         77  
   
 
 
 
Income from continuing operations   $ 342   $ 569   $ (227 )
   
 
 
 

Net revenues and total expenses increased $4.3 billion and $4.6 billion, respectively, during 2001 primarily due to the acquisitions of the following businesses which contributed incremental revenues and expenses aggregating $4.0 billion and $3.8 billion, respectively:

Acquired Business

  Date of Acquisition
  Incremental
Contribution to
Net Revenues

  Incremental
Contribution to
Total Expenses

 
Avis Group Holdings, Inc.   March 2001   $ 3,093   $ 3,096 (a)
Fairfield Resorts, Inc.   April 2001     568     451  
Galileo International, Inc.   October 2001     337     256  
       
 
 
Total Contributions       $ 3,998   $ 3,803  
       
 
 

(a)
Excludes $58 million of restructuring and other unusual charges and $5 million of acquisition and integration related costs.

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In addition to the contributions made by acquired businesses, net revenues were favorably impacted by growth primarily within our Real Estate Services segment (exclusive of acquisitions). For a detailed discussion of revenue trends, see below.

Also contributing to the increase in total expenses recorded during 2001 was an increase of $560 million in other charges as follows:

 
  2001
  2000
  Change
Restructuring and other unusual(a)   $ 379   $ 109   $ 270
Acquisitions and integration related(b)     112         112
Mortgage servicing rights impairment(c)     94         94
Litigation and related(d)     86     2     84
   
 
 
Total other charges(e)   $ 671   $ 111   $ 560
   
 
 

(a)
The 2001 charges primarily related to (i) restructuring initiatives undertaken in response to the September 11, 2001 terrorist attacks ($192 million), (ii) the funding of an irrevocable contribution to the Real Estate Technology Trust ($95 million), (iii) the funding of Trip Network ($85 million) and (iv) a contribution to the Cendant Charitable Foundation ($7 million). The 2000 charges primarily related to (i) restructuring initiatives undertaken to consolidate business operations and rationalize certain existing processes ($60 million), (ii) the funding of an irrevocable contribution to the Hospitality Technology Trust ($21 million), (iii) executive termination costs ($11 million), (iv) the abandonment of certain computer system applications ($7 million) and (iv) stock option contract modifications and the postponement of the initial public offering of Move.com common stock ($6 million).
(b)
The 2001 charges primarily related to (i) outsourcing our information technology operation to IBM in connection with the acquisition of Galileo ($78 million), (ii) integrating our existing travel agency businesses with Galileo's computerized reservations system ($23 million) and (iii) severance in connection with the rationalization of duplicative functions ($4 million).
(c)
The 2001 charge was incurred in connection with unprecedented rate reductions subsequent to the September 11, 2001 terrorist attacks that we deemed not to be in the ordinary course of business.
(d)
The 2001 and 2000 charges were incurred in connection with settlements or investigations relating to the 1998 discovery of accounting irregularities in the former business units of CUC. The 2001 and 2000 charges were partially offset by non-cash credits of $14 million and $41 million, respectively, to reflect adjustments to the PRIDES class action litigation settlement charge we recorded in 1998.
(e)
See Note 7—Other Charges (Credits) to our Consolidated Financial Statements for a detailed description of each charge.

Additionally, our 2001 and 2000 operating results were impacted by gains and losses related to the dispositions of businesses and, for 2001, also by losses related to the impairment of investments. During 2001, these events resulted in (i) $443 million of gains primarily related to the sale of our real estate Internet portal ($436 million), (ii) $26 million of losses related to the dispositions of non-strategic businesses and (iii) $441 million of losses related to the impairment of our investments in Homestore ($407 million) and lodging and Internet-related businesses ($34 million). During 2000, the dispositions of businesses resulted in (i) $37 million of gains primarily related to the recognition of a deferred gain resulting from the 1999 sale of our fleet businesses and (ii) $45 million of losses on the dispositions of other non-strategic businesses.

Our overall effective tax rate was 33.2% and 34.3% for 2001 and 2000, respectively. The effective rate for 2001 was lower as the benefit from the recognition of foreign tax credits exceeded the negative impact of acquisitions.

Our 2001 operating results benefited by $59 million less minority interest as a result of the maturity of the Feline PRIDES in February 2001. However, our 2001 operating results were negatively impacted by after-tax losses of $77 million related to our equity ownership in Homestore.

As a result of the above-mentioned items, income from continuing operations decreased $227 million, or 40%, during 2001.

Discussed below are the operating results for each of our segments, which focuses on revenues and Adjusted EBITDA. Adjusted EBITDA is defined as earnings before non-program related interest, income taxes, non-program related depreciation and amortization, minority interest and, in 2001, equity in

55



Homestore. Such measure is then adjusted to exclude items that are of a non-recurring or unusual nature and are also not measured in assessing segment performance. In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," our management believes such discussions are the most informative representation of how management evaluates performance. However, our presentation of Adjusted EBITDA may not be comparable with similar measures used by other companies. The footnotes to the table presented below describe the items that have been excluded from Adjusted EBITDA.

 
  Revenues
  Adjusted EBITDA
 
 
  2001
  2000
  % Change
  2001(a)
  2000(b)
  % Change
 
Real Estate Services(c)   $ 1,859   $ 1,461   27 % $ 939   $ 752   25 %
Hospitality(d)     1,522     918   66     513     385   33  
Travel Distribution(e)     437     99   *     108     10   *  
Vehicle Services(f)     3,322     230   *     290     169   *  
Financial Services     1,402     1,380   2     310     373   (17 )
   
 
     
 
     
Total Reportable Segments     8,542     4,088         2,160     1,689      
Corporate and Other(g)     71     232   *     (73 )   (104 ) *  
   
 
     
 
     
Total Company   $ 8,613   $ 4,320         2,087     1,585      
   
 
                     
Less: Non-program related depreciation and amortization                     477     321      
Less: Other charges:                                  
  Acquisition and integration related costs                     112          
  Litigation and related costs                     86     2      
  Restructuring and other unusual charges                     379     109      
  Mortgage servicing rights impairment                     94          
Less: Non-program related interest, net                     252     152      
Plus: Gains on dispositions of businesses                     443     37      
Less: Losses on dispositions of businesses                     26     45      
Less: Impairment of investments                     441          
                   
 
     
Income before income taxes, minority interest and equity in Homestore                   $ 663   $ 993      
                   
 
     

*
Not meaningful.
(a)
Adjusted EBITDA excludes charges of $192 million incurred primarily in connection with restructuring and other initiatives undertaken as a result of the September 11, 2001 terrorist attacks ($31 million, $51 million, $58 million, $7 million, $10 million and $35 million of charges were recorded within Real Estate Services, Hospitality, Vehicle Services, Travel Distribution, Financial Services and Corporate and Other, respectively).
(b)
Adjusted EBITDA excludes charges of $109 million in connection with restructuring and other initiatives ($2 million, $63 million, $31 million and $13 million of charges were recorded within Real Estate Services, Hospitality, Financial Services and Corporate and Other, respectively).
(c)
Adjusted EBITDA for 2001 excludes charges of $95 million related to the funding of an irrevocable contribution to the Real Estate Technology Trust and $94 million related to the impairment of our mortgage servicing rights asset.
(d)
Adjusted EBITDA for 2001 excludes a charge of $11 million related to the impairment of investments due in part to the September 11, 2001 terrorist attacks. Adjusted EBITDA for 2000 excludes $12 million of losses related to the dispositions of businesses.
(e)
Adjusted EBITDA for 2001 excludes charges of $23 million related to the acquisition and integration of Cheap Tickets.
(f)
Adjusted EBITDA for 2001 excludes charges of $5 million related to the acquisition and integration of Avis and $2 million related to the impairment of investments due to the September 11, 2001 terrorist attacks.
(g)
Represents the results of operations of our non-strategic businesses, unallocated corporate overhead and the elimination of transactions between segments. Adjusted EBITDA for 2001 excludes charges of (i) $427 million primarily related to the impairment of our investment in Homestore, (ii) $100 million for litigation and related costs, (iii) $85 million related to the funding of Trip Network, (iv) $78 million related to the outsourcing of our information technology operations to IBM in connection with the acquisition of Galileo, (v) $26 million related to the dispositions of non-strategic businesses in 1999, (vi) $7 million related to a non-cash contribution to the Cendant Charitable Foundation and (vii) $4 million related to the

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Real Estate Services

Revenues and Adjusted EBITDA increased $398 million (27%) and $187 million (25%), respectively. The increase in operating results was primarily driven by substantial growth in mortgage loans sold due to increased refinancing activity and purchase volume. Higher franchise fees from our Century 21, Coldwell Banker and ERA franchise brands and increases in relocation services also contributed to the favorable operating results. Offsetting the revenue increases, operating and administrative expenses within this segment increased $208 million primarily to support the higher volume of mortgage originations and related servicing activities.

Collectively, mortgage loans sold increased $14.8 billion (70%) to $35.9 billion, generating incremental revenues of $367 million, a 117% increase. Closed mortgage loans increased $22.4 billion (101%) to $44.5 billion in 2001. Such growth consisted of a $17.6 billion increase (approximately ten-fold) in refinancings and a $4.8 billion increase (24%) in purchase mortgage closings. A significant portion of mortgage loans closed in any quarter will generate revenues in future periods as those loans closed are packaged and sold and revenue is recognized upon the sale of the loan, which is typically 45 to 60 days after closing. Beginning in January 2001, Merrill Lynch outsourced its mortgage loan origination and servicing operations to us under a 10-year agreement, which accounted for $7.4 billion (17%) of our mortgage closings in 2001. Consideration paid to Merrill Lynch for this outsourcing agreement was not material. Partially offsetting record production revenues was a $26 million (24%) decline in net loan servicing revenue. The average servicing portfolio grew $28 billion (45%) resulting from the high volume of mortgage loan originations and our purchase of rights to service $11 billion of existing mortgage loans owned by Merrill Lynch; however, accelerated servicing amortization expenses during 2001, due primarily to refinancing activity, more than offset the increase in recurring servicing fees from the portfolio growth.

Franchise fees from our real estate franchise brands also contributed to revenue and Adjusted EBITDA growth. Royalties and other franchise fees increased $41 million (8%), despite only modest industry-wide growth and a year-over-year industry decline in California, principally due to a 4% increase in the average price of homes sold and a $16 million fee received from NRT in connection with the termination of a franchise agreement under which NRT operated our Century 21 real estate brand. Service-based fees from relocation activities also contributed to the increase in revenues and Adjusted EBITDA principally due to a $14 million increase in referral fees resulting from increased volume, which included the execution of new service contracts. In addition, asset-based relocation revenues decreased by $3 million, which was comprised of a $10 million revenue decline due to lower corporate and government homesale closings, partially offset by a $7 million increase in net interest income from relocation operations due to reduced debt levels in 2001.

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Hospitality

Revenues and Adjusted EBITDA increased $604 million (66%) and $128 million (33%), respectively. While our April 2001 acquisition of Fairfield produced the bulk of this growth, our pre-existing timeshare exchange operations also made contributions. Prior to the acquisition of Fairfield, the results of this segment consisted principally of royalties earned on our lodging brands and exchange fees earned from our timeshare exchange business, Resort Condominium International, LLC. Fairfield contributed revenues and Adjusted EBITDA of $568 million and $144 million, respectively, during 2001. In addition, the first quarter 2001 acquisition of Holiday Cottages Group Limited, the leading UK brand in self-catering vacation home rentals, contributed incremental revenues and Adjusted EBITDA of $34 million and $13 million, respectively, in 2001. Notwithstanding the negative impact that the September 11, 2001 terrorist attacks had on the economy's travel sector, timeshare subscription and transaction fees increased $41 million supported by increases in both members and exchange transactions. A corresponding increase in timeshare-related staffing costs was incurred to support volume growth and meet anticipated service levels. Revenues and Adjusted EBITDA in this segment include a decline in preferred alliance fees of $8 million, principally due to the expiration of a vendor contract in 2000. Royalties, marketing fund and reservations revenues from our lodging franchise operations declined $13 million (6%) and $14 million (7%), respectively, due to a 7% decrease in revenue per available room. Lower marketing fund revenues received from franchisees were offset by lower expenses incurred on the marketing of our nine lodging brands. The September 11, 2001 terrorist attacks caused a decline in the occupancy levels and room rates of our franchised lodging properties in the fourth quarter of 2001.

Travel Distribution

Prior to the acquisitions of Galileo and Cheap Tickets, revenue and Adjusted EBITDA for this segment principally comprised the operations of Cendant Travel, our travel agent subsidiary. Galileo contributed revenues and Adjusted EBITDA of $337 million and $104 million, respectively, while Cheap Tickets contributed revenues and expenses of $8 million each and made no contribution to Adjusted EBITDA. The September 11, 2001 terrorist attacks caused a decline in demand for travel-related services and, accordingly, reduced the booking volumes for Galileo and our travel agency businesses below fourth quarter 2000 levels. Galileo worldwide booking volume for air travel declined 19% in fourth quarter 2001 compared with fourth quarter 2000 and other travel-related bookings (car, hotel, etc.) were down 23% for the comparable periods. Upon completing the acquisitions of Galileo and Cheap Tickets, in response to the existing economic conditions, we not only moved aggressively to integrate these businesses and achieve expected synergies, but we also re-examined their cost structures and streamlined their operations through workforce reductions and other means to meet expected business volumes.

Vehicle Services

Revenues and Adjusted EBITDA increased $3.1 billion and $121 million, respectively, substantially due to the acquisition of Avis in March 2001. Prior to the acquisition of Avis, revenues and Adjusted EBITDA of this segment consisted principally of earnings from our 18% equity investment in Avis and franchise royalties received from Avis. The acquisition of Avis contributed incremental revenues and Adjusted EBITDA of $3.1 billion and $112 million, respectively, in 2001. Avis' results in 2001 were negatively impacted by reduced demand at airport locations due to a general decline in commercial travel throughout the year, which was further exacerbated by the September 11, 2001 terrorist attacks. In response to the slowdown in commercial travel and in the wake of the September 11, 2001 terrorist attacks, we believe that we have rightsized our car rental operations to meet anticipated business levels, which included reductions in workforce and fleet (fleet was downsized by approximately 10%). Our fleet management and fuel card management businesses were not materially impacted by the September 11, 2001 terrorist attacks.

Financial Services

Revenues increased $22 million (2%) while Adjusted EBITDA decreased $63 million (17%). While the royalties we will receive from Trilegiant will benefit segment results in future periods, the outsourcing of

58



our individual membership business to Trilegiant caused a decrease in Adjusted EBITDA during 2001, largely due to $41 million of our transaction-related expenses and $66 million of marketing spending by Trilegiant, which we were contractually required to fund and, as such, expensed (see discussion in "Liquidity and Capital Resources—Trilegiant Corporation"). The transaction related expenses are comprised of the $20 million write-off of the entire amount of our preferred stock investment due to operating losses incurred by Trilegiant in excess of the common equity and other expenses that include employee benefits and professional fees and a portion of the marketing advance that was expensed as Trilegiant incurred qualified marketing expenses pursuant to the contractual terms of the agreement. Membership volumes and revenues declined; however, commissions increased due to higher commission rates. Conversely, the cost savings from servicing fewer members, as well as Trilegiant's absorption of its share of fixed overhead expenses subsequent to the outsourcing, more than offset the lower membership revenues and higher commissions. In addition, we acquired Netmarket, an online membership business, during fourth quarter 2000, which was immediately integrated into our existing membership business. Netmarket contributed incremental revenues of $53 million in 2001. Jackson Hewitt, our tax preparation franchise business, contributed incremental revenues of $18 million, principally comprised of higher royalties due to a 22% increase in tax return volume, with relatively no corresponding increases in expenses due to the significant operating leverage within our franchise operations. Revenues and Adjusted EBITDA in 2000 included $8 million of fees recognized from the sale of certain referral agreements.

Corporate and Other

Revenues decreased $161 million while Adjusted EBITDA increased $31 million. Our real estate Internet portal and certain ancillary businesses, which were sold to Homestore in February 2001, collectively accounted for a decline in revenues of $87 million and an improvement to Adjusted EBITDA of $82 million because we were investing in the development and marketing of the portal during 2000. Revenues and Adjusted EBITDA were negatively impacted by $36 million less income from financial investments. In addition, revenues recognized from providing electronic reservation processing services to Avis ceased coincident with our acquisition of Avis, contributing to a reduction in revenues of $43 million with no Adjusted EBITDA impact since Avis had been billed for such services at cost. In December 2001, we entered into a ten-year, information technology services relationship with IBM whereby IBM will manage substantially all of our domestic data center operations. Adjusted EBITDA in 2001 benefited from the absence of $13 million of costs incurred in 2000 to pursue Internet initiatives and also reflects increased unallocated corporate overhead costs principally due to infrastructure expansion to support company growth.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The majority of our businesses operate in environments where we are paid a fee for services provided. Within our car rental, vehicle management, relocation, mortgage services and timeshare development businesses, we purchase assets or finance the purchase of assets on behalf of our clients. Assets generated in this process are classified as assets under management and mortgage programs. We seek to offset the interest rate exposures inherent in these assets by matching them with financial liabilities that have similar term and interest rate characteristics. As a result, we minimize the interest rate risk associated with managing these assets and create greater certainty around the financial income that they produce. Fees generated from our clients are used, in part, to repay the interest and principal associated with the financial liabilities. Funding for our assets under management and mortgage programs is also provided by both unsecured borrowings and secured financing arrangements, which are classified as liabilities under management and mortgage programs, as well as securitization facilities with special purpose entities. Cash inflows and outflows relating to the generation or acquisition of assets and the principal debt repayment or financing of such assets are classified as activities of our management and mortgage programs. Our finance activities vary from the rest of our businesses based upon the impact of the relative business and financial risks and asset attributes, as well as the nature and timing associated with the respective cash flows. Accordingly, we believe that it is appropriate to segregate our assets under management and mortgage programs and our liabilities under management and mortgage programs separately from the assets and

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liabilities of the rest of our businesses because, ultimately, the source of repayment of such liabilities is the realization of such assets.

FINANCIAL CONDITION

 
  2002
  2001
  Change
 
Total assets exclusive of assets under management and mortgage programs   $ 20,889   $ 21,676   $ (787 )
Total liabilities exclusive of liabilities under management and mortgage programs     12,443     15,207     (2,764 )
Assets under management and mortgage programs     15,008     11,868     3,140  
Liabilities under management and mortgage programs     13,764     10,894     2,870  
Mandatorily redeemable preferred securities     375     375      
Stockholders' equity     9,315     7,068     2,247  

Total assets exclusive of assets under management and mortgage programs decreased primarily due to (i) the application of $1.4 billion of prior payments made to the stockholder litigation settlement trust to extinguish the remaining portion of our principal stockholder litigation settlement liability, (ii) the sale of $1.3 billion of NCP assets and (iii) a $1.8 billion reduction in cash (see "Liquidity and Capital Resources—Cash Flows" below for a detailed discussion of such reduction). Such decreases were partially offset by (i) a $3.1 billion net increase in goodwill and other intangible assets resulting primarily from the acquisitions of NRT, Trendwest and the assets of Budget and (ii) various other increases in assets resulting from the impact of acquired businesses. For a detailed discussion of the activity and ending balance of goodwill, see Notes 3 and 12 to our Consolidated Financial Statements.

Total liabilities exclusive of liabilities under management and mortgage programs decreased primarily due to (i) the extinguishment of our $2.85 billion stockholder litigation settlement liability and (ii) the repurchase/redemption of approximately $1.3 billion of debt securities (see "Liquidity and Capital Resources—Corporate Indebtedness"). Such decreases were partially offset by (i) $600 million of borrowings drawn under our $2.9 billion revolving credit facility during 2002 and (ii) various other increases in liabilities resulting from the impact of acquired businesses.

Assets under management and mortgage programs increased primarily due to (i) an increase of $2.8 billion in vehicles primarily due to the acquisition of the assets of Budget, (ii) an increase of $460 million in timeshare receivables primarily resulting from the acquisitions of Trendwest and Equivest and (iii) an increase of $679 million in mortgage loans held for sale primarily due to timing differences arising between the origination and sales of such loans. Such increases were partially offset by (i) a decrease of $507 million in restricted cash primarily due to the utilization of such amounts for the acquisition of vehicles and (ii) a net reduction of $272 million to our mortgage servicing rights asset (including the related derivatives) due to valuation adjustments and related amortization, net of additions.

Liabilities under management and mortgage programs increased primarily due to issuances of debt during 2002 to finance the growth in our portfolio of assets under management and mortgage programs, as discussed above (see "Liquidity and Capital Resources—Debt Related to Management and Mortgage Programs" for a detailed description of the change in debt related to management and mortgage programs).

Stockholders' equity increased primarily due to (i) $846 million of net income generated during 2002 (excluding the $245 million reclassification of non-cash foreign currency translation losses realized upon the sale of NCP), (ii) the issuance of $916 million (47.4 million shares) in CD common stock in connection with the Trendwest acquisition, (iii) the issuance of $216 million (11.5 million shares) in CD common stock in connection with the acquisition of NRT, (iv) $98 million relating to the sale of subsidiary stock in connection with our venture with Marriott and (v) $124 million related to the exercise of employee stock

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options. Such increases were partially offset by our repurchase of $291 million (19.8 million shares) in CD common stock, of which $288 million was repurchased using cash.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash on hand and our ability to generate cash through operations and financing activities, as well as available credit and securitization facilities, each of which is discussed below.

CASH FLOWS

At December 31, 2002, we had $126 million of cash on hand, a decrease of approximately $1.8 billion from approximately $1.9 billion at December 31, 2001 reflecting, in part, management's efforts to apply our cash balances to reduce outstanding indebtedness and liabilities. The following table summarizes such decrease:

 
  Year Ended December 31,
 
 
  2002
  2001
  Change
 
Cash provided by (used in):                    
  Operating activities   $ 1,257 (a) $ 2,787   $ (1,530 )
  Investing activities     (1,917) (b)   (6,457 )   4,540  
  Financing activities     (1,271 )   4,643     (5,914 )
Effects of exchange rate changes on cash and cash equivalents     41     (8 )   49  
Cash provided by discontinued operations     74     121     (47 )
   
 
 
 
Net change in cash and cash equivalents   $ (1,816 ) $ 1,086   $ (2,902 )
   
 
 
 

(a)
Includes the application of prior payments made to the stockholder litigation settlement trust of $1.41 billion, the March 2002 payment of $250 million to the trust and the May 2002 payment of $1.2 billion to the trust to fund the remaining balance of the settlement liability.
(b)
Includes $1.41 billion of proceeds from the stockholder litigation settlement trust, which were used to extinguish the remaining portion of the principal stockholder litigation settlement liability.

During 2002, we generated approximately $1.5 billion less cash from operating activities primarily due to (i) $1.41 billion of cash payments made in prior periods to the stockholder litigation settlement trust that were used during first quarter 2002 to extinguish the remaining portion of our principal stockholder litigation settlement liability and (ii) $1.44 billion of payments made in 2002 to pay off the remaining balance of the stockholder litigation settlement liability. Partially offsetting these uses were greater operating cash flows generated by our Avis car rental, Galileo and mortgage businesses.

During 2002, we used approximately $4.5 billion less cash in investing activities primarily due to (i) the proceeds in 2002 of $1.41 billion of prior payments made to the stockholder litigation settlement trust that were used to extinguish a portion of our stockholder litigation settlement liability, (ii) a reduction of $1.4 billion in cash used for acquisitions, (iii) the proceeds of $1.2 billion from the sale of NCP and (iv) the absence of $1.1 billion of payments made in 2001 to the shareholder litigation settlement trust. Partially offsetting the decrease in cash used in investing activities was additional cash used to acquire vehicles for our car rental and fleet management operations.

Capital expenditures during 2002 amounted to $399 million and were utilized to support operational growth, enhance marketing opportunities and develop operating efficiencies through technological improvements. We anticipate aggregate capital expenditure investments during 2003 in the range of $450 million to $480 million.

During 2002, we used approximately $1.3 billion of cash in financing activities as compared to generating approximately $4.6 billion of cash during 2001. Reflected in the cash we used during 2002 are (i) repayments of outstanding borrowings of $750 million under revolving credit facilities at our PHH subsidiary, (ii) debt redemptions of approximately $1.3 billion, which are described in greater detail below (see "Financial Obligations—Corporate Indebtedness") and (iii) stock repurchases of $288 million.

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Partially offsetting such uses was $600 million of borrowings drawn under our $2.9 billion revolving credit facility during 2002.

We also intend to deploy our available cash to continue to repurchase current maturities of outstanding indebtedness and, subject to Board approval, outstanding shares of our CD common stock beyond the current Board authorized amount. Management currently expects that approximately half of our discretionary cash use during the 2003 fiscal year will be to effect debt repurchases, while the remainder will be used to acquire complementary businesses and repurchase outstanding shares. We are also currently analyzing the benefits of paying dividends on our CD common stock in the future. However, we can make no assurances that either such a dividend will be paid or that we will obtain Board approval to increase our stock repurchase program. As of December 31, 2002, we had approximately $171 million of remaining availability under our board-authorized CD common stock repurchase program. During January and February 2003, we repurchased approximately 6.7 million shares of our CD common stock for approximately $77 million in cash.

FINANCIAL OBLIGATIONS

At December 31, 2002, we had approximately $18.7 billion of indebtedness (including corporate indebtedness of $5.6 billion, debt related to our management and mortgage programs of $12.7 billion and our mandatorily redeemable interest of $375 million). Our net debt (excluding the Upper DECS and debt related to our management and mortgage programs and net of cash and cash equivalents) to total capital (including net debt and the Upper DECS) ratio was 36% and 37% as of December 31, 2002 and 2001, respectively, and the ratio of Adjusted EBITDA to net non-program related interest expense was 10 to 1 and 8 to 1 for 2002 and 2001, respectively.

Corporate Indebtedness

Corporate indebtedness consisted of:

 
  Earliest
Mandatory
Redemption
Date

  Final
Maturity
Date

  As of
December 31,
2002

  As of
December 31,
2001

  Change
 
Term notes                            
  73/4% notes   December 2003   December 2003   $ 966   $ 1,150   $ (184 )
  67/8% notes   August 2006   August 2006     850     850      
  11% senior subordinated notes   May 2009   May 2009     530     584     (54 )
  3% convertible subordinated notes   February 2002   February 2002         390     (390 )
Contingently convertible debt securities                            
  Zero coupon convertible debentures   May 2003   May 2021     857     1,000     (143 )
  Zero coupon senior convertible contingent notes   February 2004   February 2021     420     920     (500 )
  37/8% convertible senior debentures   November 2004   November 2011     1,200     1,200      
Other                            
  Revolver borrowings       December 2005     600         600  
  Net hedging gains (*)             89     11     78  
  Other             89     27     62  
           
 
 
 
Total long-term debt, excluding Upper DECS             5,601     6,132     (531 )
Upper DECS             863     863      
           
 
 
 
Total corporate debt, including Upper DECS           $ 6,464   $ 6,995   $ (531 )
           
 
 
 

(*)
Represents derivative gains resulting from fair value hedges, of which $52 million had been realized as of December 31, 2002 and will be amortized by us as an offset to interest expense over the duration of the hedged debt instruments.

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During 2002, our corporate indebtedness decreased $531 million due to (i) the redemption of our 3% convertible subordinated notes for $390 million, (ii) the repurchase of $517 million of our zero coupon senior convertible contingent notes with a face value of approximately $821 million, (iii) the repurchase of $184 million of our 73/4% notes, (iv) the repurchase of $143 million of our zero coupon convertible debentures and (v) the repurchase of $26 million of our 11% senior subordinated notes. In connection with the repurchase of these securities, we recorded extraordinary losses of $42 million ($30 million after tax) during 2002. These reductions were partially offset by (i) borrowings of $600 million under our $2.9 billion revolving credit facility, which were primarily used to fund the Budget acquisition and related costs and (ii) other net reductions of $129 million. The significant terms for our outstanding debt instruments at December 31, 2002 can be found in Note 18 to our Consolidated Financial Statements.

Subsequent to December 31, 2002, we issued $800 million of five-year senior unsecured notes bearing interest at 6.25% and $1.2 billion of ten-year senior unsecured notes bearing interest at 7.375% for net proceeds of $1.97 billion. These notes are senior unsecured obligations and rank equally in right of payment with all our existing and future unsecured senior indebtedness. The proceeds from such offering were used to repay outstanding corporate indebtedness as follows: (i) $37 million of our 11% senior subordinated notes with a face value of $33 million for $37 million in cash; (ii) $338 million of our zero coupon convertible debentures for $339 million in cash; (iii) $737 million of our 73/4% notes with a face value of $737 million for $771 million in cash and (iv) $600 million of borrowings under our revolving credit facility. Accordingly, we expect to record an after-tax loss of approximately $17 million during first quarter 2003, which will reduce our income from continuing operations.

The following table reflects our corporate indebtedness as of December 31, 2002 after giving effect to only these issuances and the use of proceeds therefrom.

 
  Earliest
Mandatory
Redemption
Date

  As of
December 31,
2002

  Issuances/
(Repayments)

  Pro
Forma

Cash and cash equivalents       $ 126   $ 224   $ 350
       
 
 
Term notes                      
  73/4% notes   December 2003   $ 966   $ (737 ) $ 229
  67/8% notes   August 2006     850           850
  11% senior subordinated notes   May 2009     530     (37 )   493
  61/4% notes   January 2008           800     800
  73/8% notes   January 2013           1,200     1,200
Contingently convertible debt securities                      
  Zero coupon convertible debentures   May 2003     857     (338 )   519
  Zero coupon senior convertible contingent notes   February 2004     420           420
  37/8% convertible senior debentures   November 2004     1,200           1,200
Other                      
  Revolver borrowings         600     (600 )  
  Net hedging gains         89           89
  Other         89           89
       
       
Total long-term debt, excluding Upper DECS         5,601           5,889
Upper DECS         863           863
       
       
Total corporate debt, including Upper DECS       $ 6,464         $ 6,752
       
       

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Contingently Convertible Debt Securities

Our contingently convertible debt securities, which were all issued during 2001, comprised the following:

 
  Earliest
Mandatory
Redemption
Date

  Final
Maturity
Date

  CD Common
Stock
Conversion
Rate Per
$1,000 Face

  Principal
Amount at
December 31,
2002

  Shares
Potentially
Issuable
as of
December 31,
2002

  Pro Forma
Principal
Amount

  Shares
Potentially
Issuable
on a Pro
Forma
Basis

Zero coupon convertible debentures   May 2003   May 2021   39.08   $ 857 million   33.5 million   $ 519 million   20.3 million
Zero coupon senior convertible contingent notes(a)   Feb. 2004   Feb. 2021   33.40   $ 658 million   22.0 million   $ 658 million   22.0 million
37/8% convertible senior debentures   Nov. 2004   Nov. 2011   41.58   $ 1,200 million   49.9 million   $ 1,200 million   49.9 million

(a)
Issued at a discount representing a yield-to-maturity of 2.5%.

As depicted above, these debt securities may be convertible into shares of our CD common stock upon the satisfaction of certain contingencies. If these securities do indeed become convertible, it could have a material impact to our total number of shares outstanding and to the number of shares utilized in performing our earnings per share calculations. As also depicted above, these debt securities include provisions that permit investors to require us to redeem the securities at their accreted value at specified times. If our stock price fails to adequately appreciate from the date of issuance of these securities until their redemption date, we believe it is likely that investors would exercise their option to require us to redeem the securities absent any modification to the terms of the securities. A redemption could cause us to utilize a material amount of cash to redeem such securities at their accreted value; however, we would not expect it to have a material adverse effect on our results of operations. The cost of redeeming and/or refinancing such securities would depend on market conditions at the time and the type of securities, if any, issued for refinancing purposes. As a result, our management considers the potential redemption of these securities in establishing and utilizing our credit facilities, in targeting our cash position and in evaluating additional issuances of debt securities. We consider our access to capital adequate to meet our prospective obligations under the terms of these securities. If holders were to require us to redeem these securities, we would fund such redemptions with available cash, borrowings under available credit facilities and/or the issuance of debt or equity securities; we may also consider amending the terms of the securities to induce holders to retain, rather than redeem, these securities, although we currently have no intent to do so.

These securities also contain provisions that could require us to pay a higher interest rate on the securities if they remain outstanding after the date at which we begin to have the right to redeem them. Because we have the right to redeem the securities at their accreted value before any such provisions become effective, we do not believe these provisions would have an adverse impact on our results of operations compared to our results of operations using other financing sources available at that time.

Upper DECS

Because the Upper DECS obligate holders to purchase shares of our CD common stock at a price determined by the average closing price of CD common stock during a 20-trading-day period ending in August 2004, the Upper DECS are functionally equivalent to issuing shares of CD common stock subject to an issue-price collar, with a delay in issuance until 2004. The issuance of the CD common stock will have a material impact to the number of shares utilized in performing our earnings per share calculation in 2004. However, the Upper DECS could also materially impact our diluted earnings per share calculations prior to 2004 if the price of CD common stock exceeds $28.42 (the point at which we would be required to reflect the issuance of the CD common stock in the number of shares used to calculate diluted earnings per share). At the time of issuance of the Upper DECS, we believed that the impact of issuing the Upper DECS would be favorable compared to an equivalent immediate issuance of common stock. Upon

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settlement of the forward purchase contracts in August 2004, we expect to receive gross proceeds in cash of approximately $863 million. Upon maturity in August 2006 of the senior notes that are currently a component of the Upper DECS, we would be required to repay $863 million.

Debt Related to Management and Mortgage Programs

The following table summarizes the components of our debt related to management and mortgage programs:

 
  As of December 31,
 
 
  2002
  2001
  Change
 
Asset-Backed Debt:                    
  Vehicle rental program(a)   $ 6,082   $ 3,759   $ 2,323  
  Vehicle management program(a)     3,058     2,933     125  
  Mortgage program     871     500     371  
  Timeshare program     145     10     135  
  Relocation program     80         80  
   
 
 
 
      10,236     7,202     3,034  
   
 
 
 

Unsecured Debt:

 

 

 

 

 

 

 

 

 

 
  Term notes     1,421     679     742  
  Commercial paper     866     917     (51 )
  Bank loans     107     906     (799 )
  Other     117     140     (23 )
   
 
 
 
      2,511     2,642     (131 )
   
 
 
 
Total debt related to management and mortgage programs   $ 12,747   $ 9,844   $ 2,903  
   
 
 
 

(a)
Approximately $3.5 billion and $2.1 billion of the term notes outstanding under the vehicle rental and vehicle management programs, respectively, as of December 31, 2002 were rated AAA and Aaa by Standard & Poor's and Moody's Investor Services, respectively.

Our debt related to management and mortgage programs increased approximately $2.9 billion due to (i) the net issuance of approximately $2.3 billion of variable funding notes under our vehicle rental program (approximately $2.0 billion of which was related to debt issued in connection with the refinancing of Budget debt assumed in the acquisition), (ii) the net issuance of $125 million of term notes under our vehicle management programs, (iii) a net increase of $371 million primarily related to additional borrowings under our mortgage warehouse facilities within our mortgage program, (iv) $135 million of new borrowings under our timeshare program, (v) $80 million of borrowings under our new relocation program and (vi) the net issuance of $742 million of unsecured term notes by and for the exclusive use of our PHH subsidiary. Such amounts were partially offset by (i) the repayment during 2002 of $750 million of outstanding borrowings under our revolving credit facilities and (ii) other net repayments of $123 million. The significant terms for our outstanding debt instruments relating to management and mortgage programs at December 31, 2002 can be found in Note 19 to our Consolidated Financial Statements.

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The following tables provide, for debt under management and mortgage programs, the contractual final maturities and our estimates of amortization of the corresponding assets under management and mortgage programs as service for such debt can generally be provided from the liquidation of such assets:

 
  Contractual Final Maturity
  Estimates of Amortization
Year(a)

  Unsecured
  Asset-Backed
  Total
  Unsecured
  Asset-Backed
  Total
2003   $ 851   $ 1,695   $ 2,546   $ 851   $ 2,573   $ 3,424
2004     119     2,684     2,803     119     3,432     3,551
2005     949     1,647     2,596     949     2,082     3,031
2006         845     845         372     372
2007     189     1,311     1,500     189     1,181     1,370
Thereafter     403     2,054     2,457     403     596     999
   
 
 
 
 
 
    $ 2,511   $ 10,236   $ 12,747   $ 2,511   $ 10,236   $ 12,747
   
 
 
 
 
 

(a)
Unsecured commercial paper borrowings of $750 million and $116 million are assumed to be repaid with borrowings under PHH's committed credit facilities expiring in 2005 and 2004, respectively, as such amounts are fully supported by PHH's committed credit facilities, which are described below.

Subsequent to December 31, 2002, our PHH subsidiary issued $1.0 billion of unsecured term notes for net proceeds of $988 million, of which $600 million will mature in March 2013 and bear interest at 7.125% and $400 million will mature in March 2008 and bear interest at 6%. We used the proceeds from these notes to repay outstanding commercial paper.

Mandatorily Redeemable Interest

Included within our total indebtedness in addition to corporate indebtedness and debt related to our management and mortgage program is a $375 million mandatorily redeemable senior preferred interest, which is mandatorily redeemable by the holder in 2015 and may not be redeemed by us prior to March 2005, except upon the occurrence of specified circumstances. We are required to pay distributions on the senior preferred interest based on three-month LIBOR plus a margin of 1.77%. In the event of default, or other specified events, including a downgrade in our credit ratings below investment grade, holders of the senior preferred interest have certain remedies and liquidation preferences, including the right to demand payment by us.

Stockholder Litigation Settlement Liability

On March 18, 2002, the Supreme Court denied all final petitions by plaintiffs relating to our principal securities class action lawsuit. As of December 31, 2001, we had deposited cash totaling $1.41 billion to a trust established for the benefit of the plaintiffs in this lawsuit. In March 2002, we made an additional payment of $250 million to the trust. We completely funded all remaining obligations arising out of the principal securities class action lawsuit on May 24, 2002 with a final payment of approximately $1.2 billion to the trust. We have no remaining obligations relating to the principal securities class action lawsuit.

AVAILABLE CREDIT AND ASSET-BACKED FUNDING ARRANGEMENTS

At December 31, 2002, we had approximately $3.7 billion of available funding arrangements and credit facilities (including availability of approximately $1.3 billion at the corporate level and approximately $2.4 billion available for use in our management and mortgage programs).

As of December 31, 2002, the committed credit facilities at the corporate level consisted of:

 
  Total
Capacity

  Outstanding
Borrowings

  Letters of
Credit Issued

  Available
Capacity

Maturing in December 2005   $ 2,900   $ 600   $ 1,010   $ 1,290

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Borrowings under this facility bear interest at LIBOR plus a margin of 107.5 basis points. In addition, we are required to pay a per annum facility fee of 17.5 basis points under this facility. In the event that the credit ratings assigned to us by nationally recognized debt rating agencies are downgraded to a level below our ratings as of December 31, 2002 but still investment grade, the interest rate and facility fees on this facility are subject to incremental upward adjustments of 10 and 2.5 basis points, respectively. In the event that such credit ratings are downgraded below investment grade, the interest rate and facility fees are subject to further upward adjustments of 47.5 and 15 basis points, respectively. In addition to the $1,010 million of letters of credit issued as of December 31, 2002, this facility also contains the committed capacity to issue an additional $240 million in letters of credit. The letters of credit outstanding under this facility at December 31, 2002 were issued primarily as credit enhancements to provide additional collateralization for our Avis and Budget vehicle financing arrangements.

As of December 31, 2002, available funding under our asset-backed debt programs and committed credit facilities related to our management and mortgage programs consisted of:

 
  Total
Capacity

  Outstanding
Borrowings

  Available
Capacity

Asset-Backed Funding Arrangements(a)                  
  Vehicle rental program   $ 6,470   $ 6,082   $ 388
  Vehicle management program     3,491     3,058     433
  Mortgage program     900     871     29
  Timeshare program     153     145     8
  Relocation program     100     80     20
   
 
 
      11,114     10,236     878
   
 
 
Committed Credit Facilities(b)                  
  Maturing in February 2004     750         750
  Maturing in February 2005     750         750
   
 
 
      1,500         1,500
   
 
 
    $ 12,614   $ 10,236   $ 2,378
   
 
 

(a)
Capacity is subject to maintaining sufficient assets to collateralize debt.
(b)
These committed credit facilities were entered into by and are for the exclusive use of our PHH subsidiary.

Any borrowings under our two $750 million credit facilities maturing in February 2004 and 2005 will bear interest at LIBOR plus a margin currently approximating 72.5 basis points. In addition, we will also be required to pay a per annum facility fee of approximately 15 basis points under these facilities and a per annum utilization fee of approximately 25 basis points if usage under the facilities exceeds 25% of aggregate commitments. In the event that the credit ratings assigned to our PHH subsidiary by nationally recognized debt rating agencies are downgraded to a level below PHH's ratings as of December 31, 2002, the interest rate and facility fees on these facilities are subject to incremental upward adjustments of approximately 22.5 basis points. In the event that the credit ratings are downgraded below investment grade, the interest rate and facility fees are subject to further upward adjustments of approximately 65 basis points.

We also currently have $1 billion of availability for public debt or equity issuances under a shelf registration statement at the corporate level and $1 billion of availability for public debt issuances under shelf registration statements at the PHH level.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

In addition to our on-balance sheet borrowings and available credit facilities as part of our overall financing and liquidity strategy, we sell specific assets under management and mortgage programs

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generated or acquired in the normal course of business. At the corporate level, we sell timeshare receivables to bankruptcy remote qualifying special purpose entities under revolving sales agreements in exchange for cash. Our PHH subsidiary also sells relocation receivables to Apple Ridge Funding LLC, a bankruptcy remote qualifying special purpose entity, in exchange for cash. Additionally, our PHH subsidiary sells mortgage loans originated by our mortgage business into the secondary market, which is customary practice in the mortgage industry. Such mortgage loans are sold into the secondary market primarily through one of the following means: (i) the direct sale to a government-sponsored entity, (ii) through capacity under a subsidiary's public registration statement (which approximated $1.1 billion as of December 31, 2002) or (iii) through Bishop's Gate Residential Mortgage Trust, an unaffiliated bankruptcy remote special purpose entity.

We utilize the above-mentioned special purpose entities because they are highly efficient for the sale or financing of assets and represent conventional practice in the finance industry. See Note 1 to our Consolidated Financial Statements for our accounting policy regarding the sale of assets to off-balance sheet entities. None of our affiliates, officers, directors or employees hold any equity interest in any of these special purpose entities, nor do we or our affiliates provide any financial support or financial guarantee arrangements to these special purpose entities. None of our affiliates, officers, directors or employees receive any remuneration from any of these special purpose entities.

Presented below is detailed information for each of the special purpose entities we utilized in off-balance sheet financing and sale arrangements as of December 31, 2002:

 
  Assets
Serviced(a)

  Maximum
Funding
Capacity

  Debt
Issued

  Maximum
Available
Capacity(b)

  Annual
Servicing
Fee(c)

Timeshare                            
  Sierra(d)   $ 645   $ 550   $ 550   $   1.00%
  Others     546     488     488       .75%-1.75%
Relocation                            
  Apple Ridge     567     600     490     110   .75%
Mortgage                            
  Bishop's Gate(e)     2,302     3,223(f)     2,351     724   .37%

(a)
Does not include cash of $25 million, $24 million, $11 million and $195 million at Sierra, other timeshare special purpose entities, Apple Ridge and Bishop's Gate, respectively.
(b)
Subject to maintaining sufficient assets to collateralize debt.
(c)
Represents annual servicing fees we receive on the outstanding balance of the transferred assets.
(d)
Sierra Receivables Funding Company LLC is a bankruptcy remote qualifying special purpose entity that we formed during 2002 in connection with the establishment of a securitization facility that replaced certain other timeshare receivable securitization facilities utilized by our Fairfield and Trendwest subsidiaries.
(e)
The equity of Bishop's Gate (currently in excess of 4%) is held by independent third parties who bear the credit risk of the assets. Bishop's Gate has entered into swaps with several banks, the net effect of which is that the banks have agreed to bear certain interest rate risks, non-credit related market risks and prepayment risks related to the mortgage loans held by Bishop's Gate. Additionally, PHH has entered into separate corresponding swaps with the banks, the net effect of which is that PHH has agreed to bear the interest rate risks, non-credit related market risks and prepayment risks related to the mortgage loans held by Bishop's Gate assumed by the banks under their swap with Bishop's Gate. We in turn offset the interest rate risks associated with the swaps by entering into forward delivery contracts for mortgage-backed securities. Both the swaps and the forward delivery commitments are derivatives under SFAS No. 133 and are recorded at fair value through earnings at the end of each reporting period. The fair value and changes in fair value of the swaps and forward delivery commitments have substantially offsetting effects. In connection with the adoption of FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (discussed below in "Recently Issued Accounting Pronouncements"), we expect to consolidate Bishop's Gate in our financial statements as of July 1, 2003.
(f)
Includes our ability to fund assets with $148 million of outside equity certificates.

The receivables and mortgage loans transferred to these special purpose entities, as well as the mortgage loans sold to the secondary market through other means, are generally non-recourse to us and to PHH.

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PHH also sells interests in operating leases and the underlying vehicles to two independent Canadian third parties. PHH repurchases the leased vehicles and then leases such vehicles under direct financing leases to the Canadian third parties. The Canadian third parties retain the lease rights and prepay all the lease payments except for an agreed upon amount, which is typically 8% of the total lease payments. The amounts not prepaid represent our only exposure in connection with these transactions. The total subordinated interest under these leasing arrangements, as recorded on our Consolidated Balance Sheets at December 31, 2002 and 2001, were $22 million and $21 million, respectively. We recognized $6 million and $7 million of net revenues related to these securitizations during 2002 and 2001, respectively.

Liquidity Risk

Our liquidity position may be negatively affected by unfavorable conditions in any one of the industries in which we operate, as we may not have the ability to generate sufficient cash flows from operating activities due to those unfavorable conditions. Additionally, our liquidity as it relates to both management and mortgage programs could be adversely affected by a deterioration in the performance of the underlying assets of such programs. Access to the principal financing program for our vehicle rental subsidiaries may also be impaired should General Motors Corporation or Ford Motor Company not be able to honor its obligations to repurchase a substantial number of our vehicles. Our liquidity as it relates to mortgage programs is highly dependent on the secondary markets for mortgage loans. Access to certain of our securitization facilities and our ability to act as servicer thereto also may be limited in the event that our or PHH's credit ratings are downgraded below investment grade and, in certain circumstances, where we or PHH fail to meet certain financial ratios. However, we do not believe that our or PHH's credit ratings are likely to fall below such thresholds. Additionally, we monitor the maintenance of these financial ratios and as of December 31, 2002, we were in compliance with all covenants under these facilities. When securitizing assets under management and mortgage programs, we make representations and warranties customary to the securitization markets, including eligibility characteristics of the assets transferred and servicing responsibilities.

Currently our credit ratings are as follows:

 
  Moody's
Investors
Service

  Standard &
Poor's

  Fitch
Cendant            
Senior unsecured debt   Baa1   BBB     BBB+
Subordinated debt   Baa2   BBB-     BBB  

PHH

 

 

 

 

 

 
Senior debt   Baa1     BBB+     BBB+
Short-term debt   P-2   A-2   F-2

All of the above credit ratings, with the exception of those assigned to PHH's short-term debt, are currently on negative outlook. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.

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Contractual Obligations

The following table summarizes our future contractual obligations:

 
  2003
  2004
  2005
  2006
  2007
  Thereafter
  Total
Long-term debt(a)   $ 30   $ 1,622   $ 31   $ 920   $ 8   $ 3,278   $ 5,889
Upper DECS(b)                 863             863
Debt under management and mortgage programs(c)     1,896     2,687     2,374     845     1,500     3,457     12,759
Mandatorily redeemable interest                         375     375
Operating leases     442     342     264     201     138     620     2,007
Capital leases     17     8     2     1             28
Commitments to purchase vehicles(d)     2,567                         2,567
Other purchase commitments(e)[di y^^_htm][nc_ul][dd]     624     606     275     284     249     598     2,636
   
 
 
 
 
 
 
Total   $ 5,576   $ 5,265   $ 2,946   $ 3,114   $ 1,895   $ 8,328   $ 27,124
   
 
 
 
 
 
 

(a)
Represents long-term debt (which includes current portion) and reflects (i) January 2003 issuance of $800 million due 2008 and $1.2 billion due 2013 and (ii) the 2003 repurchases of $1,075 million due 2003, $600 million due 2005 and $37 million due 2009.
(b)
Assumes that the senior note component of the Upper DECS are successfully remarketed in 2004. If such remarketing is not successful, the senior notes would be retired (without any payment of cash by us) in 2004 in satisfaction of the related forward purchase contract, whereby holders of the Upper DECS are required to purchase shares of our CD common stock.
(c)
Represents debt under management and mortgage programs which was issued to support the purchase of assets under management and mortgage programs. Amounts shown are based upon contractual maturities and reflect (i) the February 2003 issuance of $650 million of commercial paper and redemption of $650 million of medium-term notes due 2003, (ii) the February 2003 issuance of $400 million of medium-term notes due 2008 and $600 million of medium-term notes due 2013 and (iii) the February 2003 repayment of $988 million of commercial paper due 2003.
(d)
Represents commitments to purchase vehicles from either General Motors Corporation or Ford Motor Company. The purchase of such vehicles are financed through the issuance of debt under management and mortgage programs in addition to cash received upon the sale of vehicles primarily under repurchase programs (see Note 19—Debt Under Management and Mortgage Programs and Borrowing Arrangements to our Consolidated Financial Statements).
(e)
Primarily represents commitments under service contracts for information technology and telecommunications.

AFFILIATED ENTITIES

We maintain investments in affiliated entities principally to support our business model of growing earnings and cash flow with minimal asset risk. Certain of our officers may serve on the Board of Directors of these entities, but in no instances do they constitute a majority of the Board, nor do they receive any economic benefits. Our consolidation policy as it relates to these affiliated entities can be found in Note 1 to our Consolidated Financial Statements. Furthermore, the effects on our results of operations, cash flows and financial position from maintaining these relationships are presented in the aggregate in the tables provided in Note 28—Related Party Transactions to our Consolidated Financial Statements. Provided below are detailed descriptions of our relationship with each of our affiliated entities, which is also presented in substantially the same manner in Note 28 to our Consolidated Financial Statements.

Trip Network, Inc.

During March 2001, we funded the creation of Trip Network with a contribution of assets valued at approximately $20 million in exchange for all of the common and preferred stock of Trip Network. We unilaterally transferred all the common shares of Trip Network to the Hospitality Technology Trust ("HTT") and retained the preferred stock of Trip Network and warrants to purchase up to 28,250 shares of Trip Network's common stock. Trip Network provides travel services to both our franchisees as well as non-franchisees and, as such, our initial contribution of the Trip Network common stock to HTT supported our lodging franchise business model whereby we endeavored to avoid direct competition with our franchisees for the sale of transient hotel rooms. HTT is an independent technology trust that is controlled by three independent trustees who are not officers, directors or employees of Cendant or relatives of

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officers, directors or employees of Cendant. HTT was established in 1997 for purposes of enhancing and promoting the use of advanced technology for our lodging brands, its beneficiaries, including providing financial and technology support services and investing in Internet related activities for the benefit of its beneficiaries. The hotel franchise chains have agreed to link their brand and property Web sites to Trip.com because of, for among other reasons, their beneficial interest in HTT. A hotel franchise chain is not required to make any contributions to Trip Network in order for the franchisee's brand and property to be included on Trip Network's Web site. Trip Network earns a commission on all hotel rooms sold on its Web site, including those sold by our hotel franchise chains, at market rates ranging from 8 to 10%. Management believes that the enhanced functionality for the brand and property Web pages to be provided by Trip.com links will help build customer loyalty and avoid the problem of viewers leaving the brand and property Web sites for the sites of competitors. Additionally, management believes that the aggregate links of all franchisee properties create critical mass and Web-traffic for Trip Network further enhancing its ability to be successful. If Trip Network is successful, then management believes the common shares will likely appreciate in value. The liquidation of shares (representing HTT's equity stake, which approximates 20% of Trip Network's common stock on a fully diluted basis) will provide HTT with further resources to pursue its stated objectives.

In 2001, we contributed $85 million, including $45 million in cash and 1.5 million shares of Homestore common stock then-valued at $34 million, to Trip Network for the purpose of pursuing the development of an online travel business for the benefit of certain of our current and future franchisees. This arrangement is consistent with our strategy of creating a single platform to research and develop Internet related products within an integrated business plan. Since we did not have the in-house expertise to develop new technology for Internet Web sites, we outsourced the development of certain Internet assets and Web-site features to Trip Network through the existing arrangement. Since the advance is repayable to us only if the development results in the achievement of certain financial results, such amount was expensed by us during 2001 and is included as a component of restructuring and other unusual charges in our Consolidated Statement of Income. As of December 31, 2002, none of the financial results that would have caused the repayment of this advance had been achieved.

During October 2001, we entered into two separate lease and licensing agreements with Trip Network, whereby Trip Network was granted a license to operate the online businesses of Trip.com, Inc. and Cheap Tickets (both wholly-owned subsidiaries of Cendant) and a lease or sublease, as applicable, to all the assets of these companies necessary to operate such businesses. The Trip.com license agreement has a one-year term and is renewable at Trip Network's option for 40 additional one-year periods. The Cheaptickets.com license agreement has a 40-year term. Under these agreements, we receive a license fee of 3% of revenues generated by Trip.com and Cheaptickets.com during the term of the agreements. The royalty rate was negotiated with and approved by Trip Network's board of directors. We proposed our royalty rate based upon market rate analysis of similar licensing type agreements. In connection with this agreement, we also received warrants to purchase up to 46,000 shares of Trip Network common stock, which are exercisable, at our option, at a price of $0.01 per share, upon achievement of certain financial results beginning in October 2003 or upon a change of control of Trip Network. The warrants were also negotiated with and approved by Trip Network's board of directors. During 2002, we recognized $3 million of revenue in connection with this agreement. During 2001, the revenue recorded by us in connection with this agreement was not material.

Also during October 2001, we entered into a travel services agreement with Trip Network, whereby we provide Trip Network with call center services. In addition, we process and support Trip Network's booking and fulfillment of travel transactions and provide travel-related products and services to maintain and develop relationships, discounts and favorable commissions with travel vendors. For these services, we receive a fee of cost plus an applicable mark-up (6%), which was determined based upon an examination of profit margins in the travel agency industry. During 2002, we recognized $5 million of revenue in connection with this agreement. During 2001, the revenue recorded by us in connection with this agreement was not material.

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Additionally, during October 2001, we entered into a 40-year global distribution services subscriber agreement with Trip Network, whereby we provide all global distribution services for Trip Network. Pursuant to such agreement, we, through our Galileo subsidiary, receive payments from airlines, car rental agencies and hoteliers each time Trip Network books a reservation using the Galileo global distribution system. As it is normal and customary for a global distribution system provider to pay incentive fees to a travel agency, we prepaid Trip Network $42 million as compensation for booking segments through Galileo. Accordingly, on the date of commitment, we recorded an asset of $42 million for prepaid incentive fees, which is being amortized over 40 years, and a related credit in accounts payable and other current liabilities as we did not disburse the cash until January 2002. Such amount was mutually agreed to and represented the projected discounted amount of incentive fees that we expected to pay Trip Network over the term of the 40-year licensing agreement. We benefited from such prepayment by receiving a discount on the lump sum payment of incentive fees upon consummation of the contract rather than paying a portion of the incentive fee in advance and a portion of the incentive fee as segments are booked. Amortization of the asset is calculated in direct proportion to the expected cash flow benefits. During 2002, amortization recorded by us relating to this prepaid asset was $1 million. The amortization we recorded during 2001 was not material. As of December 31, 2002 and 2001, the prepaid asset approximated $41 million and $42 million, respectively, and was included within other non-current assets on our Consolidated Balance Sheets.

Our preferred stock investment, which is convertible into approximately 80% of Trip Network's common stock on a fully diluted basis, is non-voting and accounted for using the cost method. The preferred stock investment is not convertible prior to March 31, 2003 except upon a change of control of Trip Network. As of December 31, 2002 and 2001, our preferred equity interest in Trip Network approximated $17 million. During the years ended December 31, 2002 and 2001, we did not record any dividend income relating to our preferred equity interest in Trip Network. The warrants are exercisable, at our option, upon the achievement of certain financial results beginning on March 31, 2003 or upon a change of control of Trip Network at an exercise price of $0.01 per share. As of December 31, 2002, none of the financial results which would cause the warrants to be exercisable had been achieved. We are not obligated or contingently liable for any debt incurred by Trip Network.

Management is currently engaged in discussions with the trustees of HTT to negotiate our acquisition of the common stock of Trip Network, which is expected to occur during second quarter 2003. The consolidation of Trip Network upon acquisition will not have a material impact on our consolidated results of operations or any trends related thereto.

FFD Development Company, LLC

Prior to our acquisition of Fairfield Resorts, Inc. in April 2001, Fairfield operated its own property acquisition, planning, design and construction functions. These functions were transferred by Fairfield to FFD Development Company LLC ("FFD") immediately prior to our acquisition of Fairfield, along with Fairfield employees who were responsible for these functions. Given the extensive knowledge of Fairfield's standards and specifications as it related to the procurement of property and the planning and construction of timeshares, we continued to rely on the relationship between Fairfield and FFD throughout 2002 and 2001. However, we continued to penetrate the timeshare industry in 2002 with our acquisitions of Trendwest and Equivest and, as a result, developed the ability to integrate FFD into the Cendant timeshare businesses in a manner that would be both effective and cost beneficial. Accordingly, on February 3, 2003, we acquired all of the common equity interests of FFD (see Note 31—Subsequent Events). Therefore, FFD will be included within our consolidated results of operations and financial position beginning on February 4, 2003. For a detailed discussion of our relationship with FFD and the impact thereof on our results of operations and financial position during 2002 and 2001, see Note 28 to our Consolidated Financial Statements.

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Trilegiant Corporation

On July 2, 2001, the former management of our individual membership businesses (Cendant Membership Services and Cendant Incentives subsidiaries) purchased 100% of the common stock of a newly-created company, Trilegiant Corporation, for $2.7 million in cash. Trilegiant operates membership-based clubs and programs and other incentive-based programs through an outsourcing arrangement with us whereby we outsourced our individual membership and loyalty businesses to Trilegiant. We entered into this outsourcing arrangement with Trilegiant on July 2, 2001 whereby we retained substantially all of the assets and liabilities of the existing membership business outsourced under the arrangement and licensed Trilegiant the right to market products utilizing our intellectual property to new members. Accordingly, we continue to collect membership fees from, and are obligated to provide membership benefits to, members of our individual membership business that existed as of July 2, 2001 (referred to as "existing members"), including their renewals and Trilegiant provides fulfillment services (including collecting cash, paying commissions, processing refunds, providing membership services and benefits and maintaining specified service level standards) for these members in exchange for a servicing fee pursuant to the Third Party Administrator agreement, which is cost plus 10%. Furthermore, Trilegiant collects the membership fees from, and is obligated to provide membership benefits to, any members who join the membership based clubs and programs and all other incentive programs subsequent to July 2, 2001 (referred to as "new members") and recognizes the related revenue and expenses. Similar to our other franchise businesses, we receive a royalty from Trilegiant on all future revenue (over the 40-year term of the license agreement) generated by the new members (initially 5% beginning in third quarter 2002 and increasing to approximately 16% over 10 years).

During 2002 and 2001, we expensed $179 million and $128 million, respectively, of servicing fees relating to this outsourcing arrangement, of which we paid Trilegiant $166 million and $106 million, respectively, and owed Trilegiant $13 million and $22 million as of December 31, 2002 and 2001, respectively. The amounts expensed were included as a component of operating expense within our Consolidated Statements of Income.

During 2002 and 2001, we collected $240 million and $183 million, respectively, of membership fees from Trilegiant in connection with membership renewals by the existing members and as of December 31, 2002 and 2001, Trilegiant owed us an additional $19 million and $29 million, respectively, of such fees collected on our behalf. During 2002, we recorded $7 million of royalty revenue related to Trilegiant's members, of which we collected $3 million from Trilegiant during 2002 and as of December 31, 2002, Trilegiant owed us $4 million. We also recognized approximately $23 million and $8 million of revenues during 2002 and 2001, respectively, related to travel agency services provided to Trilegiant in connection with the provision of fulfillment services to members of the travel related clubs and programs.

As referred to above, Trilegiant is licensing and/or leasing from us the assets of our individual membership business in order to service these members and also to obtain new members. The assets licensed to Trilegiant include various tradenames, trademarks, logos, service marks and other intellectual property relating to its membership business. Upon expiration of the licensing term (40 years), Trilegiant will have the option to purchase any or all of the intellectual property licenses at their then-fair market values. Real property we owned was leased to Trilegiant on a monthly basis at rates that approximated our depreciation expense. In connection with the licensing and leasing arrangements, we recognized $21 million and $9 million of revenue during 2002 and 2001, respectively, of which Trilegiant paid us $19 million and $7 million, respectively, and owed us $2 million as of December 31, 2002 and 2001.

In connection with the foregoing arrangements, we advanced approximately $100 million in cash and $33 million of prepaid assets to Trilegiant to support their marketing activities and also made a $20 million convertible preferred stock investment in Trilegiant. We also received warrants to purchase up to 2.1 million shares of Trilegiant's common stock. We accounted for the entire advance to Trilegiant as a prepaid expense at the date of advance. The purpose of the advance was to help Trilegiant fund qualified marketing costs associated with obtaining new members whose revenue would become subject to royalties paid to us. We expense such advance as Trilegiant incurs qualified marketing expenses pursuant to the

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terms of the advance. During 2002 and 2001, we expensed $16 million and $66 million, respectively, of the advance, which is recorded as a component of marketing and reservation expenses within our Consolidated Statements of Income. As of December 31, 2002 and 2001, the remaining balance of this prepaid expense approximated $51 million and $67 million, respectively, of which approximately $17 million and $16 million were classified within other current assets and approximately $34 million and $51 million were classified within other non-current assets on our Consolidated Balance Sheets. Our preferred stock investment is mandatorily redeemable and, therefore, classified as an available-for-sale debt security and accounted for at fair value. The preferred stock investment is convertible, at any time at our option, into approximately 32% of Trilegiant's common stock on a fully diluted basis (after giving effect to non-cash dividends of approximately $3 million received from Trilegiant during 2002). We are entitled to receive a 12% cumulative non-cash dividend annually through July 2006 on our preferred stock investment and also entitled to vote our stock on an as-converted basis in proportion to our ownership percentage with the holders of the common stock on all matters. During third quarter 2001, we wrote-off the entire $20 million of our preferred stock investment due to operating losses incurred by Trilegiant and the fact that this entity had relatively thin common equity capitalization since inception. Such amount is included as a component of operating expenses in our Consolidated Statement of Income. The warrants are exercisable, at our option, at an exercise price of $0.01 per share, upon the achievement of certain business valuations ranging from $200 million to $750 million, into a majority ownership interest in Trilegiant. As of December 31, 2002, none of the business valuations that would have caused the warrants to be currently exercisable had been achieved.

We also provide Trilegiant with a $35 million revolving line of credit under which advances are at our sole and unilateral discretion. As of December 31, 2002, Trilegiant had not drawn on this line.

During August 2001, Trilegiant entered into marketing agreements with a third party, whereby Trilegiant provided certain marketing services to the third party in exchange for a commission. As part of our royalty arrangement with Trilegiant, we receive 13% of the commissions paid by the third party to Trilegiant. During 2002, we recognized $9 million of revenues in connection with these marketing agreements, of which Trilegiant paid us $6 million and owed us $3 million on December 31, 2002. We did not recognize any revenues during 2001 in connection with these marketing agreements. In connection with these marketing agreements, we provided Trilegiant with a $75 million loan facility bearing interest at a rate of 9% under which we advanced funds to Trilegiant for marketing performed by Trilegiant on behalf of the third party. As of December 31, 2002 and 2001, the outstanding loan balance under this facility was $57 million and $24 million, respectively. Such amount is accounted for as a note receivable and included in other non-current assets on our Consolidated Balance Sheets. We evaluate the collectibility of the note at the end of each reporting period. We will collect the receivable as commissions are received by Trilegiant from the third party. We recognized $5 million of non-cash interest income within net non-program related interest expense on our Consolidated Statement of Income in connection with amounts outstanding under this facility during 2002, which is also reflected as a note receivable and included in other non-current assets on our Consolidated Balance Sheet at December 31, 2002.

Trilegiant's Board of Directors is comprised of three directors elected by the Trilegiant management (as the common shareholders) and three directors elected by us (as the sole preferred shareholder). We are not obligated or contingently liable for any debt incurred by Trilegiant.

CHANGE IN ACCOUNTING POLICIES

Goodwill and Other Intangible Assets.    On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," in its entirety. In connection with the adoption of this standard, we have not amortized any goodwill or indefinite-lived intangible assets during 2002. Prior to the adoption, all intangible assets were amortized on a straight-line basis over their estimated periods to be benefited. Therefore, the results of operations for 2001 and 2000 reflect the amortization of goodwill and indefinite-lived intangible assets, while the results of operations for 2002 do not reflect such amortization (see Note 12—Intangible Assets to our Consolidated Financial Statements for a pro forma disclosure depicting

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our results of operations during 2001 and 2000 after applying the non-amortization provisions of SFAS No. 142).

In connection with the implementation of SFAS No. 142, we were required to assess goodwill and indefinite-lived intangible assets for impairment. We reviewed the carrying value of our reporting units by comparing such amounts to their fair value and determined that the carrying value of our reporting units did not exceed their respective fair values. Accordingly, the initial implementation of this standard and the annual testing did not result in a charge and, as such, did not impact our results of operations during 2002.

Impairment or Disposal of Long-Lived Assets.    On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This standard supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and replaces the accounting and reporting provisions of APB Opinion No. 30, "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," as it relates to the disposal of a segment of a business. SFAS No. 144 requires the use of a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations, by requiring those long-lived assets to be measured at the lower of carrying amount or fair value less cost to sell. The impairment recognition and measurement provisions of SFAS No. 121 were retained for all long-lived assets to be held and used with the exception of goodwill.

Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.    On April 1, 2001, we adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125" in its entirety. This standard revised the criteria for accounting for securitizations, other financial asset transfers and collateral and introduced new disclosures, but otherwise carried forward most of the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" without amendment. The impact of adopting the remaining provisions of this standard was not material to our financial position or results of operations.

Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets.    On January 1, 2001, we adopted the provisions of the Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets." Prior to the adoption of EITF Issue No. 99-20, we accounted for impairment of beneficial interests in securitizations in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and EITF Issue No. 93-18, "Recognition of Impairment for an Investment in a Collateralized Mortgage Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate." EITF Issue No. 99-20 modified the accounting for interest income and impairment of beneficial interests in securitization transactions, whereby beneficial interests determined to have an other-than-temporary impairment are required to be written down to fair value. The adoption of EITF Issue No. 99-20 resulted in the recognition of a non-cash charge of $46 million ($27 million, after tax) in first quarter 2001 to account for the cumulative effect of the accounting change.

Accounting for Derivative Instruments and Hedging Activities.    On January 1, 2001, we adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard, as amended and interpreted, establishes accounting and reporting standards for derivative instruments and hedging activities. As required by SFAS No. 133, we have recorded all such derivatives at fair value in the Consolidated Balance Sheets. The adoption of this standard resulted in the recognition of a non-cash charge of $16 million ($11 million, after tax) in the Consolidated Statement of Income on January 1, 2001 to account for the cumulative effect of the accounting change relating to derivatives designated in fair value type hedges prior to adopting this standard, to derivatives not designated as hedges and to certain embedded derivatives. As provided for in SFAS No. 133, we also reclassified certain financial investments as trading securities at January 1, 2001, which resulted in a pre-tax net benefit of $10 million recorded in other revenues within the Consolidated Statement of Income.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Early Extinguishment of Debt.    In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Such standard requires any gain or loss on extinguishments of debt to be presented as a component of continuing operations (unless specific criteria are met) whereas SFAS No. 4 required that such gains and losses be classified as an extraordinary item in determining net income. Upon adoption of this standard, we expect to reclassify any extraordinary gains or losses on the extinguishments of debt recorded in prior periods to continuing operations. We will adopt these provisions on January 1, 2003, as required. The other provisions of SFAS No. 145 were not relevant to us.

Costs Associated with Exit or Disposal Activities.    In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Such standard requires costs associated with exit or disposal activities (including restructurings) to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. SFAS No. 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized until such liability has actually been incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of a commitment to an exit or disposal plan. The provisions of this standard are effective for exit or disposal activities initiated after December 31, 2002. We will adopt this standard on January 1, 2003, as required.

Guarantees.    In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Such Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation apply to guarantees issued or modified after December 31, 2002. We will adopt these provisions on January 1, 2003. The disclosure provisions of this Interpretation are effective for financial statements with annual periods ending after December 15, 2002. We have applied the disclosure provisions of this Interpretation as of December 31, 2002, as required (see Note 23—Commitments and Contingencies to our Consolidated Financial Statements).

Stock-Based Compensation.    On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." This standard amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This standard also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have applied the disclosure provisions of SFAS No. 148 as of December 31, 2002. See Note 1—Summary of Significant Accounting Policies to our Consolidated Financial Statements for a table that illustrates the effect on net income and earnings per share if the fair value based method had been applied during each period presented.

As permitted by SFAS No. 123, during 2002, we measured stock-based compensation using the intrinsic value approach under Accounting Principles Board Opinion No. 25. Accordingly, we did not recognize compensation expense upon the issuance of our stock options because the option terms were fixed and the exercise price equaled the market price of the underlying CD common stock on the grant date. We complied with the provisions of SFAS No. 123 by providing pro forma disclosures of net income and related per share data giving consideration to the fair value method provisions of SFAS No. 123.

On January 1, 2003, we adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123, which is considered by the FASB to be the preferable accounting method for stock-based employee compensation, and have elected to use the prospective method permitted by SFAS No. 148. Therefore, the transition provisions of SFAS No. 148 will be adopted concurrently with the fair

76



value based recognition provisions of SFAS No. 123 on January 1, 2003. Subsequently, we will expense all future employee stock awards over the vesting period based on the fair value of the award on the date of grant in accordance with the prospective transition method.

Consolidation of Variable Interest Entities.    On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Such Interpretation addresses consolidation of entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks and rewards. These entities have been commonly referred to as special purpose entities. The Interpretation provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. It also provides guidance related to the initial and subsequent measurement of assets, liabilities and noncontrolling interests in newly consolidated variable interest entities and requires disclosures for both the primary beneficiary of a variable interest entity and other beneficiaries of the entity.

For variable interests entities created, or interests in variable interest entities obtained, subsequent to January 31, 2003, we are required to apply the consolidation provisions of this Interpretation immediately. To date, we have not created a variable interest entity nor obtained an interest in a variable interest entity for which we would be required to apply the consolidation provisions of this Interpretation immediately.

For variable interest entities created, or interests in variable interest entities obtained, on or before January 31, 2003, the consolidation provisions of this Interpretation are first required to be applied in our financial statements as of July 1, 2003. For these variable interest entities, we expect to apply the prospective transition method whereby the consolidation provisions of this Interpretation are applied prospectively with a cumulative-effect adjustment, if necessary, as of July 1, 2003. This Interpretation also requires certain disclosures herein if it is reasonably possible that we will consolidate or disclose information about a variable interest entity when we initially apply the guidance in this Interpretation. We have applied the disclosure provisions of this Interpretation as of December 31, 2002.

We are currently evaluating the impact of adopting this Interpretation. Thus far, we have concluded that the adoption of this Interpretation will result in the consolidation of the mortgage securitization facility, Bishop's Gate Residential Mortgage Trust, as of July 1, 2003. The consolidation of Bishop's Gate is not expected to affect our results of operations. However, had we consolidated Bishop's Gate as of December 31, 2002, our total assets and liabilities under management and mortgage programs would have increased by approximately $2.5 billion each. See Note 20—Transfers and Servicing of Financial Assets to our Consolidated Financial Statements for a detailed description of the Bishop's Gate mortgage securitization facility.

Additionally, based upon a preliminary analysis, we believe that upon adoption of this Interpretation, it is possible that we may be required to consolidate Trilegiant Corporation as of July 1, 2003. This assessment is based upon facts and circumstances in existence as of the date of this filing. However, we have been engaged in discussions with Trilegiant to address enhancements to their business model and expect modifications to our existing contractual relationships. Such modifications would require us to reapply the criteria set forth in this Interpretation, which could result in a different conclusion whereby we would not be required to consolidate Trilegiant. However, if we were to be unsuccessful in our endeavors, we believe that the consolidation of Trilegiant would cause our total assets and total liabilities to increase by approximately $100 million and $400 million (approximately $250 million of which represents deferred income), respectively, on July 1, 2003. Additionally, we expect that the consolidation of Trilegiant, if necessary, would result in a non-cash charge of approximately $300 million, which would be recorded on July 1, 2003 as a cumulative effect of accounting change but would not impact our continuing results of operations. Additionally, the consolidation of Trilegiant would not result in any changes to our consolidated financial statements for any prior periods (including first and second quarters of 2003). Further, we do not expect that the consolidation of Trilegiant would materially impact our results of operations, financial position or cash flows in any future periods. See Note 28—Related Party Transactions to our Consolidated Financial Statements for a detailed description of our relationship with Trilegiant.

77


ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use various financial instruments, particularly swap contracts, forward delivery commitments and futures and options contracts to manage and reduce the interest rate risk related specifically to our committed mortgage pipeline, mortgage loan inventory, mortgage servicing rights, mortgage-backed securities, debt and certain other interest bearing liabilities. Foreign currency forwards are also used to manage and reduce the foreign currency exchange rate risk associated with our foreign currency denominated receivables and forecasted royalties, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated acquisitions.

We are exclusively an end user of these instruments, which are commonly referred to as derivatives. We do not engage in trading, market-making, or other speculative activities in the derivatives markets. More detailed information about these financial instruments is provided in Note 27—Financial Instruments to our Consolidated Financial Statements.

Our principal market exposures are interest and foreign currency rate risks.

We assess our market risk based on changes in interest and foreign currency exchange rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and currency rates.

We use a discounted cash flow model in determining the fair values of relocation receivables, timeshare receivables, equity advances on homes, mortgage loans, commitments to fund mortgages, mortgage servicing rights, mortgage-backed securities and our retained interests in securitized assets. The primary assumptions used in these models are prepayment speeds, estimated loss rates, and discount rates. In determining the fair value of mortgage servicing rights and mortgage-backed securities, the models also utilize credit losses and mortgage servicing revenues and expenses as primary assumptions. In addition, for commitments to fund mortgages, the borrower's propensity to close their mortgage loan under the commitment is used as a primary assumption. For mortgage loans, commitments to fund mortgages, forward delivery contracts and options, we rely on prices sourced from Bloomberg in determining the impact of interest rate shifts. We also utilize an option-adjusted spread ("OAS") model to determine the impact of interest rate shifts on mortgage servicing rights and mortgage-backed securities. The primary assumption in an OAS model is the implied market volatility of interest rates and prepayment speeds and the same primary assumptions are used in determining fair value.

We use a duration-based model in determining the impact of interest rate shifts on our debt portfolio, certain other interest bearing liabilities and interest rate derivatives portfolios. The primary assumption used in these models is that a 10% increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.

We use a current market pricing model to assess the changes in the value of the U.S. dollar on foreign currency denominated monetary assets and liabilities and derivatives. The primary assumption used in these models is a hypothetical 10% weakening or strengthening of the U.S. dollar against all our currency exposures at December 31, 2002, 2001 and 2000.

Our total market risk is influenced by a wide variety of factors including the volatility present within the markets and the liquidity of the markets. There are certain limitations inherent in the sensitivity analyses

78



presented. While probably the most meaningful analysis, these "shock tests" are constrained by several factors, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.

We used December 31, 2002, 2001 and 2000 market rates on our instruments to perform the sensitivity analyses separately for each of our market risk exposures—interest and currency rate instruments. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves and exchange rates.

We have determined that the impact of a 10% change in interest and foreign currency exchange rates and prices on our earnings, fair values and cash flows would not be material. While these results may be used as benchmarks, they should not be viewed as forecasts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Financial Statements and Financial Statement Index commencing on Page F-1 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information contained in the Company's Annual Proxy Statement under the sections titled "Election of Directors", "Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" are incorporated herein by reference in response to this item.

ITEM 11. EXECUTIVE COMPENSATION

The information contained in the Company's Annual Proxy Statement under the section titled "Executive Compensation and Other Information" is incorporated herein by reference in response to this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information contained in the Company's Annual Proxy Statement under the section titled "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference in response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained in the Company's Annual Proxy Statement under the section titled "Certain Relationships and Related Transactions" is incorporated herein by reference in response to this item.

ITEM 14. CONTROLS AND PROCEDURES.

(a)    Evaluation of Disclosure Controls and Procedures.    Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to our company (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act.

(b)    Changes in Internal Controls.    Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.

79



PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

ITEM 15(A)(1) FINANCIAL STATEMENTS

See Financial Statements and Financial Statements Index commencing on page F-1 hereof.

ITEM 15(A)(3) EXHIBITS

See Exhibit Index commencing on page G-1 hereof.

ITEM 15(B) REPORTS ON FORM 8-K

On October 22, 2002, we filed a current report on Form 8-K to report under Item 5 our third quarter 2002 results.

On November 15, 2002, we filed a current report on Form 8-K to report under Item 5 the hosting of a Travel Distribution and Real Estate Teach-In for the investment community.

On November 25, 2002, we filed a current report on Form 8-K to report under Item 5 the completion of the acquisition of substantially all of the domestic assets of Budget Group, Inc.

On December 11, 2002, we filed a current report on Form 8-K to report under Item 5 a new $2.9 billion three-year revolving credit facility replacing $2.4 billion of credit facilities scheduled to expire in August 2003 and February 2004.

On December 17, 2002, we filed a current report on Form 8-K to report under Item 5 updated projections for the fourth quarter of 2002 and for 2003 and, that beginning with 2003 results, we will discontinue reporting pro forma earnings per share and, instead, exclusively report GAAP earnings per share results.

80



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    CENDANT CORPORATION

 

 

By:

 

/s/  
JAMES E. BUCKMAN      
James E. Buckman
Vice Chairman and General Counsel
Date: March 5, 2003

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
  Title
  Date

 

 

 

 

 
/s/  HENRY R. SILVERMAN      
(Henry R. Silverman)
  Chairman of the Board, President, Chief Executive Officer and Director   March 5, 2002

/s/  
JAMES E. BUCKMAN      
(James E. Buckman)

 

Vice Chairman, General Counsel and Director

 

March 5, 2002

/s/  
STEPHEN P. HOLMES      
(Stephen P. Holmes)

 

Vice Chairman and Director

 

March 5, 2002

/s/  
KEVIN M. SHEEHAN      
(Kevin M. Sheehan)

 

Senior Executive Vice President and Chief Financial Officer

 

March 5, 2002

/s/  
TOBIA IPPOLITO      
(Tobia Ippolito)

 

Executive Vice President and Chief Accounting Officer

 

March 5, 2002

/s/  
MYRA J. BIBLOWIT      
(Myra J. Biblowit)

 

Director

 

March 5, 2002

/s/  
WILLIAM S. COHEN      
(The Honorable William S. Cohen)

 

Director

 

March 5, 2002

/s/  
LEONARD S. COLEMAN      
(Leonard S. Coleman)

 

Director

 

March 5, 2002

/s/  
MARTIN L. EDELMAN      
(Martin L. Edelman)

 

Director

 

March 5, 2002


(Dr. John C. Malone)

 

Director

 

 

 

 

 

 

 

81



/s/  
CHERYL D. MILLS      
(Cheryl D. Mills)

 

Director

 

March 5, 2002

/s/  
BRIAN MULRONEY      
(The Rt. Hon. Brian Mulroney, P.C., L.L.D.)

 

Director

 

March 5, 2002

/s/  
ROBERT E. NEDERLANDER      
(Robert E. Nederlander)

 

Director

 

March 5, 2002

/s/  
ROBERT W. PITTMAN      
(Robert W. Pittman)

 

Director

 

March 5, 2002

/s/  
SHELI Z. ROSENBERG      
(Sheli Z. Rosenberg)

 

Director

 

March 5, 2002

/s/  
ROBERT F. SMITH      
(Robert F. Smith)

 

Director

 

March 5, 2002

82



CERTIFICATIONS

I, Henry R. Silverman, certify that:

Date: March 5, 2003

    /s/  HENRY R. SILVERMAN      
Chief Executive Officer

83


I, Kevin M. Sheehan, certify that:

Date: March 5, 2003

    /s/  KEVIN M. SHEEHAN      
Chief Financial Officer

84



INDEX TO FINANCIAL STATEMENTS

 
  Page
Independent Auditors' Report   F-2

Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000

 

F-3

Consolidated Balance Sheets as of December 31, 2002 and 2001

 

F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000

 

F-5

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000

 

F-7

Notes to Consolidated Financial Statements

 

F-9

F-1



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Cendant Corporation:

We have audited the accompanying consolidated balance sheets of Cendant Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted the non-amortization provisions for goodwill and other indefinite lived intangible assets. Also, as discussed in Note 1, on January 1, 2001, the Company modified the accounting treatment relating to securitization transactions and the accounting for derivative instruments and hedging activities. Also, as discussed in Note 1, on January 1, 2000, the Company revised certain revenue recognition policies.

/s/ Deloitte & Touche LLP
New York, New York
February 5, 2003
(March 3, 2003 as to the subsequent events described in Note 31)

F-2



Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
Revenues                    
  Service fees and membership-related, net   $ 10,062   $ 5,426   $ 4,191  
  Vehicle-related     3,979     3,134     11  
  Other     47     53     118  
   
 
 
 
Net revenues     14,088     8,613     4,320  
   
 
 
 
Expenses                    
  Operating     6,721     2,658     1,176  
  Vehicle depreciation, lease charges and interest, net     2,094     1,789      
  Marketing and reservation     1,392     1,114     896  
  General and administrative     1,120     965     663  
  Non-program related depreciation and amortization     466     477     321  
  Other charges (credits):                    
    Acquisition and integration related costs     285     112      
    Litigation and related charges, net     103     86     2  
    Restructuring and other unusual charges     (14 )   379     109  
    Mortgage servicing rights impairment         94      
  Non-program related interest (net of interest income of $41, $91 and $73)     262     252     152  
   
 
 
 
Total expenses     12,429     7,926     3,319  
   
 
 
 
Gains on dispositions of businesses         443     37  
   
 
 
 
Losses on dispositions of businesses         (26 )   (45 )
   
 
 
 
Impairment of investments         (441 )    
   
 
 
 
Income before income taxes, minority interest and equity in Homestore     1,659     663     993  
Provision for income taxes     556     220     341  
Minority interest, net of tax     22     24     83  
Losses related to equity in Homestore, net of tax         77      
   
 
 
 
Income from continuing operations     1,081     342     569  
Income from discontinued operations, net of tax     51     81     91  
Loss on disposal of discontinued operations, net of tax     (256 )        
   
 
 
 
Income before extraordinary losses and cumulative effect of accounting changes     876     423     660  
Extraordinary losses on early extinguishment of debt, net of tax     (30 )       (2 )
   
 
 
 
Income before cumulative effect of accounting changes     846     423     658  
Cumulative effect of accounting changes, net of tax         (38 )   (56 )
   
 
 
 
Net income   $ 846   $ 385   $ 602  
   
 
 
 
CD common stock income per share                    
  Basic                    
    Income from continuing operations   $ 1.06   $ 0.37   $ 0.79  
    Net income     0.83     0.42     0.84  
  Diluted                    
    Income from continuing operations   $ 1.04   $ 0.36   $ 0.77  
    Net income     0.81     0.41     0.81  

See Notes to Consolidated Financial Statements.

F-3



Cendant Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)

 
  December 31,
 
 
  2002
  2001
 
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 126   $ 1,942  
  Restricted cash     307     211  
  Receivables (net of allowance for doubtful accounts of $136 and $104)     1,457     1,313  
  Stockholder litigation settlement trust         1,410  
  Deferred income taxes     334     697  
  Assets of discontinued operations         1,310  
  Other current assets     1,134     834  
   
 
 
Total current assets     3,358     7,717  

Property and equipment, net

 

 

1,780

 

 

1,394

 
Deferred income taxes     1,115     897  
Goodwill, net     10,699     7,234  
Other intangibles, net     2,464     2,866  
Other non-current assets     1,473     1,568  
   
 
 
Total assets exclusive of assets under programs     20,889     21,676  
   
 
 
Assets under management and mortgage programs:              
  Restricted cash     354     861  
  Mortgage loans held for sale     1,923     1,244  
  Relocation receivables     239     292  
  Vehicle-related, net     10,052     7,219  
  Timeshare-related, net     675     215  
  Mortgage servicing rights, net     1,380     1,937  
  Derivatives related to mortgage servicing rights, net     385     100  
   
 
 
      15,008     11,868  
   
 
 
Total assets   $ 35,897   $ 33,544  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable and other current liabilities   $ 4,287   $ 3,468  
  Current portion of long-term debt     30     401  
  Stockholder litigation settlement         2,850  
  Liabilities of discontinued operations         172  
  Deferred income     680     900  
   
 
 
Total current liabilities     4,997     7,791  

Long-term debt, excluding Upper DECS

 

 

5,571

 

 

5,731

 
Upper DECS     863     863  
Deferred income     320     297  
Other non-current liabilities     692     525  
   
 
 
Total liabilities exclusive of liabilities under programs     12,443     15,207  
   
 
 
Liabilities under management and mortgage programs:              
  Debt     12,747     9,844  
  Deferred income taxes     1,017     1,050  
   
 
 
      13,764     10,894  
   
 
 
Mandatorily redeemable preferred interest in a subsidiary     375     375  
   
 
 
Commitments and contingencies (Note 23)              
Stockholders' equity:              
  Preferred stock, $.01 par value authorized 10 million shares; none issued and outstanding          
  CD common stock $.01 par value—authorized 2 billion shares; issued 1,238,952,970 and 1,166,492,626 shares     12     11  
  Additional paid-in capital     10,090     8,676  
  Retained earnings     3,258     2,412  
  Accumulated other comprehensive loss     (14 )   (264 )
  CD treasury stock, at cost—207,188,268 and 188,784,284 shares     (4,031 )   (3,767 )
   
 
 
Total stockholders' equity     9,315     7,068  
   
 
 
Total liabilities and stockholders' equity   $ 35,897   $ 33,544  
   
 
 

See Notes to Consolidated Financial Statements.

F-4



Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
Operating Activities                    
Net income   $ 846   $ 385   $ 602  
Adjustments to arrive at income from continuing operations     235     (43 )   (33 )
   
 
 
 
Income from continuing operations     1,081     342     569  
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:                    
  Non-program related depreciation and amortization     466     477     321  
  Other charges, net     191     298     24  
  Gain on dispositions of business         (443 )   (37 )
  Losses on dispositions of business         26     45  
  Impairment of investments         441      
  Proceeds from sales of trading securities         110      
  Deferred income taxes     438     418     59  
  Net change in operating assets and liabilities, excluding the impact of acquisitions and dispositions:                    
    Receivables     (74 )   10     198  
    Income taxes     46     (201 )   285  
    Accounts payable and other current liabilities     (17 )   232     (213 )
    Payment of stockholder litigation settlement     (2,850 )        
    Deferred income     (210 )   (162 )   (79 )
  Other, net     39     (150 )   (221 )
   
 
 
 
Net cash provided by (used in) operating activities exclusive of management and mortgage programs     (890 )   1,398     951  
   
 
 
 
Management and mortgage programs:                    
  Vehicle depreciation     1,783     1,411      
  Amortization of mortgage servicing rights     468     248     153  
  Provision for impairment of mortgage servicing rights     454     50      
  Origination of mortgage loans     (44,017 )   (40,963 )   (24,196 )
  Proceeds on sale of and payments from mortgage loans held for sale     43,459     40,643     24,428  
   
 
 
 
      2,147     1,389     385  
   
 
 
 
Net cash provided by operating activities     1,257     2,787     1,336  
   
 
 
 
Investing activities                    
Property and equipment additions     (399 )   (329 )   (192 )
Proceeds from (payments to) stockholder litigation settlement trust     1,410     (1,060 )   (350 )
Proceeds from sales of available-for-sale securities     29     36     379  
Purchases of available-for-sale securities     (24 )   (35 )   (441 )
Purchases of non-marketable securities     (3 )   (101 )   (90 )
Net assets acquired (net of cash acquired of $178 in 2002 and $308 in 2001) and acquisition-related payments     (1,371 )   (2,757 )   (106 )
Net proceeds from dispositions of businesses     1,151     109     4  
Other, net     (25 )   (69 )   (24 )
   
 
 
 
Net cash provided by (used in) investing activities exclusive of management and mortgage programs     768     (4,206 )   (820 )
   
 
 
 

F-5


Management and mortgage programs:                    
  Investment in vehicles     (17,168 )   (14,906 )    
  Payments received on investment in vehicles     15,141     13,324      
  Origination of timeshare receivables     (1,118 )   (497 )    
  Principal collection of timeshare receivables     1,046     538      
  Equity advances on homes under management     (5,968 )   (6,306 )   (7,637 )
  Repayment on advances on homes under management     6,028     6,340     8,009  
  Net additions to mortgage servicing rights     (377 )   (759 )   (766 )
  Net change to derivatives related to mortgage servicing rights     (285 )   (43 )   (12 )
  Proceeds from sales of mortgage servicing rights     16     58     84  
   
 
 
 
      (2,685 )   (2,251 )   (322 )
   
 
 
 
Net cash used in investing activities     (1,917 )   (6,457 )   (1,142 )
   
 
 
 
Financing activities                    
Proceeds from borrowings     637     5,608      
Principal payments on borrowings     (2,111 )   (2,213 )   (897 )
Issuances of common stock     112     877     603  
Repurchases of common stock     (288 )   (254 )   (381 )
Proceeds from mandatorily redeemable preferred interest in a subsidiary             375  
Proceeds from mandatorily redeemable preferred securities issued by subsidiary holding solely senior debentures issued by the Company             91  
Other, net     (64 )   (153 )    
   
 
 
 
Net cash provided by (used in) financing activities exclusive of management and mortgage programs     (1,714 )   3,865     (209 )
   
 
 
 
Management and mortgage programs:                    
  Proceeds from borrowings     15,171     9,460     4,133  
  Principal payments on borrowings     (14,614 )   (8,798 )   (5,320 )
  Net change in short-term borrowings     (114 )   116     913  
   
 
 
 
      443     778     (274 )
   
 
 
 
Net cash provided by (used in) financing activities     (1,271 )   4,643     (483 )
   
 
 
 
Effect of changes in exchange rates on cash and cash equivalents     41     (8 )   (6 )
   
 
 
 
Cash provided by discontinued operations     74     121     89  
   
 
 
 
Net increase (decrease) in cash and cash equivalents     (1,816 )   1,086     (206 )
Cash and cash equivalents, beginning of period     1,942     856     1,062  
   
 
 
 
Cash and cash equivalents, end of period   $ 126   $ 1,942   $ 856  
   
 
 
 
Supplemental Disclosure of Cash Flow Information                    
Interest payments   $ 788   $ 609   $ 263  
Income tax payments (refunds), net   $ 62   $ 40   $ (73 )

See Notes to Consolidated Financial Statements.

F-6



Cendant Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In millions)

 
  Common Stock
   
   
  Accumulated
Other
Comprehensive
Loss

  Treasury Stock
   
 
 
  Additional
Paid-in
Capital

  Retained
Earnings

  Total
Stockholders'
Equity

 
 
  Shares
  Amount
  Shares
  Amount
 
Balance at January 1, 2000   870   $ 9   $ 4,102   $ 1,425   $ (42 ) (164 ) $ (3,288 ) $ 2,206  
Comprehensive income:                                              
Net income               602                  
Currency translation adjustment                   (107 )            
Unrealized losses on available-for-sale securities, net of tax of ($40)                   (65 )            
Reclassification adjustments, net of tax of ($12)                   (20 )            
Total comprehensive income                                           410  
Issuances of CD common stock   28         476                   476  
Issuances of Move.com common stock   4         93                   93  
Exercise of stock options   17         56           2     26     82  
Tax benefit from exercise of stock options           66                   66  
Repurchases of CD common stock                     (17 )   (306 )   (306 )
Repurchases of Move.com common stock   (2 )       (100 )                 (100 )
Mandatorily redeemable preferred securities issued by subsidiary holding solely senior debentures issued by the Company           (108 )                 (108 )
Rights issuable           (41 )                 (41 )
Other           (4 )                 (4 )
   
 
 
 
 
 
 
 
 
Balance at December 31, 2000   917     9     4,540     2,027     (234 ) (179 )   (3,568 )   2,774  
   
 
 
 
 
 
 
 
 
Comprehensive income:                                              
Net income               385                  
Currency translation adjustment                   (65 )            
Unrealized losses on cash flow hedges, net of tax of ($22)                   (33 )            
Minimum pension liability adjustment, net of tax of ($13)                   (21 )            
Unrealized gains on available-for-sale securities, net of tax of $21                   33              
Reclassification adjustments, net of tax of $29                   56              
Total comprehensive income                                           355  
Issuances of CD common stock   108     1     2,342                   2,343  
Exercise of stock options   26         237           2     27     264  
Tax benefit from exercise of stock options           59                   59  
Repurchases of CD common stock                     (12 )   (226 )   (226 )
Repurchases of Move.com common stock   (2 )       (75 )                 (75 )
Present value of forward purchase contract distributions and related costs           (48 )                 (48 )
Modifications to stock options           25                   25  
Issuance of CD common stock and conversion of stock options for acquisitions   117     1     1,604                   1,605  
Other           (8 )                 (8 )
   
 
 
 
 
 
 
 
 
Balance at December 31, 2001   1,166   $ 11   $ 8,676   $ 2,412   $ (264 ) (189 ) $ (3,767 ) $ 7,068  
   
 
 
 
 
 
 
 
 

F-7


Balance at January 1, 2002   1,166   $ 11   $ 8,676   $ 2,412   $ (264 ) (189 ) $ (3,767 ) $ 7,068  
Comprehensive income:                                              
Net income               846                  
Currency translation adjustment                   66              
Reclassification of foreign currency translation losses realized upon the sale of NCP, net of tax of $0                   245              
Unrealized losses on cash flow hedges, net of tax of $(5)                   (8 )            
Minimum pension liability adjustment, net of tax of $(23)                   (37 )            
Unrealized losses on available-for-sale securities, net of tax of $(12)                   (19 )            
Reclassification for realized holding losses, net of tax of $2                   3              
Total comprehensive income                                           1,096  
Issuances of CD common stock   6         62                   62  
Exercise of stock options   8         72           2     27     99  
Tax benefit from exercise of stock options           25                   25  
Repurchases of CD common stock                     (20 )   (291 )   (291 )
Issuance of CD common stock and conversion of stock options for acquisitions   59     1     1,139                   1,140  
Issuance of subsidiary stock           98                   98  
Other           18                   18  
   
 
 
 
 
 
 
 
 
Balance at December 31, 2002   1,239   $ 12   $ 10,090   $ 3,258   $ (14 ) (207 ) $ (4,031 ) $ 9,315  
   
 
 
 
 
 
 
 
 

See Notes to Consolidated Financial Statements.

F-8



Cendant Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except per share amounts)

1.    Summary of Significant Accounting Policies

F-9


F-10


F-11


F-12


F-13


F-14


F-15


F-16


 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
Reported net income   $ 846   $ 385   $ 602  
Add back: Stock-based employee compensation expense included in reported net income, net of tax     2     15     5  
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax     (297 )   (233 )   (105 )
   
 
 
 
Pro Forma net income   $ 551   $ 167   $ 502  
   
 
 
 
Net income per share:                    
Reported                    
  Basic   $ 0.83   $ 0.42   $ 0.84  
  Diluted     0.81     0.41     0.81  
Pro Forma                    
  Basic   $ 0.54   $ 0.17   $ 0.70  
  Diluted     0.53     0.16     0.68  

F-17


F-18


2.    Earnings Per Share

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
Income from continuing operations:                    
Cendant Group   $ 1,081   $ 87   $ 631  
Cendant Group's retained interest in Move.com Group         238     (56 )
   
 
 
 
Income from continuing operations for basic EPS     1,081     325     575  
Convertible debt interest, net of tax     1     11     11  
Adjustment to Cendant Group's retained interest in Move.com Group(a)         (3 )    
   
 
 
 
Income from continuing operations for diluted EPS   $ 1,082   $ 333   $ 586  
   
 
 
 
Weighted average shares outstanding:                    
  Basic     1,019     869     724  
    Stock options, warrants and non-vested shares     22     30     20  
    Convertible debt     2     18     18  
   
 
 
 
  Diluted     1,043     917     762  
   
 
 
 

F-19


 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
Income per share:                    
Basic                    
  Income from continuing operations   $ 1.06   $ 0.37   $ 0.79  
  Income from discontinued operations     0.05     0.10     0.13  
  Loss on disposal of discontinued operations     (0.25 )        
  Extraordinary losses on early extinguishments of debt     (0.03 )        
  Cumulative effect of accounting changes         (0.05 )   (0.08 )
   
 
 
 
  Net income   $ 0.83   $ 0.42   $ 0.84  
   
 
 
 
Diluted                    
  Income from continuing operations   $ 1.04   $ 0.36   $ 0.77  
  Income from discontinued operations     0.05     0.09     0.12  
  Loss on disposal of discontinued operations     (0.25 )        
  Extraordinary losses on early extinguishments of debt     (0.03 )        
  Cumulative effect of accounting changes         (0.04 )   (0.08 )
   
 
 
 
  Net income   $ 0.81   $ 0.41   $ 0.81  
   
 
 
 

(a)
Represents the change in Cendant Group's retained interest in Move.com Group due to the dilutive impact of Move.com common stock options.
 
  Year Ended December 31,
 
 
  2001
  2000
 
Income (loss) from continuing operations:              
Move.com Group   $ 255   $ (62 )
Less: Cendant Group's retained interest in Move.com Group     238     (56 )
   
 
 
Income (loss) from continuing operations for basic EPS     17     (6 )
Adjustment to Cendant Group's retained interest in Move.com Group(a)     3      
   
 
 
Income (loss) from continuing operations for diluted EPS   $ 20   $ (6 )
   
 
 
Weighted average shares outstanding:              
  Basic and Diluted     2     3  
   
 
 
Income (loss) per share:              
  Basic              
    Income (loss) from continuing operations   $ 9.94   $ (1.76 )
    Cumulative effect of accounting changes     (0.07 )    
   
 
 
    Net income (loss)   $ 9.87   $ (1.76 )
   
 
 
  Diluted              
    Income (loss) from continuing operations   $ 9.81   $ (1.76 )
    Cumulative effect of accounting changes     (0.07 )    
   
 
 
    Net income (loss)   $ 9.74   $ (1.76 )
   
 
 

(a)
Represents the change in Cendant Group's retained interest in Move.com Group due to the dilutive impact of Move.com common stock options.

F-20


 
  Year Ended December 31,
 
  2002
  2001
  2000
CD Common Stock            
  Options(a)   128   98   110
  Warrants(b)   2   2   2
  Feline PRIDES       63
  Upper DECS(c)   40   40  
Move.com Common Stock            
  Options(d)       6

(a)
The weighted average exercise prices for antidilutive options at December 31, 2002, 2001 and 2000 were $21.44, $22.59 and $22.27, respectively.
(b)
The weighted average exercise prices for antidilutive warrants at December 31, 2002, 2001 and 2000 was $21.31.
(c)
The appreciation price for antidilutive Upper DECS at December 31, 2002 and 2001 was $28.42.
(d)
The weighted average exercise price for antidilutive options at December 31, 2000 was $18.60.

3.    Acquisitions

F-21


 
  Amount
 
Issuance of CD common stock   $ 216  
Fair value of options issued in exchange for stock appreciation rights     11  
Transaction costs and expenses     3  
   
 
Total purchase price     230  
Book value of Cendant's intangible assets with NRT     670  
Book value of Cendant's existing net investment in NRT     403  
   
 
Cendant's basis in NRT     1,303  
Plus: Historical value of liabilities assumed in excess of assets acquired     371  
Plus: Fair value adjustments(a)     (110 )
   
 
Excess purchase price over fair value of assets acquired and liabilities assumed   $ 1,564  
   
 

(a)
Represents the allocation of the purchase price to the value associated with NRT's pendings and listings contracts ($197 million) at the acquisition date, partially offset by (i) deferred tax liabilities for book-tax basis differences of $68 million, (ii) asset write-downs of $15 million resulting from the Company's decision to exit activities of the former NRT business and (iii) severance costs of $4 million also resulting from exiting activities, of which $2 million had been paid as of December 31, 2002. The entire $197 million was amortized by the Company as of December 31, 2002 as this intangible asset was being amortized over the closing periods of the underlying contracts, which was less than five months from the date of acquisition.
 
  Amount
Total current assets   $ 406
Property and equipment     128
Intangible assets     197
Goodwill     1,564
Other non-current assets     22
   
Total assets acquired     2,317
   
Total current liabilities     937
Total non-current liabilities     77
   
Total liabilities assumed     1,014
   
Net assets acquired   $ 1,303
   

F-22


 
  Amount
 
Issuance of CD common stock   $ 891  
Fair value of converted options     25  
Transaction costs and expenses     20  
   
 
Total purchase price     936  
Plus: Historical value of assets acquired in excess of liabilities assumed     (234 )
Plus: Fair value adjustments(a)     (15 )
   
 
Excess purchase price over fair value of assets acquired and liabilities assumed   $ 687  
   
 

(a)
Primarily represents the allocation of the purchase price to identifiable intangible assets of $65 million, which includes $25 million of indefinite-lived trademarks, $24 million of pendings and listings with a weighted average life of one year and $15 million of perpetual service agreements. The allocation to identifiable intangible assets is partially offset by deferred tax liabilities for book-tax basis differences of $39 million and adjustments to liabilities assumed of $10 million primarily related to unfavorable contractual obligations.
 
  Amount
Total current assets   $ 326
Property and equipment     44
Intangible assets     65
Goodwill     687
Other non-current assets     26
   
Total assets acquired     1,148
   
Total current liabilities     123
Long-term debt     89
   
Total liabilities assumed     212
   
Net assets acquired   $ 936
   

F-23


 
  Amount
Cash consideration   $ 109
Transaction costs and expenses     44
   
Total purchase price     153
Plus: Historical value of liabilities assumed in excess of assets acquired     166
Plus: Fair value adjustments     113
   
Excess purchase price over fair value of assets acquired and liabilities assumed   $ 432
   
 
  Amount
 
Fair value adjustments to:        
  Assets acquired primarily related to the vehicle fleet   $ 213  
  Liabilities assumed primarily related to unfavorable contracts and pension obligations     104  
Costs associated with exiting activities(a)     48  
Allocation of purchase price to identifiable intangible assets(b)     (228 )
Deferred tax assets for book-tax basis differences     (24 )
   
 
Total fair value adjustments   $ 113  
   
 

(a)
As part of the acquisition, the Company's management formally committed to various strategic initiatives primarily aimed at creating synergies between the cost structures of the Company and Budget, which will be achieved through the relocation of the Budget corporate headquarters and selected Budget employees and the involuntarily termination of Budget employees in connection with such relocation. The Company formally communicated the termination of employment to approximately 952 employees, representing a wide range of employee groups. As a result of these actions, the Company initially established a liability of $48 million associated with the resultant personnel related costs ($35 million), facility related costs ($7 million) and costs associated with contract terminations ($6 million). As of December 31, 2002, none of these costs had been paid and there were no changes to the original estimates of these costs. The Company anticipates the majority of the personnel related costs will be paid during 2003.

(b)
Primarily represents $204 million of indefinite-lived trademarks and $21 million of franchise agreements with a weighted average life of 20 years.
 
  Amount
Total current assets   $ 243
Property and equipment     132
Goodwill     432
Intangible assets     228
Other non-current assets     26
Assets under management and mortgage programs     2,443
   
Total assets acquired     3,504
   
Total current liabilities     565
Other non-current liabilities     90
Liabilities under management and mortgage programs     2,696
   
Total liabilities assumed     3,351
   
Net assets acquired   $ 153
   

F-24


 
  Amount
Real Estate Services   $ 241
Hospitality     257
Travel Distribution     157
Vehicle Services     13
Financial Services     64
   
    $ 732
   
 
  Costs
  Cash
Payments

  Other
Reductions

  Balance at
December 31,
2001

  Cash
Payments

  Other
Additions

  Balance at
December 31,
2002

Personnel related   $ 39   $ (22 ) $   $ 17   $ (20 ) $ 8   $ 5
Asset fair value adjustments     19         (19 )              
Facility related     7             7     (2 )       5
   
 
 
 
 
 
 
Total   $ 65   $ (22 ) $ (19 ) $ 24   $ (22 ) $ 8   $ 10
   
 
 
 
 
 
 

F-25


 
  Costs
  Cash
Payments

  Other
Reductions

  December 31,
2001

  Cash
Payments

  Other
Additions
(Reductions)

  December 31,
2002

Personnel related   $ 44   $ (26 ) $   $ 18   $ (36 ) $ 33   $ 15
Asset fair value adjustments and contract terminations     93     (10 )   (46 )   37     (15 )   (10 )   12
Facility related     16             16     (2 )   8     22
   
 
 
 
 
 
 
Total   $ 153   $ (36 ) $ (46 ) $ 71   $ (53 ) $ 31   $ 49
   
 
 
 
 
 
 

F-26


 
  Amount
Real Estate Services   $ 15
Hospitality     670
Travel Distribution     411
Vehicle Services     13
   
    $ 1,109
   
 
  (Unaudited)
Year Ended December 31,

 
  2002
  2001
Net revenues   $ 15,039   $ 13,760
Income from continuing operations     1,033     416
Net income     798     451

CD common stock pro forma income per share:

 

 

 

 

 

 
  Basic            
    Income from continuing operations   $ 1.00   $ 0.38
    Net income     0.77     0.42
  Diluted            
    Income from continuing operations   $ 0.97   $ 0.37
    Net income     0.75     0.41

F-27


4.    Dispositions of Businesses

 
  Year Ended December 31,
 
  2001
  2000
Move.com and ancillary businesses   $ 436   $