Avis Budget Group - 10-Q quarterly report FY

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

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File No. 1-10308

Cendant Corporation
(Exact name of Registrant as specified in its charter)

(212) 413-1800
(Registrant's telephone number, including area code)

 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed in Section 13 or 15(d) of the Securities 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 ý    No o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

 The number of shares outstanding of the Registrant's common stock was 1,018,518,986 shares as of April 30, 2003.

Cendant Corporation and Subsidiaries

Table of Contents

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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terrorist attacks, such as the September 11, 2001 terrorist attacks on New York City and Washington, D.C., other attacks, acts of war or measures taken by governments in response thereto may negatively affect the travel industry and our financial results and could also result in a disruption in our business;



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the effect of economic or political conditions or any outbreak or escalation of hostilities on the economy on a national, regional or international basis and the impact thereof on our businesses;



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the effects of a decline in travel, due to political instability, war, pandemic illness, adverse economic conditions or otherwise, on our travel related businesses;



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the effects of a decline in the volume or value of U.S. existing home sales, due to adverse economic changes or otherwise, on our real estate related businesses;



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the effects of changes in current interest rates, particularly on our real estate franchise, real estate brokerage and mortgage businesses and on our financing costs;



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the final resolution or outcome of our unresolved pending litigation relating to the previously announced accounting irregularities and other related litigation;



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our ability to develop and implement operational, technological and financial systems to manage growing operations and to achieve enhanced earnings or effect cost savings;



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competition in our existing and potential future lines of business and the financial resources of, and products available to, competitors;



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our ability to reduce quickly our substantial technology costs and other overhead costs in response to a reduction in revenue, particularly in our computer reservations, global distribution systems, vehicle rental and real estate brokerage businesses;



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our ability to provide fully integrated disaster recovery technology solutions in the event of a disaster;



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our ability to integrate and operate successfully acquired and merged businesses and risks associated with such businesses, including the acquisitions of Trendwest Resorts, Inc. and substantially all of the assets of Budget Group, Inc., the compatibility of the operating systems of the combining companies, and the degree to which our existing administrative and back-office functions and costs and those of the acquired companies are complementary or redundant;

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our ability to obtain financing on acceptable terms to finance our growth strategy and to operate within the limitations imposed by financing arrangements and to maintain our credit ratings;



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competitive and pricing pressures in the travel industry, including the vehicle rental and global distribution services industries;



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changes, if any, in the vehicle manufacturer repurchase arrangements in our Avis and Budget vehicle rental business;



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the performance of Trilegiant Corporation, which is anticipated to be included in our consolidated results as of July 1, 2003 despite our limited ability to control the operations of Trilegiant;



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filing of bankruptcy by or the loss of business of any of our significant customers, including our airline customers, and the ultimate disposition of UAL Corporation's bankruptcy reorganization; and



•

changes in laws and regulations, including changes in accounting standards, global distribution services rules, telemarketing and timeshare sales regulations, state and federal tax laws and privacy policy regulation.

 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—FINANCIAL INFORMATION

Item 1. Financial Statements

INDEPENDENT ACCOUNTANTS' REPORT

To the Board of Directors and Stockholders of
Cendant Corporation
New York, New York

 We have reviewed the accompanying consolidated condensed balance sheet of Cendant Corporation and subsidiaries (the "Company") as of March 31, 2003, and the related consolidated condensed statements of income and cash flows for the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company's management.

 We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 Based on our reviews, we are not aware of any material modifications that should be made to such consolidated condensed financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2003 (March 3, 2003 as to the subsequent events described in Note 31), we expressed an unqualified opinion (and included an explanatory paragraph with respect to the adoption of the non-amortization provisions for goodwill and other indefinite lived intangible assets, the modification of the accounting treatment relating to securitization transactions and the accounting for derivative instruments and hedging activities and the revision of certain revenue recognition policies, as discussed in Note 1 to the consolidated financial statements) on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP
New York, New York
May 8, 2003

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

See Notes to Consolidated Condensed Financial Statements.

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

See Notes to Consolidated Condensed Financial Statements.

5

Cendant Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)

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See Notes to Consolidated Condensed Financial Statements.

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

1.     Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of Cendant Corporation and its subsidiaries (collectively, the "Company"), as well as affiliates in which the Company directly or indirectly has a controlling financial interest. In management's opinion, the Consolidated Condensed Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgments and available information. Accordingly, actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The Company segregates the financial data related to its management and mortgage programs as such activities are autonomous and distinct from the Company's other activities. Assets classified under management and mortgage programs are assets generated in the operations of the Company's vehicle rental, vehicle management, relocation, mortgage services and vacation ownership businesses. The Company seeks to offset the interest rate exposures inherent in these assets by matching them with financial liabilities that have similar term and interest rate characteristics. Fees generated from these assets are used, in part, to repay the interest and principal associated with the financial liabilities. Funding for the Company's assets under management and mortgage programs is also provided by both unsecured borrowings and asset-backed 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 the Company's management and mortgage programs.

The Consolidated Condensed Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K filed on March 5, 2003.

Changes in Accounting Policies
Stock-Based Compensation.    On January 1, 2003, the Company adopted the fair value method of accounting for stock-based compensation provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which is considered by the Financial Accounting Standards Board ("FASB") to be the preferable accounting method for stock-based employee compensation. The Company also adopted SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," in its entirety on January 1, 2003.

Under the fair value method of accounting provisions of SFAS No. 123, the Company is required to expense all employee stock options over their vesting period based upon the fair value of the award on the date of grant. Under SFAS No. 148, which amended SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting provisions, the Company elected to use the prospective transition method when adopting SFAS No. 123. Accordingly, the Company is only required to expense employee stock options that were granted subsequent to December 31, 2002. During first quarter 2003, the Company did not recognize any compensation expense for employee stock awards as there were no such options granted during the quarter.

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Prior to the adoption of SFAS No. 123 and SFAS No. 148, the Company measured its stock-based compensation using the intrinsic value approach under Accounting Principles Board ("APB") Opinion No. 25, as permitted by SFAS No. 123. Accordingly, the Company did not recognize compensation expense upon the issuance of its 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. The Company 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.

The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied by the Company to all employee stock awards granted prior to January 1, 2003:

Pro forma compensation expense reflected for prior period grants is not indicative of future compensation expense that would be recorded by the Company. Future expense may vary based upon factors such as the number of awards granted by the Company and the then-current fair market value of such awards.

Early Extinguishment of Debt.    On January 1, 2003, the Company adopted 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 the early extinguishment of debt to be presented as a component of continuing operations (unless specific criteria are met) whereas SFAS No. 4 required that such gain or loss be classified as an extraordinary item in determining net income. Accordingly, on January 1, 2003, the Company reclassified $42 million of 2002 pretax net losses on the early extinguishments of debt to continuing operations as a component of net non-program related interest ($38 million and $4 million were recorded during the second and third quarters of 2002, respectively).

Costs Associated with Exit or Disposal Activities.    On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Such standard requires costs associated with exit or disposal activities (including restructurings) initiated after December 31, 2002 to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. This standard nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity

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(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.

Guarantees.    On January 1, 2003, the Company adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," in its entirety. 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 any guarantee issued or modified after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee. The impact of adopting this Interpretation was not material to the Company's results of operations or financial position.

Recently Issued Accounting Pronouncements
Consolidation of Variable Interest Entities.    On January 17, 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). 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 ("SPE"), although other non-SPE-type entities may be subject to the Interpretation. This Interpretation provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. It also requires disclosures for both the primary beneficiary of a variable interest entity and other parties with significant variable interests in the entity. Transferors to a qualifying SPE ("QSPE") and certain other interests in QSPEs are not subject to this Interpretation.

For variable interest entities created, or interests in variable interest entities obtained, subsequent to January 31, 2003, the Company is required to apply the consolidation provisions of this Interpretation immediately. The Company has not created a variable interest entity nor obtained an interest in a variable interest entity for which the Company 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 the Company's financial statements as of July 1, 2003. For these variable interest entities, the Company expects 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.

The Company is currently evaluating the impact of adopting this Interpretation. Thus far, the Company has concluded that the adoption of this Interpretation will result in the consolidation of its mortgage securitization facility, Bishop's Gate Residential Mortgage Trust ("Bishop's Gate"), as of July 1, 2003. The consolidation of Bishop's Gate is not expected to affect the Company's results of operations. However, had the Company consolidated Bishop's Gate as of March 31, 2003, its total assets and liabilities under management and mortgage programs would have each increased by approximately $2.0 billion. See Note 9—Off-Balance Sheet Financing Arrangements for more information regarding the Bishop's Gate mortgage securitization facility.

Additionally, the Company believes that upon adoption of this Interpretation, it will 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. The Company believes that the consolidation of Trilegiant would cause its total assets and total liabilities to increase by approximately $100 million and $390 million (approximately $230 million of which represents deferred income), respectively, on July 1, 2003. The consolidation of Trilegiant is expected to result in a non-cash charge of approximately $290 million, which would be recorded on July 1, 2003 as a

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cumulative effect of accounting change but would not impact income from continuing operations. As the provisions of this Interpretation will be applied prospectively by the Company, the consolidation of Trilegiant would not result in any changes to the Company's consolidated financial statements for any prior periods (including first and second quarters of 2003). Although the Company would be recording Trilegiant's profits and losses in its consolidated results of operations (beginning July 1, 2003), the Company is not obligated to infuse capital or otherwise fund or cover any losses incurred by Trilegiant. Therefore, the Company's maximum exposure to loss as a result of its involvement with Trilegiant is limited to the assets recorded on the Company's Consolidated Balance Sheet as such amounts may not be recoverable if Trilegiant ceases operations. As of March 31, 2003, the Company had $104 million of assets recorded on its Consolidated Condensed Balance Sheet in connection with advances and loans made to Trilegiant, as well as net receivables due from Trilegiant. See Note 12—Related Party Transactions for more information regarding the Company's relationship with Trilegiant.

Derivative Instruments and Hedging Activities.    On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." Such standard amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement are generally effective for contracts entered into or modified after June 30, 2003. The Company is in the process of assessing the impact of adopting this standard on its consolidated results of operations and financial position.

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2.     Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share ("EPS").

The following table summarizes the Company's outstanding common stock equivalents, which were antidilutive and therefore excluded from the computation of diluted EPS.

---

^(a)

The weighted average exercise prices for antidilutive options at March 31, 2003 and 2002 were $19.88 and $22.83, respectively.

^(b)

The weighted average exercise price for antidilutive warrants at March 31, 2003 and 2002 was $21.31.

^(c)

The appreciation price for antidilutive Upper DECS at March 31, 2003 and 2002 was $28.42.

The Company's contingently convertible debt securities, which provided for the potential issuance of approximately 71 million and 138 million shares of CD common stock as of March 31, 2003 and 2002, respectively, were not included in the computation of diluted EPS for such periods as the related contingency provisions were not satisfied.

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3.     Acquisitions

2003 Acquisitions
On February 3, 2003, the Company acquired all of the common interests of FFD Development Company LLC ("FFD") from an independent business trust for approximately $27 million in cash. As part of the acquisition, the Company also assumed approximately $58 million of debt, which was subsequently repaid. The goodwill resulting from the allocation of the purchase price approximated $18 million and was allocated to the Company's Hospitality segment. FFD, which was formed prior to the Company's April 2001 acquisition of Fairfield Resorts, Inc. ("Fairfield"), is the primary developer of timeshare inventory for Fairfield. See Note 12—Related Party Transactions for more information regarding the Company's relationship with FFD.

On March 31, 2003, the Company acquired a majority interest in Trip Network, Inc. ("Trip Network") through the conversion of its preferred stock investment. The Company recorded $34 million of goodwill in connection with this transaction, which was allocated to the Travel Distribution segment. Trip Network is an online travel agent that operates through a licensing agreement with the Company. See Note 12—Related Party Transactions for more information regarding the Company's relationship with Trip Network.

These acquisitions were not significant to the Company's results of operations, financial position or cash flows on a pro forma basis.

2002 Acquisitions
In April 2002, the Company acquired NRT Incorporated ("NRT") for $230 million resulting in goodwill of approximately $1.6 billion and Trendwest Resorts, Inc. ("Trendwest") for $936 million resulting in goodwill of $687 million. The following table sets forth the Company's results of operations on a pro forma basis for the first quarter of 2002 as if the acquisitions of NRT and Trendwest had occurred on January 1, 2002:

These pro forma results do not give effect to any synergies expected to result from the acquisitions of NRT and Trendwest, are not necessarily indicative of what actually would have occurred if the acquisitions had been consummated on January 1, 2002, and are not necessarily indicative of future consolidated results. Although the Company acquired other businesses during 2002 (including certain assets of Budget Group, Inc. ("Budget") in November), such businesses were not significant to the Company's results of operations on a pro forma basis and, as such, have not been reflected in the above table.

Utilization of Purchase Acquisition Liabilities for Exiting Activities
In connection with the Company's acquisitions of the following businesses, the Company established purchase accounting liabilities in prior periods for costs associated with exiting activities that are currently in progress. These exiting activities were formally committed to by the

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Company's management in connection with strategic initiatives primarily aimed at creating synergies between the cost structures of the Company and the acquired entity. The Company anticipates that the majority of personnel related costs will be paid during 2003.

The recognition of such costs and the corresponding utilization are summarized by category as follows:

Budget Group, Inc. (assets acquired in November 2002)

The major area of cost reduction is expected to result from the relocation of the Budget corporate headquarters and selected Budget employees and the involuntarily termination of Budget employees in connection with such relocation. To complete these initiatives, the Company will (i) involuntarily terminate Budget employees, (ii) abandon assets in connection with the relocation of Budget corporate headquarters and other offices and (iii) terminate contractual service agreements. As a result, the Company incurred severance and other personnel costs related to the involuntary termination or relocation of employees, contract termination costs primarily related to the cancellation of an information technology contract and facility related costs primarily representing future lease payments for abandoned facilities due to relocation. The Company formally communicated the termination of employment to approximately 952 employees, representing a wide range of employee groups. The Company expects to complete this plan in fourth quarter 2003.

Galileo International, Inc. (acquired October 2001)

The major areas of cost reductions are expected to result from (i) rightsizing the core business functions of Galileo International, Inc. ("Galileo") and relocating the corporate and other offices (including the back office support functions) and (ii) exiting certain activities and certain acquired businesses, including the sale of assets. To complete these initiatives, the Company (i) involuntarily terminated Galileo employees, (ii) relocated the Galileo corporate headquarters, back office support functions and other offices, (iii) merged numerous offices in Europe to a single European headquarters and (iv) abandoned assets in connection with such relocation, as well as terminated contractual service agreements associated with the activities to be exited. Consistent with the original integration plan to streamline Galileo's worldwide operations and due to the extent and breadth of these global efforts, the full evaluation of exiting activities was not completed until third

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quarter 2002. The Company formally communicated the termination of employment to approximately 880 employees, representing a wide range of employee groups, and as of December 31, 2002, the Company had terminated all such employees.

Acquisition and Integration Related Costs
During first quarter 2003, the Company incurred $10 million of costs primarily related to the acquisition and integration of real estate brokerages by NRT, as well as costs related to Budget. Such costs consisted of (i) $3 million of non-cash amortization related to the contractual pendings and listings intangible assets acquired and (ii) $7 million of other costs primarily related to the integration of Budget's reservation system with the Avis reservation system.

4.     Discontinued Operations

On May 22, 2002, the Company sold its car parking facility business, National Car Parks ("NCP"), a then wholly-owned subsidiary within its Vehicle Services segment, for $1.2 billion in cash and recognized an after-tax loss of approximately $256 million, which was recorded in second quarter 2002. NCP operated off-street commercial parking facilities and managed on-street parking and related operations on behalf of town and city administration in England. Pursuant to SFAS No. 144, "Accounting for the Impariment or Disposal of Long-Lived Assets," the activities of NCP were segregated and reported as a discontinued operation for first quarter 2002. During first quarter 2002, NCP generated net revenues and income from discontinued operations of $97 million and $32 million ($27 million, after tax), respectively.

5.     Intangible Assets

Intangible assets consisted of:

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The changes in the carrying amount of goodwill are as follows:

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^(a)

Relates to the acquisition of FFD.

^(b)

Relates to the acquisition of Trip Network.

^(c)

Relates to the acquisition of NRT and other real estate brokerages (April 17, 2002 and forward).

^(d)

Primarily relates to the acquisition of Equivest Finance, Inc. (February 2002).

^(e)

Primarily relates to the acquisition of distribution partners by the Company's Galileo subsidiary (June 2002 and forward).

^(f)

Relates to the acquisition of Budget (November 2002).

Amortization expense relating to all intangible assets excluding mortgage servicing rights (See Note 6—Mortgage Servicing Activities) was as follows:

Based on the Company's amortizable intangible assets as of March 31, 2003, the Company expects related amortization expense for the remainder of 2003 and the five succeeding fiscal years to approximate $60 million, $80 million, $80 million, $80 million, $60 million and $50 million, respectively.

6.     Mortgage Servicing Activities

The activity in the Company's residential first mortgage loan servicing portfolio consisted of:

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^(*)

Does not include approximately $1.8 billion and $1.6 billion of second-home equity mortgages serviced by the Company as of March 31, 2003 and 2002, respectively.

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Substantially all of the mortgage loans serviced by the Company were sold without recourse. However, approximately $2.0 billion (approximately 1.7%) of the Company's total servicing portfolio at March 31, 2003 were sold with recourse. The majority of such loans were sold under a program where the Company retains the credit risk for a limited period of time and only for a specific default event. For these loans, the Company accrues a provision (equal to the fair value of the recourse obligation) for expected losses. As of March 31, 2003, the provision approximated $3 million and was recorded as a component of accounts payable and other current liabilities on the Consolidated Condensed Balance Sheet. There was no significant activity that would cause the Company to utilize this provision in the first quarter of 2003. The Company believes that this provision is adequate to cover expected losses and that such losses would not be material to its results of operations.

The weighted average note rate on all the underlying mortgages serviced by the Company as of March 31, 2003 and 2002 was 5.93% and 6.70%, respectively.

The activity in the Company's capitalized mortgage servicing rights ("MSR") asset consisted of:

As of March 31, 2003, the Company expects MSR amortization expense for the remainder of 2003 and the five succeeding fiscal years to approximate $250 million, $290 million, $230 million, $200 million, $180 million and $160 million, respectively. As of March 31, 2003, the MSR portfolio had a weighted average life of approximately 4.6 years.

The Company uses derivatives to mitigate the impact that accelerated prepayments have on the fair value of its MSR asset. Such derivatives, which are primarily designated as fair value hedging instruments, tend to increase in value as interest rates decline and conversely decline in value as

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interest rates increase. The activity in the Company's derivatives related to mortgage servicing rights asset consisted of:

The net impact of the changes in fair value of the Company's MSR asset after giving effect to the changes in fair value of the related derivatives was a gain of $63 million during first quarter 2003 and a loss of $6 million during first quarter 2002. During first quarter 2003 and 2002, the Company recorded $61 million and $31 million, respectively, of impairment through the MSR valuation allowance. Such amounts are included within net revenues in the Consolidated Condensed Statements of Income.

7.     Long-term Debt and Borrowing Arrangements

Long-term debt consisted of:

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^(*)

Indicates earliest mandatory redemption date.

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^(a)

The change in the balance at March 31, 2003 reflects the redemption of $737 million of these notes for approximately $771 million in cash. In connection with such redemption, the Company recorded a pretax charge of approximately $22 million.

^(b)

The change in the balance at March 31, 2003 reflects (i) the redemption of $81 million in face value of these notes, with a carrying value of $91 million, for $91 million in cash and (ii) $4 million related to the amortization of a premium. The loss recorded by the Company in connection with this redemption was not material.

^(c)

These notes, issued in January 2003, are senior unsecured obligations and rank equally in right of payment with all the Company's existing and future unsecured senior indebtedness.

^(d)

These notes, issued in March 2003, are senior unsecured obligations and rank equally in right of payment with all the Company's existing and future unsecured senior indebtedness.

^(e)

The change in the balance at March 31, 2003 reflects the redemption of $456 million of these debentures for approximately $457 million in cash. In connection with such redemption, the Company recorded a pretax charge of approximately $7 million.

^(f)

The change in the balance at March 31, 2003 reflects the redemption of $396 million of these debentures for approximately $408 million in cash. In connection with such redemption, the Company recorded a pretax charge of approximately $19 million.

^(g)

Reflects the repayment of outstanding revolver borrowings during first quarter 2003.

^(h)

The balance as of March 31, 2003 reflects the reclassification of the outstanding balances for the Company's 7³/4% notes, zero coupon convertible debentures and zero coupon senior convertible contingent notes to long-term debt based upon the Company's determination that it had the intent and ability to refinance these amounts with borrowings under its revolving credit facilities. The balance as of December 31, 2002 reflects the reclassification of the outstanding balances for the Company's 7³/4% notes and zero coupon convertible debentures to long-term debt based upon the Company's determination that it had the intent and ability to refinance these amounts with borrowings under its revolving credit facilities and proceeds received from the issuance of $2.0 billion of notes in January 2003 (described in note (c) above).

The number of shares of CD common stock potentially issuable for each of the Company's contingently convertible debt securities are detailed below (in millions):

Available Funding Arrangements and Committed Credit Facilities
As of March 31, 2003, the Company maintained $2.9 billion of revolving credit facilities, under which there were no outstanding borrowings; however, letters of credit of $1.1 billion were issued and outstanding. These letters of credit were issued primarily as credit enhancements to provide additional collateralization for the Company's vehicle rental financing arrangements. Accordingly, as of March 31, 2003, the Company had approximately $1.8 billion of availability under these facilities (including $132 million of additional capacity to issue letters of credit). Additionally, as of March 31, 2003, the Company had $400 million of availability for public debt or equity issuances under a shelf registration statement.

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Debt Maturities and Covenants
Aggregate maturities of debt (excluding the Upper DECS), after giving effect to the reclassifications previously discussed, are as follows:

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^(a)

Excludes $863 million of Upper DECS. If the Upper DECS are not successfully remarketed in August 2004, the senior notes would be retired (without any payment of cash by the Company) in August 2004 in satisfaction of the related forward purchase contract, whereby holders of the Upper DECS are required to purchase shares of CD common stock (based upon the price of CD common stock on March 31, 2003, approximately 40 million shares would be purchased).

At March 31, 2003, the Company was in compliance with all restrictive and financial covenants of its debt instruments and credit facilities.

20

8.     Debt Under Management and Mortgage Programs and Borrowing Arrangements

Debt under management and mortgage programs consisted of:

---

^(a)

The change in the balance at March 31, 2003 principally reflects (i) the issuance of $965 million of term notes at various interest rates, (ii) the issuance of $175 million of variable funding notes and (iii) the repayment of $755 million of variable funding notes. At March 31, 2003, approximately $4.4 billion of asset-backed term notes were included in outstanding borrowings.

^(b)

At March 31, 2003, approximately $2.3 billion of asset-backed term notes were included in outstanding borrowings.

^(c)

The change in the balance at March 31, 2003 reflects the repayment of $408 million of outstanding borrowings.

^(d)

The change in the balance at March 31, 2003 primarily reflects the borrowing of $130 million under a timeshare financing agreement.

^(e)

The change in the balance at March 31, 2003 principally reflects the issuance of (i) $400 million of 6% term notes due March 2008, (ii) $600 million of 7¹/8% term notes due March 2013, (iii) $147 million of term notes with various interest rates and maturity dates and (iv) the February 2003 repayment of $650 million of 8¹/8% term notes.

^(f)

The change in the balance at March 31, 2003 reflects the repayment of $512 million primarily with the proceeds from the issuance of the term notes described in note (e) above.

Available Funding Arrangements and Committed Credit Facilities
As of March 31, 2003, available funding under the Company's asset-backed debt programs and

21

committed credit facilities related to the Company's management and mortgage programs consisted of:

---

^(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 PHH Corporation ("PHH"), a subsidiary of the Company.

As of March 31, 2003, the Company also had $916 million of availability for public debt issuances under a shelf registration statement at its PHH subsidiary.

Debt Maturities and Covenants
The following table provides the contractual maturities for debt under management and mortgage programs at March 31, 2003 (except for notes under the Company's vehicle management program, for which estimates of payments based on the expected cash inflows relating to the corresponding assets under management and mortgage programs have been provided, as required by the underlying indentures.):

---

^(a)

Unsecured commercial paper borrowings of $354 million are assumed to be repaid with borrowings under PHH's committed credit facility expiring in February 2005, as such amount is fully supported by PHH's committed credit facilities, which are detailed above.

At March 31, 2003, the Company was in compliance with all restrictive and financial covenants of its debt instruments and credit facilities related to management and mortgage programs.

9.     Off-Balance Sheet Financing Arrangements

In addition to the Company's on-balance sheet borrowings, the Company sells specific assets under management and mortgage programs. The Company sells timeshare receivables to Sierra Receivables Funding Company LLC ("Sierra"), a bankruptcy remote QSPE, in exchange for cash.

22

Prior to the establishment of Sierra, the Company sold timeshare receivables to multiple bankruptcy remote QSPEs under revolving sales agreements in exchange for cash. The Company's PHH subsidiary sells relocation receivables to Apple Ridge Funding LLC ("Apple Ridge"), a bankruptcy remote QSPEs, in exchange for cash. The Company's PHH subsidiary also sells mortgage loans originated by its 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 $856 million as of March 31, 2003) or (iii) through Bishop's Gate, an unaffiliated bankruptcy remote SPE. Presented below is detailed information for each of the SPEs the Company utilizes in off-balance sheet financing and sale arrangements as of March 31, 2003.

---

^(a)

Does not include cash of $30 million, $24 million, $19 million and $23 million at Sierra, other timeshare QSPEs, Apple Ridge and Bishop's Gate, respectively.

^(b)

Subject to maintaining sufficient assets to collateralize debt.

^(c)

Consists of a (i) $550 million conduit facility with outstanding borrowings of $342 million and available capacity of $208 million and (ii) a term note agreement under which $303 million was outstanding. At March 31, 2003, the Company was servicing receivables of $405 million under the conduit facility and $331 million under the term note agreement.

^(d)

Primarily represents term notes.

^(e)

As discussed in Note 1—Summary of Significant Accounting Policies, the Company expects to consolidate Bishop's Gate in its financial statements as of July 1, 2003, as required by FIN 46.

^(f)

Includes the Company's ability to fund assets with $148 million of outside equity certificates.

The receivables and mortgage loans transferred to the above SPEs, as well as the mortgage loans sold to the secondary market through other means, are generally non-recourse to the Company and to PHH. Pretax gains recognized on all securitizations of financial assets, which are recorded within net revenues on the Company's Consolidated Condensed Statements of Income, were as follows:

10.     Commitments and Contingencies

The June 1999 disposition of the Company's fleet businesses was structured as a tax-free reorganization and, accordingly, no tax provision was recorded on a majority of the gain. However, pursuant to an interpretive ruling, the Internal Revenue Service ("IRS") has taken the position that similarly structured transactions do not qualify as tax-free reorganizations under the Internal Revenue Code Section 368(a)(1)(A). If the transaction is not considered a tax-free reorganization, the resultant incremental liability could range between $10 million and $170 million depending upon certain factors, including utilization of tax attributes. Notwithstanding the IRS interpretive

23

ruling, the Company believes that, based upon analysis of current tax law, its position would prevail, if challenged.

The Company is involved in litigation asserting claims associated with accounting irregularities discovered in former CUC business units outside of the principal common stockholder class action litigation. While the Company has an accrual of approximately $100 million recorded on its Consolidated Condensed Balance Sheets for these claims based upon its best estimates, it does not believe that it is feasible to predict or determine the final outcome or resolution of these unresolved proceedings. An adverse outcome from such unresolved proceedings could be material with respect to earnings in any given reporting period. However, the Company does not believe that the impact of such unresolved proceedings should result in a material liability to the Company in relation to its consolidated financial position or liquidity.

The Company is involved in pending litigation in the usual course of business. In the opinion of management, such other litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

11.     Stockholders' Equity

During first quarter 2003, the Company repurchased $152 million (12.7 million shares) of CD common stock under its common stock repurchase program. As of March 31, 2003, the Company had approximately $19 million in remaining availability for repurchases under this program. See Note 14—Subsequent Events for information regarding an increase to the Company's share repurchase program.

The components of comprehensive income are summarized as follows:

The after-tax components of accumulated other comprehensive income (loss) are as follows:

The currency translation adjustments exclude income taxes related to indefinite investments in foreign subsidiaries.

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12.     Related Party Transactions

As previously discussed in Note 3—Acquisitions, during first quarter 2003, the Company acquired all the common interests of FFD and also acquired a majority interest in Trip Network. Accordingly, the Company began consolidating these two entities during first quarter 2003, as discussed below. Additionally, in April 2002, the Company acquired all the outstanding common stock of NRT and, as such, has been consolidating NRT since second quarter 2002. Therefore, as of March 31, 2003, the only affiliated operating entity not consolidated by the Company was Trilegiant. In connection with the Company's adoption of FIN 46, discussed in Note 1—Summary of Significant Accounting Policies, the Company plans to consolidate Trilegiant beginning in the third quarter of 2003.

FFD Development Company, LLC
FFD has been included within the Company's consolidated results of operations, cash flows and financial position since February 3, 2003. The consolidation of FFD resulted in an increase of approximately $80 million to both the Company's total assets and total liabilities as of March 31, 2003. During first quarter 2003 (prior to the acquisition) and 2002, the Company recognized non-cash dividend income on its preferred interest of $1 million and $3 million, respectively. Such amounts are recorded within other revenues on the Company's Consolidated Condensed Statements of Income.

Trip Network, Inc.
Trip Network is included in the Company's Consolidated Condensed Balance Sheet as of March 31, 2003 and will be included within the Company's consolidated results of operations and cash flows beginning on April 1, 2003. The consolidation of Trip Network resulted in an increase of approximately $20 million to both the Company's total assets and total liabilities as of March 31, 2003. During first quarter 2003 (prior to the acquisition) and 2002, the Company recorded $1 million and $4 million, respectively, of revenue on its Consolidated Condensed Statements of Income in connection with its relationship with Trip Network.

Trilegiant Corporation
Trilegiant operates membership-based clubs and programs and other incentive-based programs through an outsourcing arrangement with the Company. Pursuant to the outsourcing arrangement, the Company 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 the Company's intellectual property to new members. Accordingly, the Company continues to collect membership fees from, and is obligated to provide membership benefits to, members of the Company's individual membership business that existed as of July 2, 2001 (referred to as "existing members"), including their renewals and Trilegiant provides fulfillment services for these members in exchange for a servicing fee pursuant to the Third Party Administrator agreement. Furthermore, Trilegiant collects the membership fees from, and is obligated to provide membership benefits to, any members who joined 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 the Company's franchise businesses, the Company receives a royalty from Trilegiant on all future revenue generated by the new members.

During first quarter 2003 and 2002, the Company recognized revenue of $90 million and $157 million, respectively, in connection with fees previously collected from existing members (as the membership period expired) and Trilegiant charged the Company $36 million and $51 million, respectively, in connection with providing fulfillment services to these members (such charges were recorded by the Company as a component of operating expenses). During first quarter 2003 and 2002, the Company also recorded revenue of $17 million and $11 million, respectively, as a result of it's relationship with Trilegiant and marketing expenses of $4 million and $10 million,

25

respectively, related to the advance made to Trilegiant in 2001. The resultant impact of these activities to the Company's cash position was a net inflow of $22 million and $27 million to cash provided by operating activities during first quarter 2003 and 2002, respectively (including fees collected from Trilegiant in connection with membership renewals by the existing members and fees paid to Trilegiant in connection with servicing the existing members).

The Company's preferred stock investment is convertible, at any time at the Company's option, into approximately 33% of Trilegiant's common stock on a fully diluted basis (after giving effect to non-cash dividends of approximately $1 million received from Trilegiant during first quarter 2003).

NRT Incorporated
As discussed in Note 3—Acquisitions, on April 17, 2002, the Company purchased all the outstanding common stock of NRT. Accordingly, NRT has been included in the Company's consolidated results of operations and financial position since April 17, 2002. Reflected within the Company's Consolidated Condensed Statement of Income for first quarter 2002 (prior to the Company's acquisition of NRT) are $84 million of revenues (comprised of $53 million of royalty and marketing fees, $8 million of dividend income, $7 million of real estate referral fees and $16 million of termination fees) and $6 million of non-program related depreciation and amortization expense.

Entertainment Publications, Inc.
On March 25, 2003, the Company sold its common stock investment in Entertainment Publications, Inc. for approximately $33 million in cash. The Company recorded a gain of approximately $30 million on this disposition, which is included within other revenue on the Consolidated Condensed Statement of Income. At December 31, 2002, the Company's investment of $5 million was accounted for using the equity method and was included within other non-current assets of its Corporate and Other segment.

13.   Segment Information

Management evaluates the operating results of each of its reportable segments based upon revenue and "EBITDA," which is defined as earnings from continuing operations before non-program related interest, minority interest, income taxes, non-program related depreciation and amortization and amortization of pendings and listings. On January 1, 2003, the Company changed its performance measure used in evaluating the operating results of its reportable segments and, as such, the information presented below for first quarter 2002 has been revised to reflect this change. The Company's presentation of EBITDA may not be comparable to similar measures used by other companies. Presented below is the revenue and EBITDA for each of the Company's reportable segments.

26

---

^(a)

Includes the results of operations of the Company's non-strategic businesses, unallocated corporate overhead, the elimination of transactions between segments and, in 2003, a $30 million gain on the sale of Entertainment Publications, Inc.

14.     Subsequent Events

On April 3, 2003, the Company's Board of Directors authorized a $500 million increase to its share repurchase program.

On April 1, 2003, the Company acquired all the remaining common interests of Trip Network for $4 million in cash. This acquisition was not significant to the Company's results of operations, financial position or cash flows.

On May 5, 2003, the Company retired $394 million of its zero coupon convertible debentures for $394 million in cash.

On May 6, 2003, the Company issued $750 million of term notes under its vehicle rental program with maturities ranging from three to five years and a blended interest rate of 3.1%.

****

27

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2002 Annual Report on Form 10-K filed with the Commission on March 5, 2003. Unless otherwise noted, all dollar amounts are in millions.

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. Our Real Estate Services segment franchises our three residential and one commercial real estate brands, provides brokerage services under our real estate franchise brands, provides home buyers with mortgages, title, appraisal review and closing services and facilitates employee relocations; our Hospitality segment develops, markets, sells and manages vacation ownership interests, provides consumer financing to individuals purchasing these interests, facilitates the exchange of vacation ownership intervals, franchises our nine lodging brands and markets vacation rental properties in Europe; our Travel Distribution segment provides global distribution and computer reservation and travel agency services; our Vehicle Services segment operates and franchises our Avis and Budget vehicle rental brands and provides fleet management and fuel card services; our Financial Services segment provides financial institution enhancement products, insurance-based and loyalty solutions, operates and franchises tax preparation offices and provides a variety of membership programs through an outsourcing arrangement with Trilegiant Corporation.

The majority of our businesses operate in environments where we are paid a fee for a service performed. 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. However, 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 that we are required to make pertain to matters that are inherently uncertain as they relate to future events. Presented within the section entitled "Critical Accounting Policies" of our 2002 Annual Report on Form 10-K are the accounting policies that we believe require subjective and complex judgments that could potentially affect reported results (mortgage servicing rights, retained interests from securitizations, financial instruments and goodwill and other intangible assets). There have not been any significant changes to those accounting policies nor to our assessment of which accounting policies we would consider to be critical accounting policies. From time to time, we evaluate the estimates used in recording goodwill in connection with the acquisition of a business. In certain circumstances, these estimates may be based upon preliminary or outdated information. Accordingly, the allocation to goodwill is subject to revision when we receive new information. Revisions to the estimates are recorded as further adjustments to goodwill or within the Consolidated Statements of Income, as appropriate.

Strategic Initiatives
During first quarter 2003, we made continued progress toward our goal of simplifying our corporate structure and strategy as demonstrated by the curtailment of acquisitions and the consolidation of FFD Development Company LLC and Trip Network, Inc. We continue to provide comprehensive, informative disclosures and believe that our consolidation of Trilegiant Corporation and Bishop's Gate Residential Mortgage Trust in the third quarter of 2003 (discussed further under the section entitled "Recently Issued Accounting Pronouncements"), following which we will have consolidated all of our off-balance-sheet operating affiliates, will further enhance the transparency of our financial results and liquidity.

We are also working to strengthen our liquidity position and increase shareholder value. To this end, we have completed the first phase of our debt reduction program, which was to replace current

28

maturities of indebtedness with longer-term debt. In the second phase, we intend to reduce our outstanding corporate indebtedness throughout 2003. Our actions to this end include the retirement, in May 2003, of $394 million of our zero coupon convertible debentures that were put to us. In addition to reducing our near-term obligations, the retirement of our convertible debt instruments has, to date, eliminated 83 million shares of potential dilution to our future earnings per share. During first quarter 2003, we also bought back 12.7 million shares of our stock (at an average price of $11.93) further removing dilution to our earnings per share and on April 3, 2003, our Board of Directors authorized a $500 million increase to our share repurchase program. As of May 8, 2003, we had $424 million of availability under this program for future share repurchases. For more detailed information regarding our debt reduction program, see the section entitled "Liquidity and Capital Resources—Financial Obligations—Corporate Indebtedness."

Historically, a significant portion of our growth has been generated through the strategic acquisitions of businesses that have strengthened our position in the travel and real estate services industries and helped us to develop a hedged and diversified portfolio of businesses. We are now focused on growing our core businesses organically. We plan to execute this strategy by continuing to manage our capital with a focus on return on investment and by growing revenues through market penetration and cross-selling. The size and diversity of our portfolio of businesses have proven effective at managing risk and achieving growth in a challenging economic environment. Although we remain highly disciplined in our acquisition activity, we may augment organic growth through select acquisitions of, and joint ventures with, complementary businesses. With respect to acquisitions, we intend to fund the purchase price 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 growth objectives and, from time to time, engage in discussions concerning possible divestitures, joint ventures and related corporate transactions to redirect our portfolio of businesses to company-wide objectives.

In addition, we are paying close attention to corporate governance and remain committed to enhancing long-term shareholder value.

RESULTS OF OPERATIONS—FIRST QUARTER 2003 VS. FIRST QUARTER 2002

Our consolidated results from continuing operations comprised the following:

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Net revenues and total expenses increased approximately $1.5 billion (56%) and $1.5 billion (70%), respectively, principally due to the acquisitions of the following businesses, which contributed incremental revenues and expenses aggregating $1.3 billion and $1.4 billion, respectively.

In addition to the contributions made by acquired businesses (each of which is generally seasonally weakest in the first calendar quarter of the year), net revenues were favorably impacted by growth in our mortgage business, which also contributed to the increase in total expenses in order to support the continued high level of mortgage loan production and related servicing activities. A detailed discussion of revenue trends is included in "Results of Reportable Operating Segments." Our overall effective tax rate was 33% and 34% for the first quarter 2003 and 2002, respectively. The effective tax rate for first quarter 2003 was lower primarily due to a decrease in taxes on our foreign operations, which was partially offset by higher state taxes and an increase in non-deductible items. As a result of the above-mentioned items, income from continuing operations decreased $6 million (2%).

Discussed below are the results of operations for each of our reportable segments. Management evaluates the operating results of each of our reportable segments based upon revenue and "EBITDA," which is defined as earnings from continuing operations before non-program related interest, minority interest, income taxes, non-program related depreciation and amortization and amortization of pendings and listings. On January 1, 2003, we changed our performance measure used in evaluating the operating results of our reportable segments and, as such, the information presented below for first quarter 2002 has been revised to reflect this change. Our presentation of EBITDA may not be comparable to similar measures used by other companies.

*

Not meaningful.

^(a)

Includes the results of operations of our non-strategic businesses, unallocated corporate overhead, the elimination of transactions between segments and, in 2003, a $30 million gain on the sale of Entertainment Publications, Inc.

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Real Estate Services
Revenues and EBITDA increased $940 million (229%) and $43 million (24%), respectively, in first quarter 2003 compared with 2002.

Revenues and EBITDA were primarily impacted by the April 17, 2002 acquisition of NRT (the operating results of which have been included from the acquisition date forward and are therefore included in first quarter 2003 but not in first quarter 2002) and increased production and servicing fee income from our mortgage business. NRT contributed $792 million of revenues and EBITDA losses of $16 million in first quarter 2003. The EBITDA losses contributed by NRT are reflective of the seasonality of the real estate brokerage business, whereby the operating results are typically weakest in the first quarter of every year. Prior to our acquisition of NRT, during first quarter 2002, we received royalty and marketing fees of $53 million, real estate referral fees of $7 million and a $16 million fee in connection with the termination of a franchise agreement under which NRT operated our ERA real estate brand. We also had a preferred stock investment in NRT prior to our acquisition, which generated dividend income of $8 million during first quarter 2002. In connection with the acquisition of NRT, we merged our pre-existing title and appraisal businesses with and into the larger scale title and appraisal business of NRT. Accordingly, beginning in first quarter 2003, we conformed the presentation of our pre-existing businesses to the presentation used by our NRT title and appraisal businesses. This conforming change resulted in an increase in revenues of $27 million with no impact to EBITDA in first quarter 2003.

On a comparable basis, including post-acquisition intercompany royalties paid by NRT, our real estate franchise brands generated incremental royalties of $12 million in first quarter 2003, an increase of 10% over 2002 due to a 3% increase in home sale transactions and a 7% 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 significant operating leverage within our franchise operations.

Revenues from mortgage-related activities grew $124 million (86%) in first quarter 2003 compared with 2002 due to a significant increase in mortgage loan production resulting from continued historically low interest rates and increased revenues from our servicing operations. Revenues from mortgage loan production increased $110 million (61%) due to a 58% increase in the volume of loans that we packaged and sold, as well as growth in our fee-based mortgage origination operations (discussed below). We sold $12.7 billion of mortgage loans in first quarter 2003 compared with $8.5 billion in first quarter 2002, generating incremental production revenues of $79 million. In addition, production revenues generated from our fee-based mortgage origination activity increased $31 million (68%) as compared with first quarter 2002. Production fee income on fee-based 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 in first quarter 2003 was driven by a mix of mortgage loans closed and mortgage loans sold. Mortgage loans closed increased $5.2 billion (42%) to $17.8 billion in first quarter 2003, comprised of a $4.5 billion increase (58%) in closed loans to be securitized (sold by us) and a $764 million increase (16%) in closed loans that were fee-based. The increase in loan origination volume was principally driven by substantial refinancing activity during first quarter 2003. Refinancings increased $4.6 billion (63%) to $11.8 billion and purchase mortgage closings grew $679 million (13%) to $6.1 billion. Additionally, our margin on securitized loans (production revenues divided by the principal amount of loans sold) increased from prior year levels.

Net revenues from servicing mortgage loans increased $5 million, which was driven by a $16.6 billion (17%) quarter-over-quarter increase in the average servicing portfolio. Net servicing revenues also included an additional $73 million of increased mortgage servicing rights ("MSRs") amortization and provision for impairment due to the high levels of refinancings and related loan prepayments, resulting from a lower interest rate environment. However, this was substantially offset by $69 million of incremental gains from hedging and other derivative activities to protect against changes in the fair

31

value of MSRs due to fluctuations in interest rates. Excluding the acquisition of NRT, operating and administrative expenses within this segment increased $53 million, primarily due to the continued high level of mortgage loan production and related servicing activities.

Hospitality
Revenues and EBITDA increased $177 million (44%) and $32 million (29%), respectively, primarily due to the acquisitions of Trendwest in April 2002, Equivest Finance, Inc. in February 2002 and certain other European vacation rental companies in 2002. The operating results of these acquired businesses were included from their acquisition dates forward and therefore contributed to operating results of this segment during first quarter 2003 but not in first quarter 2002. Accordingly, Trendwest, Equivest and the other acquired vacation rental companies contributed incremental revenues of $129 million, $8 million and $34 million, respectively, and incremental EBITDA of $20 million, $2 million and $12 million, respectively, in first quarter 2003 compared with 2002. Excluding the impact of these acquisitions, revenues increased $6 million while EBITDA declined $2 million quarter-over-quarter. In February 2003, we acquired the common interests of FFD Development Company LLC ("FFD"), the primary developer of timeshare inventory for our Fairfield Resorts subsidiary (discussed further under "Affiliated Entities"). The operating results of FFD were included from the acquisition date forward and were not significant to our segment results in first quarter 2003. Timeshare subscription and transaction revenues within our timeshare exchange business increased $7 million (6%) as increases in the average subscription fee and average fee per exchange were partially offset by a lower volume of exchange transactions driven by the overall reduction in travel. Royalties and marketing and reservation fund revenues within our lodging franchise operations remained relatively constant in first quarter 2003 as the impact of a 4% improvement in the occupancy levels at our franchised lodging brands was offset by a 4% reduction in the number of weighted average rooms available. EBITDA benefited $4 million from a joint venture master license agreement entered into during 2002 which converted the ownership of a third party license agreement. Upon the change in ownership, the license fee (formerly included within operating expenses) is now recorded as a minority interest expense. Excluding the above-mentioned acquisitions, operating and administrative expenses within this segment increased approximately $14 million in 2003 principally due to volume-related growth in our timeshare exchange business in prior quarters and increased overhead to support anticipated future demand.

Travel Distribution
Revenues and EBITDA declined $28 million (6%) and $18 million (12%), respectively, in first quarter 2003 compared with 2002. Galileo air travel booking fees decreased $32 million (10%) principally due to an 11% decline in worldwide air booking volumes. This was partially offset by a 1% increase in the effective yield per booking reflective of a quarter-over-quarter increase in pricing. Like most industry participants, we are experiencing a decline in travel demand affecting volumes and revenues across the majority of our travel distribution businesses due to a number of factors, including military conflict in Iraq, continuing economic pressures, terrorist threat alerts, and health concerns in Asia and other parts of the world. To mitigate the impact of this industry decline, we have initiated aggressive global cost containment efforts within this business segment. Galileo subscriber fees and EBITDA during first quarter 2003 increased $13 million and $4 million, respectively, due to the acquisition of national distribution companies ("NDCs") in Europe during 2002. NDCs are independent organizations that market and sell Galileo global distribution and computer reservation services to travel agents and other subscribers. In addition, during the summer of 2002, we acquired two other companies that supply reservation and distribution services to the hospitality industry. The operating results of such businesses were included from their acquisition dates forward and collectively contributed revenue of $9 million with an immaterial EBITDA impact during first quarter 2003. Additionally, revenues from our travel agency business declined $16 million due to reductions in commission rates paid by airlines, available reduced rate air inventory and travel-related clubs that we service. However, the impact on EBITDA of lower travel agency revenues was substantially offset by expense reductions due to cost containment

32

initiatives within our travel agency business. EBITDA in first quarter 2003 was favorably impacted by $8 million in connection with a contract termination settlement during first quarter 2003.

Vehicle Services
Revenues increased $391 million (42%) while EBITDA decreased $20 million (29%) in first quarter 2003 compared with 2002. In November 2002, we acquired substantially all of the domestic assets of the vehicle rental business of Budget as well as selected international operations. Budget's operating results were included from the acquisition date forward and contributed revenues of $388 million and EBITDA losses of $20 million in first quarter 2003. The EBITDA losses contributed by Budget are principally attributable to seasonality, whereby Budget's operating results are typically weakest in the first quarter of every year. Excluding Budget's first quarter 2003 results, revenue increased $3 million while EBITDA remained flat quarter-over-quarter. The operating results excluding Budget reflect strong growth in our Wright Express fuel card business, which contributed incremental revenues of $10 million in first quarter 2003 compared with 2002 due to increased gasoline prices as Wright Express earns a percentage of the total gas purchased by its clients. The contributions by Wright Express were substantially offset by an overall decline in revenues generated by our Avis business due to reduced car rental demand.

Domestic car rental revenues at Avis declined $21 million (4%) as a result of the weaker travel environment. Time and mileage revenue per rental day increased slightly but the impact on revenue and EBITDA was more than offset by a 5% quarter-over-quarter reduction in the total number of days that Avis cars were rented. In addition, since utilization of Avis' fleet was lower in first quarter 2003, the absorption of fixed and vehicle-related costs (such as depreciation on vehicles and interest on vehicle financing) caused a corresponding quarter-over-quarter reduction in profit margin. Despite reduced Avis revenue domestically, revenues from Avis' international operations increased $11 million primarily due to increased transaction volume. Avis' revenues are primarily derived from car rentals at airport locations. Through February 2003 (the last period for which information is available), approximately 78% of Avis' revenues were generated from car rental locations at airports.

Financial Services
Revenues decreased $30 million (7%) while EBITDA increased $1 million (1%) in first quarter 2003 compared with 2002. Jackson Hewitt generated incremental franchise royalty revenues of $10 million (inclusive of intercompany royalties paid by our owned Jackson Hewitt offices), in first quarter 2003 compared to 2002, principally driven by a 13% increase in tax return volume and an 8% increase in the average price per return. Favorable results in the tax preparation franchise business are recognized with nominal increases in expenses due to significant operating leverage within this business. Tax preparation fees generated from owned Jackson Hewitt offices generated $6 million of incremental revenue quarter-over-quarter, also due to favorable tax return count and pricing. However, the impact on EBITDA was primarily offset by an increase in tax preparation-related expenses as a result of tax return volume increases. Jackson Hewitt also generated incremental revenues of $9 million in first quarter 2003 from other financial products and programs.

Revenue and EBITDA of this segment also reflect a continued shrinking membership base in connection with the outsourcing of our individual membership business to Trilegiant. However, the impact on EBITDA was mitigated by a net reduction in expenses from servicing fewer members. Fewer members resulted in a net revenue reduction of $63 million (net of $5 million of royalty income from Trilegiant), which was partially offset in EBITDA by favorable membership operating expenses and marketing expenses of $39 million and $6 million, respectively. Revenues within our insurance-wholesale business remained relatively constant in first quarter 2003 compared with 2002.

Corporate and Other
Revenues and EBITDA increased $28 million and $40 million, respectively, in first quarter 2003 compared with 2002, substantially due to the February 2003 sale of our equity investment in

33

Entertainment Publications, Inc. ("EPub") in March 2003. We sold our approximate 15% ownership interest in EPub for $33 million in cash, resulting in a pretax gain of $30 million. EBITDA also reflects a greater absorption of overhead expenses by our reportable segments during first quarter 2003 compared with 2002.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Within our vehicle rental, vehicle management, relocation, mortgage services and vacation ownership 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 asset-backed 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 liabilities of the rest of our businesses because, ultimately, the source of repayment of such liabilities is the realization of such assets.

FINANCIAL CONDITION

Total assets exclusive of assets under management and mortgage programs increased primarily due to an increase of $454 million in cash and cash equivalents (see "Liquidity and Capital Resources—Cash Flows" below for a detailed discussion of such increase), partially offset by (i) a decrease in timeshare-related assets, which are now presented within assets under management and mortgage programs as such assets are now financed under a program and (ii) a decrease in real estate owned due to the sale of the related properties. Total liabilities exclusive of liabilities under management and mortgage programs also increased primarily due to $2.6 billion of debt issuances during first quarter 2003, which was partially offset by (i) $2.3 billion of debt repurchases/retirements (see "Liquidity and Capital Resources—Financial Obligations—Corporate Indebtedness") and (ii) a reduction of $210 million in accounts payable and other current liabilities primarily resulting from the payment of annual employee bonuses during first quarter 2003.

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Assets under management and mortgage programs increased primarily due to (i) an increase of $295 million in timeshare-related assets resulting from our acquisition of FFD and the financing referred to above and (ii) an increase of $230 million in vehicles used primarily in our vehicle rental operations. Such increases were partially offset by (i) a decrease of $212 million in mortgage loans held for sale primarily due to timing differences arising between the origination and sales of such loans and (ii) a net reduction of $119 million in our mortgage servicing rights asset, including the related derivatives (see Note 6 to our Consolidated Financial Statements for the activity in the mortgage servicing rights and related derivatives accounts).

Stockholders' equity increased $214 million primarily due to $309 million of net income generated during first quarter 2003, partially offset by share repurchases aggregating $152 million (12.7 million shares).

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 March 31, 2003, we had $580 million of cash on hand, an increase of $454 million from $126 million at December 31, 2002. The following table summarizes such increase:

(a)

Includes the application of prior payments made to the stockholder litigation settlement trust of $1.41 billion and the March 2002 payment of $250 million.

(b)

Includes $1.41 billion of proceeds from the stockholder litigation settlement trust, which were used to extinguish a portion of the stockholder litigation settlement liability.

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During first quarter 2003, we generated approximately $1.1 billion of net cash from operating activities as compared to using $572 million of net cash during 2002. This change principally reflects the completion of our funding of the stockholder litigation settlement liability in 2002. Excluding the $1.66 billion of outflows reflected in 2002 in connection with the funding of the stockholder litigation settlement liability, net cash provided by operating activities remained relatively flat as increased contributions from our mortgage business were offset by a decrease in net cash inflows provided by mortgage origination and sale activity due to a timing difference on the receipt of proceeds from the sales of loans originated.

During first quarter 2003, we used $696 million of net cash for investing activities compared to generating $529 million of cash during 2002. This change principally reflects the absence in 2003 of $1.41 billion of proceeds received in 2002 from the stockholder litigation settlement trust, which represented funds we deposited to the trust in prior periods that we then used to fund the stockholder litigation settlement liability as discussed above. Excluding these proceeds, we used $185 million less cash in investing activities during first quarter 2003 as compared to 2002. This decrease primarily reflects (i) less cash used for acquisitions in 2003, (ii) proceeds of $64 million received in 2003 on the sale of real estate, which resulted from our foreclosure on certain mortgages classified outside of assets under management and mortgage programs and (iii) aggregate proceeds of $72 million received in 2003 on the sale of our investment in Entertainment Publications, Inc. ($33 million) and the sale/leaseback of one of our New Jersey facilities ($39 million). Such decreases were partially offset by a net increase of $68 million in cash used in management and mortgage program investing activities, which primarily resulted from an increase in cash used to acquire vehicles for our vehicle rental operations, partially offset by greater cash inflows on derivative contracts used to manage the interest rate risk inherent in our MSR asset. We also used more cash for capital expenditures to support operational growth and businesses acquired in 2002, enhance marketing opportunities and develop operating efficiencies through technological improvements. We continue to anticipate aggregate capital expenditure investments for 2003 to be in the range of $450 million to $480 million.

We generated $83 million of cash from financing activities during first quarter 2003 compared to using $832 million of cash in financing activities during 2002. Such change principally reflects proceeds received in 2003 that we had not yet used to repay debt as of March 31, 2003, partially offset by an increase in cash used to repurchase shares of our CD common stock. See "Liquidity and Capital Resources—Financial Obligations" for a detailed discussion of financing activities during first quarter 2003.

Throughout the remainder of 2003, we intend to deploy our available cash and cash generated through operations primarily to reduce/retire corporate indebtedness and repurchase outstanding shares of our CD common stock. 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 repurchase outstanding shares and acquire complementary businesses. 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 such a dividend will be paid.

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Financial Obligations
At March 31, 2003, we had approximately $19.9 billion of indebtedness (including corporate indebtedness of $5.9 billion, Upper DECS of $863 million, debt under management and mortgage programs of $12.7 billion and our mandatorily redeemable preferred interest of $375 million).

Corporate Indebtedness
Corporate indebtedness consisted of:

^(a)

The change in the balance at March 31, 2003 reflects the redemption of $737 million of these notes for approximately $771 million in cash. In connection with such redemption, we recorded a pretax charge of approximately $22 million.

^(b)

The change in the balance at March 31, 2003 reflects (i) the redemption of $81 million in face value of these notes, with a carrying value of $91 million, for $91 million in cash and (ii) $4 million related to the amortization of a premium. The loss recorded in connection with this redemption was not material.

^(c)

These notes, issued in January 2003, are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured senior indebtedness.

^(d)

These notes, issued in March 2003, are senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured senior indebtedness.

^(e)

The change in the balance at March 31, 2003 reflects the redemption of $456 million of these debentures for approximately $457 million in cash. In connection with such redemption, we recorded a pretax charge of approximately $7 million.

^(f)

The change in the balance at March 31, 2003 reflects the redemption of $396 million of these debentures for approximately $408 million in cash. In connection with such redemption, we recorded a pretax charge of approximately $19 million.

^(g)

Reflects the repayment of outstanding revolver borrowings during first quarter 2003.

As of December 31, 2002, we had approximately $1.8 billion of debt (7³/4% notes and zero coupon convertible debentures) scheduled to mature or potentially become due in 2003. Due to the successful completion of the first phase of our debt reduction program during first quarter 2003, we were able to repurchase approximately $1.2 billion of these current maturities and eliminate 17.8 million shares of

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potential dilution to our future earnings per share (see notes (a) and (e) to the above table). Accordingly, as of March 31, 2003, only $630 million of such debt was scheduled to mature or potentially become due in 2003. During first quarter 2003, we also repurchased $396 million of debt (3⁷/8% convertible senior debentures) that could have been put to us in November 2004, thereby eliminating another 16.5 million shares of potential dilution to our future earnings per share (see note (f) to the above table).

The number of shares of CD common stock potentially issuable for each of our contingently convertible debt securities are detailed below (in millions):

Subsequent to March 31, 2003, we retired $394 million (zero coupon convertible debentures) of the remaining $630 million of debt that was scheduled to potentially become due in 2003, thereby eliminating another 15.4 million shares of potential dilution to future earnings per share.

Debt Under Management and Mortgage Programs
The following table summarizes the components of our debt under management and mortgage programs: