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Business Context and Reporting Period

This Form 10-Q covers Cendant Corporation for the quarterly and six-month periods ended June 30, 1998. The Company, formed by the December 1997 merger of HFS Incorporated and CUC International Inc., operates in Travel Services, Real Estate Services, and Alliance Marketing segments. The financial statements presented are restated to reflect the completion of an Audit Committee investigation into accounting irregularities discovered in former CUC business units in April 1998. Consequently, prior period data (1997) and the current period's first quarter have been adjusted.

Key Financial Metrics

Note: Total Debt includes $1,850.0 million current term loan, $2,185.4 million long-term debt, and $6,830.0 million debt under management/mortgage programs. The $4,035.4 million figure represents corporate debt excluding program-specific financing.

Material Changes vs. Prior Period

• Profitability Surge: Net income for the six months ended June 30, 1998, was $413.8 million, a dramatic increase from $11.0 million in the same period in 1997. This improvement is largely driven by a $341.6 million favorable variance in "Merger-related costs and other unusual charges," which shifted from a $299.6 million expense in 1997 to a $42.0 million credit in 1998 due to changes in liability estimates.
• Revenue Growth: Net revenues increased 24% year-over-year for the six-month period, driven by organic growth in Travel and Real Estate segments and the inclusion of new acquisitions (National Parking Corporation, Harpur Group, Jackson Hewitt).
• Restatement Impact: The filing incorporates significant restatements. For the six months ended June 30, 1997, previously reported net income of $152.4 million was reduced to $11.0 million due to corrections for accounting errors and irregularities totaling $141.4 million in adjustments.
• Investment in Avis: The Company recognized a $17.0 million pre-tax gain from the sale of a portion of its investment in Avis Rent A Car, Inc., reducing its ownership stake from 27.5% to 20.4%.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Acquisitions

Management continues to pursue an aggressive acquisition strategy. Pending transactions include the acquisition of American Bankers Insurance Group (approx. $3.1 billion) and RAC Motoring Services (approx. $735 million). The Company plans to fund these via a new $3.25 billion term loan facility and proceeds from asset divestitures.

The Company has committed to divesting its consumer software and classified advertising businesses (Cendant Software and Hebdo Mag), expecting significant gains and proceeds to reduce debt.

Risks and Contingencies

• Accounting Irregularities & Litigation: The discovery of accounting irregularities in the former CUC units has led to 69 purported class-action lawsuits and investigations by the SEC and the U.S. Attorney for the District of New Jersey. Management believes an adverse outcome could materially impact financial condition.
• Financing Constraints: Due to the accounting issues, the Company is currently unable to access equity and public debt markets until restated financial statements are filed (expected late August 1998). Liquidity is currently maintained through bank credit facilities.
• Credit Ratings: Credit rating agencies (S&P, Moody's, Duff & Phelps) are reviewing the Company's ratings with negative implications following the accounting disclosures and pending acquisitions.
• Year 2000 Compliance: The Company estimates $4 million in future costs to ensure system compliance, with potential material operational impact if not completed timely.

Investor Verification Checklist

• Restatement Accuracy: Verify the final audited restated financial statements for 1995–1997 (expected in amended Form 10-K/A) to confirm the full extent of the accounting adjustments.
• Litigation Exposure: Monitor the status of the 69 class-action lawsuits and SEC investigations for potential settlement costs or regulatory penalties.
• Debt Covenants: Review the restrictive covenants in the new $3.25 billion Term Loan Facility and revolving credit agreements, particularly the 3:1 interest coverage ratio, given the high leverage from recent acquisitions.
• Acquisition Integration: Assess the integration progress and financial performance of National Parking Corporation (NPC) and Jackson Hewitt, which contributed significantly to Q2 results.
• Divestiture Timeline: Track the closing of the Hebdo Mag and Cendant Software sales to confirm the expected debt reduction and gain recognition.