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Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 1997, for Cendant Corporation. The Company was formed on December 17, 1997, through the merger of CUC International Inc. and HFS Incorporated. Cendant operates as a global provider of consumer and business services across three primary segments: Membership Services (consumer clubs, insurance, and financial products), Travel Services (lodging and car rental franchising, timeshare exchange, and fleet management), and Real Estate Services (brokerage franchising, relocation, and mortgage banking). The Company also maintains an "Other Services" segment including software and information technology.

Key Financial Metrics

Note: Financial data has been restated to reflect the pooling of interests for the Cendant Merger and other acquisitions.

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased 87% to $55.4 million from $423.6 million in 1996. This was primarily driven by $1.148 billion in pre-tax merger-related costs and unusual charges (including $844.9 million for the Cendant Merger and $303.0 million for the PHH Merger).
• Revenue Growth: Net revenues increased 36% to $5.3 billion, driven by the inclusion of HFS businesses and growth in franchise and membership segments.
• Effective Tax Rate: The effective income tax rate rose to 81.2% in 1997 from 40.6% in 1996 due to non-deductible merger-related charges. Excluding these, the rate was 40.0%.
• Segment Performance (Excluding Charges):
  • Membership Services: Operating income increased 46% to $459.4 million.
  • Travel Services: Operating income increased 83% to $488.9 million.
  • Real Estate Services: Operating income increased 70% to $367.4 million.
• Divestiture: The Company sold Interval International Inc. (timeshare exchange) for net proceeds of $232.0 million, recognizing a gain of $34.7 million.

Guidance, Outlook, and Risks

Acquisitions and Strategic Moves:

• American Bankers: Agreed to acquire for approximately $3.1 billion (cash and stock) to expand insurance offerings.
• National Parking Corporation (NPC): Agreed to acquire for approximately $1.3 billion in cash.
• Providian: Agreed to acquire for $219 million in cash.
• Completed: Acquired Jackson Hewitt (tax preparation) for $480 million and Harpur Group (fuel card) for $186 million in early 1998.

Liquidity and Financing:

• The Company issued $1.4 billion in "FELINE PRIDES" securities in March 1998 to repay revolving credit facilities.
• Committed revolving credit facilities total $4.0 billion at the parent level and $175 million at the subsidiary level.
• Capital expenditures for 1998 are anticipated to be approximately $200 million.

Risks and Contingencies:

• Integration Risk: Significant challenges in integrating rapidly growing operations and acquired businesses (Cendant, PHH, Hebdo Mag).
• Regulatory: Ongoing antitrust reviews for proposed acquisitions; franchise regulations vary by state.
• Year 2000 Compliance: Estimated cost of $30 million to ensure system compliance; failure could materially impact operations.
• Litigation: Established $80 million in litigation reserves coincident with the Cendant Merger; ongoing environmental litigation regarding former gas plants.

Investor Verification Checklist

• Merger Charge Impact: Verify the non-recurring nature of the $1.1 billion charge and assess the underlying operating income growth (which was strong across all segments).
• Debt Structure: Review the maturity profile of the $1.3 billion long-term debt and the terms of the new $1.5 billion credit facility for the American Bankers acquisition.
• Acquisition Financing: Confirm the ability to fund the $3.1 billion American Bankers and $1.3 billion NPC acquisitions without diluting earnings or breaching covenants.
• Year 2000 Status: Assess the progress of the $30 million compliance program and potential operational disruptions.
• Segment Synergies: Evaluate the realization of cross-selling synergies between Membership, Travel, and Real Estate segments as projected by management.