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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the year ended December 31, 1998 Commission file number 1-7797
PHH CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6 Sylvan Way, Parsippany, New Jersey 07054
Address of principal executive offices) (Zip Code)
(973) 428-9700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1998: $0
Number of shares of PHH Corporation outstanding on December 31, 1998: 1000
PHH Corporation meets the conditions set forth in General Instructions I (1) (a)
and (b) to Form 10-K and is therefore filing this form with the reduced
disclosure format.
PHH CORPORATION
PART I
Except as expressly indicated or unless the context otherwise requires, the
"Company", "PHH", "we", "our", or "us" means PHH Corporation, a Maryland
Corporation, and its subsidiaries.
Item 1. Business
Pursuant to a merger with HFS Incorporated ("HFS"), effective April 30, 1997, we
became a wholly owned subsidiary of HFS (the "HFS Merger"). On December 17,
1997, pursuant to a merger agreement between CUC International Inc. ("CUC") and
HFS, HFS was merged into CUC (the "Cendant Merger"), with CUC surviving and
changing its name to Cendant Corporation ("Cendant"). As a result of the Cendant
Merger, we became a wholly owned subsidiary of Cendant.
As part of Cendant's ongoing evaluation of its business units, we may from time
to time explore our ability to make divestitures and enter into related
transactions as they arise. No assurance can be given that any divestiture or
other transaction will be consummated or, if consummated, the magnitude, timing,
likelihood or financial or business effect on us of such transactions. Among the
factors we will consider in determining whether or not to consummate any
transaction is the strategic and financial impact of such transaction on us and
our parent company, Cendant.
In connection with the HFS Merger, our fiscal year was changed from a year
ending on April 30 to a year ending on December 31.
GENERAL
We operate in three business segments: fleet, relocation and mortgage. Our
businesses provide a range of complementary consumer and business services. Our
businesses provide home buyers with mortgages, assist in employee relocations
and manage corporate and government vehicle fleets. Our fleet segment is
conducted primarily by our PHH Vehicle Management Services subsidiaries, which
operate the second largest provider in North America of comprehensive vehicle
management services, and our PHH Vehicle Management Services PLC and Cendant
Business Answers PLC subsidiaries, which are the market leaders in the United
Kingdom for fuel and fleet management services. In the relocation segment, our
Cendant Mobility Services Corporation subsidiary is the largest provider of
corporate relocation services in the world, offering relocation clients a
variety of services in connection with the transfer of a client's employees. In
the mortgage segment, our Cendant Mortgage Corporation ("Cendant Mortgage")
subsidiary originates, sells and services residential mortgage loans in the
United States, marketing such services to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms and mortgage banks.
Additional information related to the Company's business segments, including
financial data is included in Note 16 - Segment Information in the notes to
consolidated financial statements.
Certain statements in this Annual Report on Form 10-K, including without
limitation certain matters discussed in "Item 7. Management's Narrative Analysis
of Results of Operations and Liquidity and Capital Resources," constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve 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. Important assumptions and other important factors
that could cause actual results to differ materially from those in the
forward-looking statements, include, but are not limited to: the effect of
economic and market conditions, the ability to obtain financing, the level and
volatility of interest rates, outcome of the pending litigation relating to the
accounting irregularities at Cendant, our ability and our vendors to complete
the necessary actions to achieve a year 2000 conversion for our computer systems
as applications, the effect of any corporate transactions, including any
divestitures, and other risks and uncertainties. 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. The Company assumes no obligation to update
these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
Our principal executive offices are located at 6 Sylvan Way, Parsippany, NJ
07054 (telephone 973-428-9700).
FLEET SEGMENT
General. The Fleet Segment represented approximately 27%, 31% and 35%
of our net revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. Through our PHH Vehicle Management Services Corporation, PHH
Management Services PLC and Cendant Business Answers PLC subsidiaries, we offer
a full range of fully integrated fleet management services to corporate clients
and government agencies comprising over 672,000 vehicles under management on a
worldwide basis. These services include vehicle leasing, advisory services and
fleet management services for a broad range of vehicle fleets. Advisory services
include fleet policy analysis and recommendations, benchmarking, and vehicle
recommendations and specifications. In addition, we provide managerial services
which include ordering and purchasing vehicles, arranging for their delivery
through dealerships located throughout the United States, Canada, United Kingdom
("UK"), Germany and the Republic of Ireland, as well as capabilities throughout
Europe, administration of the title and registration process, tax and insurance
requirements, pursuing warranty claims with vehicle manufacturers and
remarketing used vehicles. We also offer various leasing plans for our vehicle
leasing programs, financed primarily through the issuance of commercial paper
and medium-term notes and through unsecured borrowings under revolving credit
agreements, securitized financing arrangements and bank lines of credit. At
December 31, 1998, we employed approximately 1,800 people in our fleet business.
Through our PHH Vehicle Management Services subsidiaries in the United
States and Canada, our Cendant Business Answers PLC subsidiary in the UK, and
our PHH Deutschland subsidiary in Germany, we also offer fuel and expense
management programs to corporations and government agencies for the effective
management and control of automotive business travel expenses. We also manage
the fuel and expense management business in the UK on behalf of the Parent
Company's Harpur Group Limited subsidiary. By utilizing our service cards issued
under the fuel and expense management programs, a client's representatives are
able to purchase various products and services such as gasoline, tires,
batteries, glass and maintenance services at numerous outlets. Service fees are
earned for billing, collection and record keeping services and for assuming
credit risk. These fees are paid by the vendor and are based upon the total
dollar amount of fuel purchased or the number of transactions processed.
Products. Our fleet management services are divided into two principal
products: (1) Asset Based Products, and (2) Fee Based Products.
Asset Based Products represent the services our clients require to
lease a vehicle which includes vehicle acquisition, vehicle remarketing,
financing, and fleet management consulting. We lease in excess of 350,000 units
on a worldwide basis through both open-end lease structures and closed-end lease
structures. Open-end leases are the prevalent structure in North America
representing 96% of the total vehicles financed in North America and 86% of the
total vehicles financed worldwide. The open-end leases can be structured on
either a fixed rate or floating rate basis (where the interest component of the
lease payment changes month to month based upon an index) depending upon client
preference. The open-end leases are typically structured with a 12 month minimum
lease term, with month to month renewals thereafter. The typical unit remains
under lease for approximately 34 months. A client receives a full range of
services in exchange for a monthly rental payment which includes a management
fee. The residual risk on the value of the vehicle at the end of the lease term
remains with the lessee under an open-end lease, except for a small amount which
is retained by the lessor.
Closed-end leases are structured with a fixed term with the lessor
retaining the vehicle residual risk. The most prevalent lease terms are 24
months, 36 months, and 48 months. The closed-end lease structure is preferred in
Europe due to certain accounting regulations. The closed-end lease structure is
utilized by approximately 71% of the vehicles leased in Europe, but only 14% of
the vehicles leased on a worldwide basis. We utilize independent third party
valuations and internal projections to set the residuals utilized for these
leases.
The Fee Based Products are designed to effectively manage costs and
enhance driver productivity. The three main Fee Based Products are Fuel
Services, Maintenance Services and Accident Management. Fuel Services represents
the utilization of our proprietary cards to access fuel through a network of
franchised and independent fuel stations. The cards operate as a universal card
with centralized billing designed to measure and manage costs.
We offer customer vehicle maintenance charge cards that are used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provide customers with benefits such as (1) negotiated discounts off full retail
prices through our convenient supplier network, (2) access to our in-house team
of certified maintenance experts that monitor each card transaction for policy
compliance, reasonability, and cost effectiveness, and (3) inclusion of vehicle
maintenance card transactions in a consolidated information and billing database
that helps evaluate overall fleet performance and costs. We maintain an
extensive network of service providers in the United States, Canada, and the
United Kingdom to ensure ease of use by the client's drivers.
We also provide our clients with comprehensive accident management
services such as (1) providing immediate assistance after receiving the initial
accident report from the driver (i.e. facilitating emergency towing services and
car rental assistance, etc.) (2) organizing the entire vehicle appraisal and
repair process through a network of preferred repair and body shops, and (3)
coordinating and negotiating potential accident claims. Customers receive
significant benefits from our accident management services such as (1)
convenient coordinated 24-hour assistance from our call center, (2) access to
our leverage with the repair and body shops included in our preferred supplier
network (the largest in the industry), which typically provides customers with
extremely favorable repair terms and (3) expertise of our damage specialists,
who ensure that vehicle appraisals and repairs are appropriate, cost-efficient,
and in accordance with each customer's specific repair policy.
Competitive Conditions. The principal factors for competition in
vehicle management services are quality of service and price. We are
competitively positioned as a fully integrated provider of fleet management
services with a broad range of product offerings. We rank second in the United
States in the number of vehicles under management and are a leader in
proprietary fuel and maintenance cards for fleet use in circulation. There are
four other major providers of fleet management service in the United States,
hundreds of local and regional competitors, and numerous niche competitors who
focus on only one or two products and do not offer the fully integrated range of
products provided by us. In the United States, it is estimated that only 45% of
fleets are leased by third party providers. The unpenetrated market and the
continued focus by corporations on cost efficiency and outsourcing will provide
the growth platform in the future.
In the UK, we rank first in vehicles under management and are a leader
in proprietary fuel and maintenance cards. We continue to compete against
numerous local and regional competitors. The UK operation has been able to
differentiate itself through its breadth of product offerings.
RELOCATION SEGMENT
General. Our Relocation Segment represented approximately 40%, 48% and
47% of our net revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. Our Cendant Mobility Services Corporation ("Cendant Mobility")
subsidiary is the largest provider of employee relocation services in the world.
Our Cendant Mobility subsidiary assists more than 100,000 transferring employees
annually, including approximately 15,000 employees internationally each year in
92 countries and 300 destination cities.
At December 31, 1998, we employed approximately 3,300 people in our relocation
business.
Services. The employee relocation business offers a variety of services
in connection with the transfer of our clients' employees. The relocation
services provided to our customers include primarily evaluation, inspection and
selling of transferees' homes or purchasing a transferee's home which is not
sold for at least a price determined on the estimated value within a specified
time period, equity advances (generally guaranteed by the corporate customer),
certain home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.
Corporate clients pay a fee for the services performed. Another source
of revenue is interest on the equity advances. Substantially, all costs
associated with such services are reimbursed by the corporate client, including,
if necessary, repayment of equity advances and reimbursement of losses on the
sale of homes purchased in most cases (other than government clients and one
corporate client). As a result of the obligations of most corporate clients to
pay the losses and guarantee repayment of equity advances, our exposure on such
items is limited to the credit risk of the corporate clients of our relocation
businesses and not on the potential changes in value of residential real estate.
We believe such risk is minimal, due to the credit quality of the corporate
clients of our relocation subsidiaries. In transactions with government clients
and one corporate client, which comprise approximately 5% of net revenue, where
we assume the risk for losses on the sale of homes, we control all facets of the
resale process, thereby limiting our exposure.
The homesale program service is the core service for many domestic and
international programs. This program gives employees guaranteed offers for their
homes and assists clients in the management of employees' productivity during
their relocation. Cendant Mobility allows clients to outsource their relocation
programs by providing clients with professional support for planning and
administration of all elements of their relocation programs. The majority of new
proposals involve outsourcing due to corporate downsizing, cost containment, and
increased need for expense tracking.
Our relocation accounting services supports auditing, reporting, and
disbursement of all relocation-related expense activity.
Our group move management services provides coordination for moves
involving a number of employees. Services include planning, communications,
analysis, and assessment of the move. Policy consulting provides customized
consultation and policy review, as well as industry data, comparisons and
recommendations. Cendant Mobility also has developed and/or customized numerous
non-traditional services including outsourcing of all elements of relocation
programs, moving services, and spouse counseling.
Our moving service, with nearly 70,000 shipments annually, provides
support for all aspects of moving an employee's household goods. We also handle
insurance and claim assistance, invoice auditing, and control the quality of van
line, driver, and overall service.
Our marketing assistance service provides assistance to transferees in
the marketing and sale of their own home. A Cendant Mobility professional
assists in developing a custom marketing plan and monitors its implementation
through the broker. The Cendant Mobility contact also acts as an advocate, with
the local broker, for employees in negotiating offers which helps clients'
employees benefit from the highest possible price for their homes.
Our affinity services provides value-added real estate and relocation
services to organizations with established members and/or customers.
Organizations, such as insurance and airline companies, that have established
members offer our affinity services' to their members at no cost. This service
helps the organizations attract new members and to retain current members.
Affinity services provides home buying and selling assistance, as well as
mortgage assistance and moving services to members of applicable organizations.
Personal assistance is provided to over 40,000 individuals with approximately
17,500 real estate transactions annually.
Our international assignment service provides a full spectrum of
services for international assignees. This group coordinates the services
previously discussed; however, they also assist with immigration support,
candidate assessment, intercultural training, language training, and
repatriation coaching.
Vendor Networks. Cendant Mobility provides relocation services through
various vendor networks that meet the superior service standards and quality
deemed necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 340 principal
brokers and 420 associate brokers. Our van line, insurance, appraisal and
closing networks allow us to receive deep discounts while maintaining control
over the quality of service provided to clients' transferees.
Competitive Conditions. The principal methods of competition within
relocation services are service, quality and price. In the United States, there
are two major national providers of such services. We are the market leader in
the United States and third in the UK.
Seasonality. Our principal sources of relocation service revenue are
based upon the timing of transferee moves, which are lower in the first and last
quarter each year, and at the highest levels in the second quarter.
MORTGAGE SEGMENT
General. Our Mortgage Segment represented approximately 32%, 21% and
18% of our net revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. Through our Cendant Mortgage Corporation ("Cendant Mortgage")
subsidiary, we are the tenth largest originator of residential first mortgage
loans in the United States as reported by Inside Mortgage Finance in 1998, and,
on a retail basis, we are the sixth largest originator in 1998. We offer
services consisting of the origination, sale and servicing of residential first
mortgage loans. A full line of first mortgage products are marketed to consumers
through relationships with corporations, affinity groups, financial
institutions, real estate brokerage firms, including CENTURY 21(R), Coldwell
Banker(R) and ERA(R) franchisees, and other mortgage banks. Cendant Mortgage is
a centralized mortgage lender conducting its business in all 50 states.
At December 31, 1998, Cendant Mortgage had approximately 4,000 employees.
Cendant Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation certificates
issued or guaranteed by Fannie Mae Corp., the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association. Cendant Mortgage
also services mortgage loans. We earn revenue from the sale of the mortgage
loans to investors, as well as from fees earned on the servicing of the loans
for investors. Mortgage servicing consists of collecting loan payments,
remitting principal and interest payments to investors, holding escrow funds for
payment of mortgage-related expenses such as taxes and insurance, and otherwise
administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Teleservices. Mortgages are offered to consumers through an
800 number teleservices operation based in New Jersey under
programs including Phone In-Move In(R) for real estate
organizations, private label programs for financial
institutions and for relocation clients in conjunction with
the operations of Cendant Mobility. The teleservices operation
provides us with retail mortgage volume which contributes to
Cendant Mortgage ranking as the sixth largest retail
originator (Inside Mortgage Finance) in 1998.
o Point of Sale. Mortgages are offered to consumers through 175
field sales professionals with all processing, underwriting
and other origination activities based in New Jersey. These
field sales professionals generally are located in real estate
offices and are equipped with software to obtain product
information, quote interest rates and prepare a mortgage
application with the consumer. Originations from these point
of sale offices are generally more costly than teleservices
originations.
o Wholesale/Correspondent. We purchase closed loans from
financial institutions and mortgage banks after underwriting
the loans. Financial institutions include banks, thrifts and
credit unions. Such institutions are able to sell their closed
loans to a large number of mortgage lenders and generally base
their decision to sell to Cendant Mortgage on price, product
menu and/or underwriting. We also have wholesale/correspondent
originations with mortgage banks affiliated with real estate
brokerage organizations. Originations from our
wholesale/correspondent platform are more costly than point of
sale or teleservices originations.
Strategy. Our strategy is to increase market share by expanding all of
our sources of business with emphasis on the Phone In-Move In(R) program. Phone
In-Move In(R) was developed for real estate firms approximately 21 months ago
and is currently established in over 4,000 real estate offices at December 31,
1998. We are well positioned to expand our relocation and financial institutions
business channels as it increases our linkage to Cendant Mobility clients and
works with financial institutions which desire to outsource their mortgage
originations operations to Cendant Mortgage. Each of these market share growth
opportunities is driven by our low cost teleservices platform which is
centralized in Mt. Laurel, New Jersey. The competitive advantages of using a
centralized, efficient and high quality teleservices platform allows us to
capture a higher percentage of the highly fragmented mortgage market more cost
effectively.
Competitive Conditions. The principal methods of competition in
mortgage banking services are service, quality and price. There are an estimated
20,000 national, regional or local providers of mortgage banking services across
the United States. Cendant Mortgage has increased its mortgage origination
market share in the United States to 1.8% in 1998 from 0.9% in 1996. The market
share leader reported a 7.7% market share in the United States according to
Insider Mortgage Finance for 1998.
Seasonality. The principal sources of mortgage services segment revenue
are based principally on the timing of mortgage origination activity which is
based upon the timing of residential real estate sales. Real estate sales are
lower in the first calendar quarter each year and relatively level the other
three quarters of the year. As a result, our revenue from the mortgage services
business is less in the first calendar quarter of each year.
REGULATION
The federal Real Estate Settlement Procedures Act and state real estate
brokerage laws restrict payments which real estate brokers and mortgage brokers
and other parties may receive or pay in connection with the sales of residences
and referral of settlement services (e.g., mortgages, homeowners insurance,
title insurance). Such laws may, to some extent, restrict preferred alliance
arrangements involving our parent's real estate brokerage franchisees and our
mortgage and relocation businesses. Our mortgage banking services business is
also subject to numerous federal, state and local laws and regulations,
including those relating to real estate settlement procedures, fair lending,
fair credit reporting, truth in lending, federal and state disclosure, and
licensing.
EMPLOYEES
As of December 31, 1998, we had approximately 9,100 employees.
Item 2. Properties
The offices of our fleet operations in North America are located throughout the
U.S. and Canada. Primary office facilities are located in a six-story, 200,000
square foot office building in Hunt Valley, Maryland, leased until September
2003 and offices in Mississauga, Canada, consisting of 41,466 square feet,
leased until February 2003 and various other small offices throughout Canada
with leases expiring between 2000 and 2004.
Our relocation operations in North America occupy approximately 519,020 square
feet in various offices located throughout the U.S. The primary office
facilities are located in Danbury, Connecticut, one building having
approximately 230,000 square feet, leased until July, 2008 and two other
buildings totaling 45,546 square feet with leases expiring in 2003 and 2004.
There are three other regional offices located in Las Colinas, Texas,
Schaumburg, Illinois, and Walnut Creek, California for a total square footage of
approximately 120,000.
Our mortgage operations are located in several offices in Mount Laurel, Cherry
Hill and Moorestown, New Jersey occupying approximately 500,000 square feet and
have various lease expiration dates. The primary building consists of 127,000
square feet and the lease expires in November 30, 2002.
The international offices of our fleet and relocation operations located in the
UK and Europe are as follows: a 129,000 square foot building which is owned by
us located in Swindon, UK; and field offices having an aggregate of
approximately 57,000 square feet located in Swindon, Manchester and Birmingham
UK; Munich, Germany; and Dublin, Ireland, are leased for various terms to
February 2015.
We consider that our properties are generally in good condition and well
maintained and are generally suitable and adequate to carry on our business.
Item 3. Legal Proceedings
We are a party to various litigation matters arising in the ordinary course of
business and a plaintiff in several collection matters which are not considered
material either individually or in the aggregate.
As a result of previously announced accounting irregularities at Cendant, our
parent, Cendant is subject to numerous purported class action lawsuits, two
purported derivative lawsuits and an individual lawsuit asserting various claims
under the federal securities laws and certain state statutory and common laws.
In addition, the staff of the Securities and Exchange Commission ("SEC") and the
United States Attorney for the District of New Jersey are conducting
investigations relating to Cendant's accounting issues. The staff of the SEC has
advised Cendant that its inquiry should not be construed as an indication by the
SEC or its staff that any violations of law occurred. (See Note 12 to the
consolidated financial statements).
Item 4. Results of Votes of Security Holders
Not Applicable
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Not Applicable
Item 6. Selected Financial Data
Not Applicable
Item 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES
We are a leading provider of mortgage, relocation and fleet services. In April
1997, we merged with a wholly-owned subsidiary of HFS Incorporated ("HFS") (the
"HFS Merger"), and in December 1997, HFS merged with and into CUC International,
Inc. ("CUC") (the "Cendant Merger") to form Cendant Corporation ("Cendant" or
the "Parent Company"). Effective upon the Cendant Merger, we became a
wholly-owned subsidiary of Cendant. However, pursuant to certain covenant
requirements in the indentures under which we issue debt, we continue to operate
and maintain our status as a separate public reporting entity.
As part of Cendant's ongoing evaluation of its business units, we may from time
to time explore opportunities to make divestitures and enter into related
transactions as they arise. No assurance can be given that any divestiture or
other transaction will be consummated or, if consummated, the magnitude, timing,
likelihood or financial or business effect on us of such transactions. Among the
factors considered in determining whether or not to consummate any transaction
is the strategic and financial impact of such transaction on us and our parent
company, Cendant.
Results of Operations
This discussion should be read in conjunction with the information contained in
our Consolidated Financial Statements and accompanying Notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
The underlying discussion of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before (i) non-operating interest,
(ii) income taxes and (iii) depreciation and amortization (exclusive of
depreciation and amortization on assets under management and mortgage programs),
adjusted to exclude merger-related costs and other unusual charges ("Unusual
Charges") which were incurred in connection with the HFS Merger and the Cendant
Merger. Such charges are of a non-recurring or unusual nature and are not
included in assessing segment performance or are not segment-specific. We
believe such discussion is the most informative representation of how
our management evaluates performance. We determined that we have three
reportable operating segments based primarily on the types of services we
provide, the consumer base to which marketing efforts are directed and the
methods used to sell services. For additional information, including a
description of the services provided in each of our reportable operating
segments, see Note 1 to the consolidated financial statements.
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
Revenues increased $237.0 million (28%) from $860.6 million in 1997 to $1.1
billion in 1998. In addition, Adjusted EBITDA which excludes Unusual Charges
(credits) of ($20.2) million and $251.0 million in 1998 and 1997, respectively,
increased $182.9 million (67%) from $273.3 million in 1997 to $456.2 million in
1998. The Adjusted EBITDA margin in 1998 was 42%, an improvement of ten
percentage points over 1997.
Mortgage revenues and Adjusted EBITDA increased $174.1 million (97%) and $110.9
million (148%), respectively, in 1998 over 1997. Mortgage origination grew
across all lines of business, including increased refinancing activity and a
shift to more profitable sales and processing channels and was responsible for
substantially all of the segment's revenue growth. Mortgage closings increased
$14.3 billion (122%) and average origination fees increased 12 basis points,
resulting in a $180.3 million increase in origination revenues. Operating
expenses increased in all areas, reflecting increased hiring and expansion of
capacity in order to support continued growth; however, revenue growth
marginally exceeded such infrastructure enhancements thereby contributing to an
improvement in the Adjusted EBITDA margin within the mortgage segment from 42%
in 1997 to 53% in 1998.
Relocation revenues and Adjusted EBITDA increased $34.6 million (8%) and $34.8
million (39%), respectively, in 1998 over 1997, while the Adjusted EBITDA margin
improved from 22% to 28%. The primary source of revenue growth was a $29.3
million increase in revenues from the relocation of government employees. In
addition, the divestiture of certain niche-market property management operations
accounted for other revenue of $8.2 million in 1998. Expenses associated with
government relocations increased in conjunction with volume and revenue growth,
but economies of scale and a reduction in overhead and administrative expenses
resulted in the improvement in Adjusted EBITDA margin.
Fleet revenues and Adjusted EBITDA increased $22.9 million (8%) and $30.9
million (29%), respectively, in 1998 over 1997, while the Adjusted EBITDA margin
improved from 39% to 47%. The revenue growth is attributable to increases in
fleet leasing fees and service fee revenue. Fleet leasing revenue increased due
to increases in both pricing and the number of vehicles leased, while service
fee revenue increased as a result of an increase in number of fuel cards and
vehicle maintenance cards, partially offset by a decline in pricing. The
Adjusted EBITDA margin improvement reflects a reduction in overhead costs.
Liquidity and Capital Resources
We manage our funding sources to ensure adequate liquidity. The sources of
liquidity fall into three general areas: ongoing liquidation of assets under
management, global capital markets, and committed credit agreements with various
high-quality domestic and international banks. In the ordinary course of
business, the liquidation of assets under management programs, as well as cash
flows generated from operating activities, provide the cash flow necessary for
the repayment of existing liabilities. Financial covenants are designed to
ensure our self-sufficient liquidity status. Financial covenants include
restrictions on dividends payable to the Parent Company and Parent Company
loans, limitations on the ratio of debt to equity, and other separate financial
restrictions.
Our exposure to interest rate and liquidity risk is minimized by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities. Using historical information, we project the time period
that a client's vehicle will be in service or the length of time that a home
will be held before being sold on behalf of the client. Once the relevant asset
characteristics are projected, we generally match the projected dollar amount,
interest rate and maturity characteristics of the assets within the overall
funding program. This is accomplished through stated debt terms or effectively
modifying such terms through other instruments, primarily interest rate swap
agreements and revolving credit agreements. Within mortgage services, we fund
the mortgage loans on a short-term basis until the mortgage loans are sold to
unrelated investors, which generally occurs within sixty days. Interest rate
risk on mortgages originated for sale is managed through the use of forward
delivery contracts, financial futures and options. Financial derivatives are
also used as a hedge to minimize earnings volatility as it relates to mortgage
servicing assets.
We support purchases of leased vehicles, originated mortgages and advances under
relocation contracts primarily by issuing commercial paper, medium term notes
and by maintaining securitized obligations. Such financing is included in
liabilities under management and mortgage programs since such debt corresponds
directly with high quality related assets. We continue to pursue opportunities
to reduce our borrowing requirements by securitizing increasing amounts of our
high quality assets. Additionally, we entered into a three year agreement
effective May 1998 and expanded in December 1998 under which an unaffiliated
Buyer (the "Buyer") committed to purchase, at our option, mortgage loans
originated by us on a daily basis, up to the Buyer's asset limit of $2.4
billion. Under the terms of this sale agreement, we retain the servicing rights
on the mortgage loans sold to the Buyer and provide the Buyer with the option to
sell or securitize the mortgage loans into the secondary market. At December 31,
1998, we were servicing approximately $2.0 billion of mortgage loans owned by
the Buyer.
In October 1998, Moody's Investors Service, Inc. and Standard and Poors
Corporation reduced our long-term and short-term debt ratings to A3/P2 and
A-/A2, respectively from A2/P1 and A+/A1, respectively. Our long-term and
short-term credit ratings remain A+/F1 and A+/D1 with Fitch IBCA and Duff and
Phelps Credit Rating Co., respectively. While the recent downgrading caused us
to incur an increase in cost of funds, management believes our sources of
liquidity continue to be adequate. (A security rating is not a recommendation to
buy, sell or hold securities and is subject to revision or withdrawal at any
time).
We expect to continue to maximize our access to global capital markets by
maintaining the quality of our assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. Depending upon asset growth and financial market conditions, we utilize
the United States, European and Canadian commercial paper markets, as well as
other cost-effective short-term instruments. In addition, we will continue to
utilize the public and private debt markets as sources of financing. Augmenting
these sources, we will continue to manage outstanding debt with the potential
sale or transfer of managed assets to third parties while retaining fee-related
servicing responsibility. At December 31, 1998, aggregate borrowings were
comprised of commercial paper, medium-term notes, securitized obligations and
other borrowings of $2.5 billion, $2.3 billion, $1.9 billion, and $0.2 billion,
respectively.
We filed a shelf registration statement with the Securities and Exchange
Commission ("SEC"), effective March 2, 1998, for the aggregate issuance of up to
$3.0 billion of medium-term note debt securities. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds will be used to finance assets we
manage for our clients and for general corporate purposes. As of December 31,
1998, we had approximately $1.6 billion of medium-term notes outstanding under
this shelf registration statement.
Securitized Obligations
We maintain four separate financing facilities, the outstanding borrowings of
which are securitized by corresponding assets under management and mortgage
programs. The collective weighted average interest rate on such facilities was
5.8% at December 31, 1998. Such securitized obligations are described below.
Mortgage Facility. In December 1998, we entered into a 364-day financing
agreement to sell mortgage loans under an agreement to repurchase (the
"Agreement") such mortgages. The Agreement is collateralized by the
underlying mortgage loans held in safekeeping by the custodian to the
Agreement. The total commitment under this Agreement is $500.0 million and
is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Mortgage loans financed under
this Agreement at December 31, 1998 totaled $378.0 million.
Relocation Facilities. We entered into a 364-day asset securitization
agreement effective December 1998 under which an unaffiliated buyer has
committed to purchase an interest in the rights to payment related to
certain of our relocation receivables. The revolving purchase commitment
provides for funding up to a limit of $325.0 million and is renewable on an
annual basis at the discretion of the lender in accordance with the
securitization agreement. Under the terms of this agreement, we retain the
servicing rights related to the relocation receivables. At December 31,
1998, we were servicing $248.0 million of assets which were funded under
this agreement.
We also maintain an asset securitization agreement, with a separate
unaffiliated buyer, which has a purchase commitment up to a limit of $350.0
million. The terms of this agreement are similar to the aforementioned
facility, whereby we retain the servicing rights on the rights of payment
related to certain of our relocation receivables. At December 31, 1998, we
were servicing $171.0 million of assets eligible for purchase under this
agreement.
Fleet Facilities. In December 1998, we entered into two secured financing
transactions each expiring five years from the effective agreement date
through our two wholly-owned subsidiaries, TRAC Funding and TRAC Funding
II. Secured leased assets (specified beneficial interests in a trust which
owns the leased vehicles and the leases (the "Trust")) totaling $600.0
million and $725.3 million, respectively, were contributed to our
subsidiaries. Loans to TRAC Funding and TRAC Funding II were funded by
commercial paper conduits in the amounts of $500.0 million and $604.0
million, respectively, and were secured by the specified beneficial
interests in the Trust. Monthly loan repayments conform to the amortization
of the leased vehicles with the repayment of the outstanding loan balance
required at time of disposition of the vehicles. Interest on the loans is
based upon the conduit commercial paper issuance cost and committed bank
lines priced on a London Interbank Offered Rate basis. Repayments of loans
are limited to the cash flows generated from the leases represented by the
specified beneficial interests.
To provide additional financial flexibility, our current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average amount of
outstanding commercial paper. We maintain $2.65 billion of unsecured committed
credit facilities, which are backed by domestic and foreign banks. The
facilities are comprised of $1.25 billion of syndicated lines of credit maturing
in March 2000 and $1.25 billion of syndicated lines of credit maturing in the
Year 2002. In addition, we have a $150.0 million revolving credit facility,
which matures in December 1999, and other uncommitted lines of credit with
various financial institutions, which were unused at December 31, 1998. We
closely evaluate not only the credit of the banks, but also the terms of the
various agreements to ensure ongoing availability. The full amount of our
committed facilities at December 31, 1998 was undrawn and available. We believe
that our current policy provides adequate protection should volatility in the
financial markets limit our access to commercial paper or medium-term notes
funding. We continually seek additional sources of liquidity to accommodate
asset growth and to provide further protection from volatility in the financial
markets.
On July 10, 1998, we entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with The First National Bank of Chicago, as trustee,
under the Senior Indenture dated as of June 5, 1997, which formalizes our policy
of limiting the payment of dividends and the outstanding principal balance of
loans to the Parent Company to 40% of consolidated net income (as defined in the
Supplemental Indenture) for each fiscal year. The Supplemental Indenture
prohibits us from paying dividends or making loans to the Parent Company if upon
giving effect to such dividends and/or loan, our debt to equity ratio exceeds 8
to 1, at the time of the dividend or loan, as the case may be.
Cash Flow
Cash flows provided by operating activities decreased $56.5 million from $918.2
million in 1997 to $861.7 million in 1998. The decrease in operating cash flows
primarily reflects growth in mortgage loan origination volume which resulted in
an incremental $391.7 million net increase in mortgage loans held for sale.
However, such growth in mortgage loan originations (which accounted for $180.3
million of incremental revenues in 1998) contributed to a $121.4 million
increase in overall net income (exclusive of merger related costs and other
unusual charges, net of tax) in 1998 over 1997. In addition, in 1998, cash
payments related to merger related costs and other unusual charges (from the HFS
Merger in April 1997) were $110.6 million less than in 1997.
Net cash used in investing activities increased $115.8 million in 1998 over 1997
primarily as a result of a $107.1 million increase in capital expenditures. In
1998, $150.8 million was invested in property and equipment which included the
development of integrated business systems within the Relocation segment as well
as systems and office expansion to support growth in the Mortgage segment. Net
cash provided by financing activities increased $450.9 million in 1998 over 1997
primarily due to temporary funding requirements associated with increased
mortgage loans held for sale on the balance sheet at December 31, 1998.
Litigation
On April 15, 1998, our Parent Company publicly announced that it discovered
accounting irregularities in the former business units of CUC. Such discovery
prompted investigations into such matters by the Parent Company and the Audit
Committee of the Parent Company's Board of Directors. As a result of the
findings from the investigations, the Parent Company restated its previously
reported financial results for 1997, 1996 and 1995. Since such announcement,
more than 70 lawsuits claiming to be class actions, two lawsuits claiming to be
brought derivatively on the Parent Company's behalf and three individual
lawsuits have been filed in various courts against the Parent Company and other
defendants. The Court has ordered consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Parent Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred.
While the Parent Company made all adjustments considered necessary as a result
of the findings from the investigations in restating its financial statements,
the Parent Company can provide no assurances that additional adjustments will
not be necessary as a result of these government investigations.
The Parent Company does not believe that it is feasible to predict or determine
the final outcome of these proceedings or investigations or to estimate the
amount or potential range of loss with respect to these proceedings or
investigations. The possible outcomes or resolutions of the proceedings could
include judgements against the Parent Company or settlements and could require
substantial payments by the Parent Company. In addition, the timing of the final
resolution of the proceedings or investigations is uncertain. We believe that
material adverse outcomes with respect to such Parent Company proceedings could
have a material adverse impact on our financial condition and cash flows.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". We will adopt SFAS No. 133 effective
January 1, 2000. SFAS No. 133 requires us to record all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. If the derivative does not qualify as a hedging instrument, the change in
the derivative fair values will be immediately recognized as gain or loss in
earnings. If the derivative does qualify as a hedging instrument, the gain or
loss on the change in the derivative fair values will either be recognized (i)
in earnings as offsets to the changes in the fair value of the related item
being hedged or (ii) be deferred and recorded as a component of other
comprehensive income and reclassified to earnings in the same period during
which the hedged transactions occur. We have not yet determined what impact the
adoption of SFAS No. 133 will have on our financial statements.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", effective for the first fiscal quarter after
December 15, 1998. We have adopted SFAS No. 134 effective January 1, 1999. SFAS
No. 134, requires that after the securitization of mortgage loans, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other interests based on its ability and intent to sell or hold
those investments. As of January 1, 1999, we reclassified mortgage-backed
securities and other interests retained after the securitization of mortgage
loans, from the trading to the available for sale category. Subsequent to the
adoption of SFAS No. 134 such securities and interests are accounted for in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities". The adoption of SFAS No. 134 did not have a material impact
on our financial statements.
Year 2000 Compliance
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after January
1, 2000. To minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we are continually identifying, evaluating,
implementing and testing changes to our computer systems, applications and
software necessary to achieve Year 2000 compliance. We selected a team of
managers to identify, evaluate and implement a plan to bring all of our critical
business systems and applications into Year 2000 compliance prior to December
31, 1999. The Year 2000 initiative consists of four phases: (i) identification
of all critical business systems subject to Year 2000 risk (the "Identification
Phase"); (ii) assessment of such business systems and applications to determine
the method of correcting any Year 2000 problems (the "Assessment Phase"); (iii)
implementing the corrective measures (the "Implementation Phase"); and (iv)
testing and maintaining system compliance (the "Testing Phase"). We have
substantially completed the Identification and Assessment Phases and has
identified and assessed five areas of risk: (i) internally developed business
applications; (ii) third party vendor software, such as business applications,
operating systems and special function software; (iii) computer hardware
components; (iv) electronic data transfer systems between us and our customers;
and (v) embedded systems, such as phone switches, check writers and alarm
systems. Although no assurance can be made, we believe that substantially all of
our systems, applications and related software that are subject to Year 2000
compliance risk have been identified and that we have either implemented or
initiated the implementation of a plan to correct such systems that are not Year
2000 compliant. In addition, as part of our assessment process we are developing
contingency plans as considered necessary. Substantially all of our mission
critical systems have been remediated during 1998. However, we cannot directly
control the timing of certain vendor products and in certain situations,
exceptions have been authorized. We are closely monitoring those situations and
intend to complete testing efforts and any contingency implementation efforts
prior to December 31, 1999. Although we have begun the Testing Phase, we do not
anticipate completion of the Testing Phase until sometime prior to December
1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded and
other systems and other key services. Interruption of those services due to Year
2000 issues could have a material adverse impact on our operations. We initiated
an evaluation of the status of such third party service providers' efforts to
determine alternative and contingency requirements. While approaches to reducing
risks of interruption of business operations vary by business unit, options
include identification of alternative service providers available to provide
such services if a service provider fails to become Year 2000 compliant within
an acceptable timeframe prior to December 31, 1999.
The total cost of our Year 2000 compliance plan is anticipated to be $22.0
million. Approximately $15.0 million of these costs had been incurred through
December 31, 1998, and we expect to incur the balance of such costs to complete
the compliance plan. We are expensing and capitalizing the costs to complete the
compliance plan in accordance with appropriate accounting policies. Variations
from anticipated expenditures and the effect on our future results of operations
are not anticipated to be material in any given year. However, if Year 2000
modifications and conversions are not made, including modifications by our third
party service providers, or are not completed in time, the Year 2000 problem
could have a material impact on our operations, cash flows and financial
condition. At this time, we believe the most likely "worst case" scenario
involves potential disruptions in our operations as a result of the failure of
services provided by third parties.
The estimates and conclusions herein are forward-looking statements and are
based on our best estimates of future events. Risks of completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of our service providers to bring their
systems into Year 2000 compliance.
Forward-Looking Statements
We make statements about our future results in this annual report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a number
of risks and uncertainties that are difficult to predict. Our actual results
could differ materially from those expressed or implied in the forward-looking
statements. Important assumptions and other important factors that could cause
our actual results to differ materially from those in the forward-looking
statements, include, but are not limited to:
o The resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities at the Parent Company;
o Our ability to successfully divest non-core assets;
o Our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
o Competition in our existing and potential future lines of business;
o Our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by financing
arrangements; and
o Our ability and our vendors' and customers' ability to complete the
necessary actions to achieve a Year 2000 conversion for computer systems
and applications.
We derive the forward-looking statements in this annual report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In normal operations, we must deal with effects of changes in interest rates and
currency exchange rates. The following discussion presents an overview of how
such changes are managed and a view of their potential effects.
We use various financial instruments, particularly interest rate and currency
swaps, but also options, floors and currency forwards, to manage its respective
interest rate and currency risks. We are exclusively an end user of these
instruments, which are commonly referred to as derivatives. Established
practices require that derivative financial instruments relate to specific
asset, liability or equity transactions or to currency exposure. More detailed
information about these financial instruments, as well as the strategies and
policies for their use, is provided in notes 10 and 11.
The SEC requires that registrants include information about potential effects of
changes in interest rates and currency exchange in their financial statements.
Although the rules offer alternatives for presenting this information, none of
the alternatives is without limitations. The following discussion is based on
so-called "shock tests", which model effects of interest rate and currency
shifts on the reporting company. Shock tests, while probably the most meaningful
analysis permitted, are constrained by several factors, including the necessity
to conduct the analysis based on a single point in time and by their inability
to include the extraordinarily complex market reactions that normally would
arise from the market shifts modeled. While the following results of shock tests
for interest rate and currencies may have some limited use as benchmarks, they
should not be viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical 10% change in interest rates across all
maturities (sometimes referred to as a "parallel shift in the yield
curve"). Under this model, it is estimated that, all else constant, such an
increase, including repricing effects in the securities portfolio, would
not materially effect our 1999 net earnings based on year-end 1998
positions.
o One means of assessing exposure to changes in currency exchange rates is to
model effects on reported earnings using a sensitivity analysis. Year-end
1998 consolidated currency exposures, including financial instruments
designated and effective as hedges, were analyzed to identify our assets
and liabilities denominated in other than their relevant functional
currency. Net unhedged exposures in each currency were then remeasured
assuming a 10% change in currency exchange rates compared with the U.S.
dollar. Under this model, it is estimated that, all else constant, such a
change would not materially effect our 1999 net earnings based on year-end
1998 positions.
Item 8. Financial Statements and Supplementary Data
See Financial Statement and Financial Statement Schedule Index included
herein.
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Not applicable.
Item 11. Executive Compensation
Not applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not applicable.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14(a)(1) Financial Statements
See Financial Statement and Financial Statement Schedule Index included
herein.
Item 14(a)(2) Financial Statement Schedules
See Financial Statement and Financial Statement Schedule Index included
herein.
Item 14(a)(3) Exhibits
The exhibits identified by an asterisk (*) are on file with the Commission and
such exhibits are incorporated by reference from the respective previous
filings. The exhibits identified by a double asterisk (**) are being filed with
this report.
Item 14(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1998.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By: /s/ Robert D. Kunisch
Robert D. Kunisch
March 31, 1999 Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Principal Executive Officer: Date:
/s/ Robert D. Kunisch March 31, 1999
Robert D. Kunisch
Chief Executive Officer and President
Principal Financial Officer:
/s/ David M. Johnson March 31, 1999
David M. Johnson
Senior Executive Vice President,
Chief Financial Officer and Assistant Treasurer
Principal Accounting Officer:
/s/ Tobia Ippolito March 31, 1999
Tobia Ippolito
Senior Vice President and
Corporate Controller
Board of Directors:
/s/ James E. Buckman March 31, 1999
James E. Buckman
Director
/s/ Stephen P. Holmes March 31, 1999
Stephen P. Holmes
Director
Exhibit No.
2-1 Agreement and Plan of Merger dated as of November 10, 1996,by and among
HFS Incorporated, PHH Corporation and Mercury Acquisition Corp., filed
as Annex 1 in the Joint Proxy Statement/Prospectus included as part of
Registration No.
333-24031(*).
3-1 Charter of PHH Corporation, as amended August 23, 1996 (filed as
Exhibit 3-1 to the Company's Transition Report on Form 10-K filed on
July 29, 1997)(*).
3-2 By-Laws of PHH Corporation, as amended October (filed as Exhibit 3-1 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997).(*)
4-1 Indenture between PHH Corporation and Bank of New York, Trustee, dated
as of May 1, 1992, filed as Exhibit 4(a)(iii) to Registration Statement
33-48125(*).
4-2 Indenture between PHH Corporation and First National Bank of Chicago,
Trustee, dated as of March 1, 1993, filed as Exhibit 4(a)(i) to
Registration Statement 33-59376(*).
4-3 Indenture between PHH Corporation and First National Bank of Chicago,
Trustee, Dated as of June 5, 1997, filed as Exhibit 4(a) to
Registration Statement 333-27715(*).
4-4 Indenture between PHH Corporation and Bank of New York, Trustee Dated
as of June 5, 1997, filed as Exhibit 4(a)(11) to Registration Statement
333-27715(*).
10.1 364-Day Credit Agreement Among PHH Corporation, PHH Vehicle Management
Services, Inc., the Lenders, the Chase Manhattan Bank, as
Administrative Agent and the Chase Manhattan Bank of Canada, as
Canadian Agent, Dated March 4, 1997 as amended and restated through
March 5, 1999, incorporated by reference to Exhibit 10.24 (a) to
Cendant Corporation's Form 10-K for the year ended December 31, 1998.
10.2 Five-year Credit Agreement among PHH Corporation, the Lenders, and
Chase Manhattan Bank, as Administrative Agent, dated March 4, 1997
filed as Exhibit 10.2 to Registration Statement 333-27715(*).
10.3 SECOND AMENDMENT, dated as of September 26, 1997 (the "Second
Amendment"), to (i) 364-day Competitive Advance and Revolving Credit
Agreement, dated as of March 4, 1997 (as heretofore and hereafter
amended, supplemented or otherwise modified from time to time, the
"364-Day Credit Agreement"), PHH Corporation (the "Borrower"), PHH
Vehicle Management Services, Inc., the Lenders referred to therein,
the Chase Manhattan Bank of Canada, as agent for the US Lenders (in
such capacity, the "Administrative Agent"), and The Chase Manhattan
Bank of Canada, as administrative agent for the Canadian Lenders (in
such capacity, the "Canadian Agent"); and (ii) the Five Year
Competitive Advance and Revolving Credit Agreement, dated as of March
4, 1997, among the Borrower, the Lenders referred to therein and the
Administrative Agent (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997).(*)
10.4 Third Amendment to PHH Credit Agreements (Incorporated by reference to
PHH Incorporated's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997, Exhibit 10.1 (*).
10.5 Fourth Amendment, dated as of November 2, 1998, to PHH Five-Year Credit
Agreement incorporated by reference to Exhibit 10.24(a) to Cendant
Corporation's Form 10-K for the year ended December 31, 1998 (*).
10.6 Distribution Agreement between the Company and CS First Boston
Corporation; Goldman, Sachs & Co.; Merrill Lynch & Co.; Merrill Lynch,
Pierce, Fenner & Smith, Incorporated; and J.P. Morgan Securities, Inc.
dated November 9, 1995, filed as Exhibit 1 to Registration Statement
33-63627(*).
10.7 Distribution Agreement between the Company and Credit Suisse; First
Boston Corporation; Goldman Sachs & Co. and Merrill Lynch & Co., dated
June 5, 1997 filed as Exhibit 1 to Registration Statement 333-27715(*).
10.8 Distribution Agreement, dated March 2, 1998, among PHH Corporation,
Credit Suisse First Boston Corporation, Goldman Sachs & Co., Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
J.P. Morgan Securities, Inc. filed as Exhibit 1 to Form 8-K dated March
3, 1998, File No. 1-07797 (*)
10.9 Loan and Security Agreement, dated as of December 17, 1998 among Trac
Funding, Inc. as borrower, Preferred Receivables Funding Corporation,
the financial institutions party thereto and The First National Bank of
Chicago, as Agent (**).
10.10 Loan and Security Agreement, dated as of December 28, 1998, among Trac
Funding II, Inc., as borrower, Quincy Capital Corporation and
Receivables Capital Corporation, as Lenders, and Bank of America
National Trust and Savings Association, as Administrator (**).
12 Schedule containing information used in the computation of the ratio of
earnings to fixed charges (**)
23.1 Consent of Deloitte & Touche LLP (**)
23.2 Consent of KPMG LLP (**)
27 Financial Data Schedule (filed electronically only).(**)
The registrant hereby agrees to furnish to the Commission upon request
a copy of all constituent instruments defining the rights of holders of
long-term debt of the registrant and all its subsidiaries for which
consolidated or unconsolidated financial statements are required to be
filed under which instruments the total amount of securities authorized
does not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis.
* Incorporated by reference
** Filed herewith
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets
as of December 31, 1998 and 1997
Consolidated Statements of Shareholder's Equity
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of PHH Corporation
We have audited the consolidated balance sheet of PHH Corporation and its
subsidiaries (a wholly-owned subsidiary of Cendant Corporation), (the "Company")
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholder's equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1998 and 1997 and the results of their operations and
their cash flows for the years then ended, in conformity with generally accepted
accounting principles.
We also audited the adjustments described in Note 3 that were applied to restate
the financial statements to give effect to the merger of Cendant Corporation's
relocation business with the Company, which has been accounted for in a manner
similar to a pooling-of-interests. Additionally, we also audited the
reclassifications described in Note 3 that were applied to restate the December
31, 1996 financial statements to conform to the presentation used by Cendant
Corporation. In our opinion, such adjustments and reclassifications are
appropriate and have been properly applied.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 17, 1999
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors PHH Corporation
We have audited the consolidated statement of income, shareholder's equity and
cash flows of PHH Corporation and subsidiaries for the year ended December 31,
1996, before the reclassifications and restatement described in Note 3 to the
consolidated financial statements. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements (before reclassifications
and restatement) referred to above present fairly, in all material respects, the
results of operations of PHH Corporation and subsidiaries and their cash flows
for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Baltimore, Maryland
April 30, 1997
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Net Revenues
Fleet services $ 206.1 $ 212.4 $ 199.2
Relocation services (net of interest costs of
$26.9, $32.0 and $35.0) 435.8 409.4 342.1
Mortgage services (net of amortization of mortgage
servicing rights and interest costs of $221.4, $180.6
and $116.9) 353.4 179.3 127.7
------------- ------------- -------------
Service fees, net 995.3 801.1 669.0
Fleet leasing (net of depreciation and interest costs of
$1,279.4, $1,205.2 and $1,132.4) 88.7 59.5 56.7
Other 13.6 - -
------------- ------------- -------------
Net revenues 1,097.6 860.6 725.7
------------- ------------- -------------
Expenses
Operating 469.7 422.9 346.9
General and administrative 171.7 164.4 173.9
Depreciation and amortization 36.8 25.7 28.6
Merger-related costs and other unusual charges (credits) (20.2) 251.0 -
-------------- ------------- -------------
Total expenses 658.0 864.0 549.4
------------- ------------- -------------
Income (loss) before income taxes 439.6 (3.4) 176.3
Provision for income taxes 159.6 44.2 71.8
------------- ------------- -------------
Net income (loss) $ 280.0 $ (47.6) $ 104.5
============= ============== =============
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
December 31,
--------------------------------
1998 1997
------------- -------------
Assets
Cash and cash equivalents $ 233.2 $ 2.1
Accounts and notes receivable (net of allowance
for doubtful accounts of $15.8 and $12.1) 775.2 567.6
Property and equipment, net 219.4 104.1
Other assets 293.2 343.0
------------ -------------
Total assets exclusive of assets under programs 1,521.0 1,016.8
------------ -------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,801.1 3,659.1
Relocation receivables 659.1 775.3
Mortgage loans held for sale 2,416.0 1,636.3
Mortgage servicing rights 635.7 373.0
------------ -------------
7,511.9 6,443.7
------------ -------------
Total assets $ 9,032.9 $ 7,460.5
============ =============
Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 752.0 $ 692.4
Deferred income 57.0 53.3
------------ -------------
Total liabilities exclusive of liabilities under programs 809.0 745.7
------------ -------------
Liabilities under management and mortgage programs
Debt 6,896.8 5,602.6
------------ -------------
Deferred income taxes 341.0 295.7
------------ -------------
Total liabilities 8,046.8 6,644.0
------------ -------------
Commitments and contingencies (Note 12)
Shareholder's Equity
Preferred stock - authorized 3,000,000 shares -- --
Common stock, no par value - authorized 75,000,000 shares;
issued and outstanding 1,000 shares 289.2 289.2
Retained earnings 727.7 544.7
Accumulated other comprehensive loss (30.8) (17.4)
------------ -------------
Total shareholder's equity 986.1 816.5
------------ -------------
Total liabilities and shareholder's equity $ 9,032.9 $ 7,460.5
============ =============
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(In millions, except share data)
Accumulated
Other Total
Common Stock Retained Comprehensive Shareholder's
Shares Amount Earnings Income (Loss) Equity
---------- ----------- ----------- -------------- -------------
Balance, January 31, 1996 34,487,748 $ 91.5 $ 521.9 $ (23.1) $ 590.3
Less: January 1996 activity:
Comprehensive loss:
Net loss - - (8.3) -
Currency translation adjustment - - - 2.4
Total comprehensive loss January 1996 - - - - (5.9)
Cash dividend declared - - 5.9 - 5.9
Stock option plans transactions, net of
related tax benefits (35,400) (.6) - - (.6)
Comprehensive income:
Net income - - 104.5 -
Currency translation adjustments - - - 12.4
Total comprehensive income - - - - 116.9
Cash dividends declared - - (25.0) - (25.0)
Stock option plan transactions, net of
related tax benefits 504,487 10.3 - - 10.3
----------- ----------- ----------- -------------- -----------
Balance, December 31, 1996 34,956,835 101.2 599.0 (8.3) 691.9
Comprehensive loss:
Net loss - - (47.6) -
Currency translation adjustments - - - (9.1)
Total comprehensive loss - - - - (56.7)
Cash dividends declared - - (6.7) - (6.7)
Stock option plan transactions, net of
related tax benefits 876,264 22.0 - - 22.0
Retirement of common stock (35,832,099) - - - -
Parent company capital contribution - 166.0 - - 166.0
----------- ----------- ----------- -------------- -----------
Balance, December 31, 1997 1,000 289.2 544.7 (17.4) 816.5
Comprehensive income:
Net income - - 280.0 -
Currency translation adjustments - - - (13.4)
Total comprehensive income - - - - 266.6
Cash dividends declared - - (97.0) - (97.0)
----------- ----------- ------------ -------------- ------------
Balance, December 31, 1998 1,000 $ 289.2 $ 727.7 $ (30.8) $ 986.1
=========== =========== =========== ============== ===========
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Operating Activities
Net income (loss) $ 280.0 $ (47.6) $ 104.5
Merger-related costs and other unusual charges (credits) (20.2) 251.0 -
Payments of merger-related costs and other unusual charge liabilities (39.1) (149.7) -
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 36.8 25.7 28.6
Gain on sales of mortgage servicing rights (19.8) (15.8) (5.2)
Accounts and notes receivable (83.7) (15.5) (21.0)
Accounts payable and other accrued liabilities 39.1 27.8 28.1
Other, net 188.4 108.4 74.2
------------- ------------- -------------
381.5 184.3 209.2
Management and mortgage programs:
Depreciation and amortization 1,259.9 1,121.9 1,021.7
Origination of mortgage loans (26,571.6) (12,216.5) (8,292.6)
Proceeds on sale and payments from mortgage loans
held for sale 25,791.9 11,828.5 8,219.3
------------- ------------- -------------
Net cash provided by operating activities 861.7 918.2 1,157.6
------------- ------------- -------------
Investing Activities
Additions to property and equipment (150.8) (43.7) (17.6)
Funding of grantor trusts - - (89.8)
Proceeds from sale of subsidiary - - 38.0
Other, net 12.1 (23.9) (2.8)
------------- -------------- --------------
(138.7) (67.6) (72.2)
Management and mortgage programs:
Investment in leases and leased vehicles (2,446.6) (2,068.8) (1,901.3)
Repayment of investment in leases and leased vehicles 987.0 589.0 595.9
Proceeds from sales and transfers of leases and leased vehicles 182.7 186.4 162.8
Equity advances on homes under management (6,484.1) (6,844.5) (4,308.0)
Payments received on advances on homes under management 6,624.9 6,862.6 4,348.9
Additions to mortgage servicing rights (524.4) (270.5) (164.4)
Proceeds from sales of mortgage servicing rights 119.0 49.0 7.1
------------- ------------- -------------
Net cash used in investing activities (1,680.2) (1,564.4) (1,331.2)
-------------- -------------- --------------
Financing Activities
Parent company capital contribution 46.0 90.0 -
Payment of dividends (97.0) (6.6) (25.0)
Other, net - 22.0 10.3
------------- ------------- -------------
(51.0) 105.4 (14.7)
Management and mortgage programs:
Proceeds from debt issuance or borrowings 4,300.0 2,816.3 1,656.0
Principal payments on borrowings (3,089.7) (1,692.9) (1,645.8)
Net change in short term borrowings (93.1) (613.5) 231.8
-------------- -------------- -------------
Net cash provided by financing activities 1,066.2 615.3 227.3
------------- ------------- -------------
Effect of exchange rates on cash and cash equivalents (16.6) 19.2 (46.7)
-------------- ------------- --------------
Increase (decrease) in cash and cash equivalents 231.1 (11.7) 7.0
Cash and cash equivalents at beginning of period 2.1 13.8 6.8
------------- ------------- -------------
Cash and cash equivalents at end of period $ 233.2 $ 2.1 $ 13.8
============= ============= =============
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
PHH Corporation, together with its wholly owned subsidiaries (the
"Company"), is a leading provider of relocation, mortgage and fleet
services. In April 1997, the Company merged with a wholly-owned
subsidiary of HFS Incorporated ("HFS") (the "HFS Merger") and in
December 1997, HFS merged (the "Cendant Merger") with and into CUC
International Inc. ("CUC") to form Cendant Corporation ("Cendant" or the
"Parent Company"). The HFS Merger and the Cendant Merger were both
accounted for as poolings of interests. Effective upon the Cendant
Merger, the Company became a wholly owned subsidiary of Cendant.
However, pursuant to certain covenant requirements in the indentures
under which the Company issues debt, the Company continues to operate
and maintain its status as a separate public reporting entity, which is
the basis under which the accompanying financial statements and
footnotes are presented. A description of the Company's reportable
operating segments are as follows:
Relocation
Relocation services are provided to client corporations for the transfer
of their employees. Such services include appraisal, inspection and
selling of transferees' homes, providing equity advances to transferees
(generally guaranteed by the corporate customer), purchase of a
transferee's home which is sold within a specified time period for a
price which is at least equivalent to the appraised value, certain home
management services, assistance in locating a new home at the
transferee's destination, consulting services and other related
services.
Mortgage
Mortgage services primarily include the origination, sale and servicing
of residential mortgage loans. Revenues are earned from the sale of
mortgage loans to investors as well as from fees earned on the servicing
of loans for investors. The Company markets a variety of mortgage
products to consumers through relationships with corporations, affinity
groups, financial institutions, real estate brokerage firms and other
mortgage banks.
Mortgage services customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association,
while generally retaining mortgage servicing rights. Mortgage servicing
consists of collecting loan payments, remitting principal and interest
payments to investors, holding escrow funds for payment of
mortgage-related expenses such as taxes and insurance, and otherwise
administering the Company's mortgage loan servicing portfolio.
Fleet
Fleet services primarily consist of the management, purchase, leasing,
and resale of vehicles for corporate clients and government agencies.
These services also include fuel, maintenance, safety and accident
management programs and other fee-based services for clients' vehicle
fleets. The Company leases vehicles primarily to corporate fleet users
under operating and direct financing lease arrangements.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts and
transactions of the Company together with its wholly owned subsidiaries.
All material intercompany balances and transactions have been eliminated
in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation is computed by the straight-line method
over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed by the straight-line method over the
estimated useful lives of the related assets or the lease term, if
shorter. The Company periodically evaluates the recoverability of its
long-lived assets, comparing the respective carrying values to the
current and expected future cash flows, on an undiscounted basis, to be
generated from such assets. Property and equipment is evaluated
separately within each business.
Revenue recognition and business operations
Relocation. Relocation services provided by the Company include
facilitating the purchase and resale of the transferee's residence,
providing equity advances on the transferee's residence and home
management services. The home is purchased under a contract of sale and
the Company obtains a deed to the property; however, it does not
generally record the deed or transfer title. Transferring employees are
provided equity advances on their home based on an appraised value
generally determined by independent appraisers, after deducting any
outstanding mortgages. The mortgage is generally retired concurrently
with the advance of the equity and the purchase of the home. Based on
its client agreements, the Company is given parameters under which it
negotiates for the ultimate sale of the home. The gain or loss on resale
is generally borne by the client corporation. In certain transactions,
the Company will assume the risk of loss on the sale of homes; however,
in such transactions, the Company will control all facets of the resale
process, thereby, limiting its exposure.
While homes are held for resale, the amount funded for such homes carry
an interest charge computed at a floating rate based on various indices.
Direct costs of managing the home during the period the home is held for
resale, including property taxes and repairs and maintenance, are
generally borne by the client corporation. The client corporation
normally advances funds to cover a portion of such carrying costs. When
the home is sold, a settlement is made with the client corporation
netting actual costs with any advanced funding.
Revenues and related costs associated with the purchase and resale of a
residence are recognized over the period in which services are provided.
Relocation services revenue is recorded net of costs reimbursed by
client corporations and interest expenses incurred to fund the purchase
of a transferee's residence. Under the terms of contracts with client
corporations, the Company is generally protected against losses from
changes in real estate market conditions. The Company also offers
fee-based programs such as home marketing assistance, household goods
moves and destination services. Revenues from these fee-based services
are taken into income over the periods in which the services are
provided and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection with
the sale of loans, and direct loan origination costs associated with
loans are deferred until such loans are sold. Mortgage loans are
recorded at the lower of cost or market value on an aggregate basis.
Sales of mortgage loans are generally recorded on the date a loan is
delivered to an investor. Gains or losses on sales of mortgage loans are
recognized based upon the difference between the selling price and the
carrying value of the related mortgage loans sold (see Note 7 - Mortgage
Loans Held for Sale).
Fees received for servicing loans owned by investors are based on the
difference between the weighted average yield received on the mortgages
and the amount paid to the investor, or on a stipulated percentage of
the outstanding monthly principal balance on such loans. Servicing fees
are credited to income when received. Costs associated with loan
servicing are charged to expense as incurred.
The Company recognizes as separate assets the rights to service mortgage
loans for others by allocating total costs incurred between the loan and
the servicing rights retained based on their relative fair values. The
carrying value of mortgage servicing rights ("MSRs") is amortized over
the estimated life of the related loan portfolio in proportion to
projected net servicing revenues. Such amortization is recorded as a
reduction of loan servicing fees in the consolidated statements of
operations. Projected net servicing income is in turn determined on the
basis of the estimated future balance of the underlying mortgage loan
portfolio, which declines over time from prepayments and scheduled loan
amortization. The Company estimates future prepayment rates based on
current interest rate levels, other economic conditions and market fore-
casts, as well as relevant characteristics of the servicing portfolio,
such as loan types, interest rate stratification and recent prepayment
experience. MSRs are periodically assessed for impairment, which
is recognized in the consolidated statements of operations during
the period in which impairment occurs as an adjustment to the
corresponding valuation allowance. Gains or losses on the sale of MSRs
are recognized when title and all risks and rewards have irrevocably
passed to the buyer and there are no significant unresolved
contingencies (see Note 8 - Mortgage Servicing Rights).
Fleet. The Company primarily leases its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases) (see Note 6 - Net
Investment in Leases and Leased Vehicle). Each lease is either
classified as an operating lease or direct financing lease, as defined.
Lease revenues are recognized based on rentals. Revenues from fleet
management services other than leasing are recognized over the period in
which services are provided and the related expenses are incurred.
Income taxes
The Company's income taxes are included in the consolidated federal
income tax return of Cendant. In addition, the Company files unitary,
consolidated, and combined state income tax returns with Cendant in
jurisdictions where required. Income tax expense is based on allocations
from Cendant and is computed as if the Company filed its federal and
state income tax returns on a stand-alone basis. The Company computes
income tax expense and deferred income taxes using the asset and
liability method. No provision has been made for U.S. income taxes on
approximately $205.4 million of cumulative undistributed earnings of
foreign subsidiaries at December 31, 1998 since it is the present
intention of management to reinvest the undistributed earnings
indefinitely in foreign operations. The determination of unrecognized
deferred U.S. tax liability for unremitted earnings is not practicable.
In addition, it is estimated that foreign withholding taxes of
approximately $3.2 million may have been payable at December 31, 1998,
if such earnings were remitted.
Parent Company stock option plans
Certain executives and employees of the Company participate in stock
option plans sponsored and administered by the Parent Company. The
Company does not sponsor or maintain any stock option plans. Accounting
Principles Board ("APB") Opinion No. 25 is applied in accounting for
options issued under the Parent Company's plans. Under APB No. 25,
because the exercise price of the stock options are equal to or greater
than the market prices of the underlying Parent Company stock on the
date of grant, no compensation expense is recognized.
Translation of foreign currencies
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates in effect as of the balance sheet dates. Equity accounts
are translated at historical exchange rates and revenues, expenses and
cash flows are translated at the average exchange rates for the periods
presented. Translation gains and losses are included as a component of
comprehensive income (loss) in the consolidated statements of
shareholder's equity.
New accounting standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities". The Company will
adopt SFAS No. 133 effective January 1, 2000. SFAS No. 133 requires the
Company to record all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. If the derivative
does not qualify as a hedging instrument, the change in the derivative
fair values will be immediately recognized as a gain or loss in
earnings. If the derivative does qualify as a hedging instrument, the
gain or loss on the change in the derivative fair values will either be
recognized (i) in earnings as offsets to the changes in the fair value
of the related item being hedged or (ii) be deferred and recorded as a
component of other comprehensive income and reclassified to earnings in
the same period during which the hedged transactions occur. The Company
has not yet determined what impact the adoption of SFAS No. 133 will
have on its financial statements.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to the presentation used in 1998.
3. Historical Adjustments
Certain reclassifications have been made to the historical financial
statements of the Company to conform with the presentation used
subsequent to the HFS Merger. Additionally, the historical financial
statements of the Company were restated to give effect to the June 1997
merger, which was accounted for in a manner similar to a
pooling-of-interests, of HFS's relocation business with and into the
Company. The effect of such reclassifications and restatement
(collectively, the "Adjustments") on the consolidated statement of
income for the year ended December 31, 1996 was as follows:
As
previously As
reported Adjustments restated
---------- ----------- --------
(In millions)
Net revenues $ 1,938.5 $ (1,212.8) $ 725.7
Total expenses 1,790.3 (1,240.9) 549.4
Provision for income taxes 60.6 11.2 71.8
---------- ----------- --------
Net income $ 87.6 $ 16.9 $ 104.5
========== ========== ========
4. Merger-Related Costs and Other Unusual Charges
The Company incurred merger-related costs and other unusual charges
("Unusual Charges") in 1997 of $251.0 million primarily associated with
the HFS Merger and the Cendant Merger. Liabilities associated with
Unusual Charges are classified as a component of accounts payable and
other current liabilities. The reduction of such liabilities from
inception is summarized by category of expenditure and by merger as
follows:
1998 Activity
Net 1997 Balance at --------------------------------- Balance at
Unusual 1997 December 31, Cash December 31,
(In millions) Charges Reductions 1997 Payments Non-Cash Adjustments 1998
---------- ---------- ----------- --------- --------- ----------- ------------
Professional fees $ 14.5 $ (13.8) $ 0.7 $ (4.3) $ - $ 3.6 $ -
Personnel related 147.5 (94.5) 53.0 (22.9) - (19.1) 11.0
Business terminations 68.8 (67.3) 1.5 (0.6) 4.7 (5.6) -
Facility related and
other 20.2 (4.7) 15.5 (11.3) - 0.9 5.1
---------- ---------- ----------- --------- -------- ----------- ----------
Total $ 251.0 $ (180.3) $ 70.7 $ (39.1) $ 4.7 $ (20.2) $ 16.1
========== ========== =========== ========= ======== =========== ==========
Cendant Merger $ 42.2 $ (30.0) $ 12.2 $ (14.5) $ - $ 3.8 $ 1.5
HFS Merger 208.8 (150.3) 58.5 (24.6) 4.7 (24.0) 14.6
----------- ---------- ----------- --------- -------- ----------- ----------
Total $ 251.0 $ (180.3) $ 70.7 $ (39.1) $ 4.7 $ (20.2) $ 16.1
=========== ========== =========== ========= ======== =========== ==========
HFS Merger Charge
The Company incurred $223.1 million of Unusual Charges in the second
quarter of 1997 primarily associated with the HFS Merger. During the
fourth quarter of 1997, as a result of the changes in estimates, the
Company reduced certain merger-related liabilities, which resulted in a
$14.3 million credit to Unusual Charges. The Company incurred $110.0
million of professional fees and executive compensation expenses
directly as a result of the HFS Merger, and also incurred $113.1 million
of expenses resulting from reorganization plans formulated prior to and
implemented as of the merger date. The HFS Merger afforded the combined
company, at such time, an opportunity to rationalize its combined
corporate infrastructure as well as its businesses and enabled the
corresponding support and service functions to gain organizational
efficiencies and maximize profits. Management initi