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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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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 fiscal year April 30, 1996 Commission file number 1-7797
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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)
11333 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
(410) 771-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, no par value New York Stock Exchange
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 June 30, 1996: $990,942,207.
Number of shares of PHH Corporation outstanding on June 30, 1996: 34,769,902*.
*Reflects the two-for-one common stock split declared June 24, 1996. See
capital stock note in Notes to Consolidated Financial Statements.
Documents Incorporated by Reference
Part III -- Proxy Statement for 1996 Annual Meeting of Stockholders
PHH CORPORATION
PART I
Item l. Business
GENERAL
The Company provides a broad range of integrated management services, expense
management programs and mortgage banking services to more than 3,000 major
clients, including many of the world's largest corporations, as well as
government agencies and affinity groups. Its primary business service segments
consist of vehicle management, real estate and mortgage banking.
Information as to revenues, operating income and identifiable assets by
business segment and geographic area is included in the business segments note
in the Notes to Consolidated Financial Statements.
As of June 30, 1996, the Company and its subsidiaries had approximately 5700
employees.
Significant Customers
No customer purchased services totaling 10% or more of consolidated revenues
in 1996, 1995 or 1994.
VEHICLE MANAGEMENT SERVICES
Vehicle management services consist primarily of the management, purchase,
leasing and resale of vehicles for corporate clients and government agencies,
including fuel and expense management programs and other fee-based services for
clients' vehicle fleets.
Fleet Management Services
The Company provides fully integrated vehicle management and leasing programs
through PHH Vehicle Management Services. These programs were developed to meet
the specific needs of companies using large and small numbers of cars and trucks
and consist of managerial, leasing and advisory services, aimed at reducing and
controlling the cost of operating corporate fleets.
The Company's advisory services for automobile fleet management programs include
recommendations on the makes and models of cars and accessories best suited to
the client's use, the determination of persons eligible for company cars, the
method of reimbursing field representatives for actual car expenses, the care
and maintenance of cars and the personal use of company cars.
Managerial services for automobile fleet programs include purchasing
automobiles, arranging for their delivery through new car dealers located
throughout the United States, Canada, the United Kingdom and the Republic of
Ireland, as well as capabilities in Mexico and throughout Europe, complying
with various local registration, title, tax and insurance requirements,
pursuing warranty claims with automobile manufacturers and selling used cars at
replacement time.
The Company offers similar programs and services for vans and light and
heavy-duty truck fleets. Advisory services offered include the determination of
the vehicle specifications, makes, models and equipment best suited to perform
the functions required by the client. Managerial services include purchasing new
vans, light and heavy-duty trucks, trailers, truck bodies and equipment from
manufacturers and franchised dealers, the performance of title, registration,
tax and insurance functions, arranging for them to be titled, licensed and
delivered to locations designated by clients, verifying invoices and selling
used vehicles at replacement time.
The Company offers various leasing plans for its vehicle leasing programs. Under
these plans, the Company provides for the financing primarily through the
issuance of commercial paper and medium-term notes and through unsecured
borrowings under revolving credit agreements and bank lines of credit. See the
Liabilities Under Management Programs note in Notes to Consolidated Financial
Statements.
The Company leases vehicles for minimum lease terms of twelve months or more
under either direct financing or operating lease agreements. The Company's
experience indicates that the full term of the leases may vary considerably due
to extensions beyond the minimum lease term. Under the direct financing lease
agreements, resale of the vehicles upon termination of the lease is generally
for the account of the lessee. The Company has two distinct types of operating
leases. Under one type, the open-end operating lease, resale of the vehicles
upon termination of the lease is for the account of the lessee except for a
minimum residual value which the Company
1
has guaranteed. The Company's experience has been that vehicles under this type
of lease agreement have consistently been sold for amounts exceeding
residual value guarantees. Under the other type of operating lease, the
closed-end operating lease, resale of the vehicle on termination of the lease is
for the account of the Company. The Company's fleet management services may be
the same whether the client owns or leases the vehicles. In either case, the
client generally operates the vehicles on a net basis, paying all the
actual costs incidental to their operation, including gasoline, oil,
repairs, tires, depreciation, vehicle licenses, insurance and taxes. The
fee charged by the Company for its services is based upon either a percentage
of the original cost of the vehicle or a stated management fee and, in the
case of a leasing client, includes the interest cost incurred in financing
the vehicle.
Fuel and Expense Management Programs
The Company offers fuel and expense management programs to corporations and
government agencies for the control of automotive business travel expenses in
each of the United States, Canada, United Kingdom, Republic of Ireland and
Germany, with capabilities in Mexico and throughout Europe. Through a service
card and billing service, a client's traveling representatives are able to
purchase various products and services such as gasoline, tires, batteries,
glass and maintenance services at numerous outlets. The Company also provides
a series of safety and accident management related programs, statistical
control reports detailing expenses related to the general operation of vehicles,
and a program which monitors and controls the type and cost of vehicle
maintenance for individual automobiles.
The Company also provides a fuel and expense management program and a
centralized billing service for companies operating truck fleets in the
United Kingdom, as well as in the United States, Republic of Ireland and
Germany. Drivers of the clients' trucks are furnished with courtesy cards
together with a directory listing the names of strategically located truck stops
and service stations which participate in this program. Service fees are earned
for billing, collection and record keeping services and for assuming credit
risk. These fees are paid by the truck stop or service stations and/or the
fleet operator and are based upon the total dollar amount of fuel purchased or
the number of transactions processed.
Competitive Conditions
The principal methods of competition within vehicle management services are
service quality and price.
In the United States and Canada, an estimated 30% of the market for vehicle
management services is served by third-party providers. There are 5 major
providers of such services in North America, as well as an estimated several
hundred local and regional competitors. The Company is the second largest
provider of comprehensive vehicle management services in North America.
In the United Kingdom, the portion of the fuel card services and vehicle
management services markets served by third-party providers is an estimated 37%
and 45%, respectively. The Company is the market leader among the 4 major
nationwide providers of fuel card services, and the 6 major nationwide providers
of vehicle management services. Numerous local and regional competitors serve
each such market element.
The following sets forth certain statistics concerning automobiles, vans, light,
medium and heavy-duty trucks for which the Company provides managerial, leasing
and/or advisory services primarily in the United States, Canada, the United
Kingdom, the Republic of Ireland and Germany at the end of the fiscal years
shown:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Ending number of vehicles
under management: 482,600 463,200 450,400 454,300 467,000
Average cost of vehicles $ 19,639 $ 19,167 $ 18,016 $ 17,203 $ 16,072
Number of vehicles purchased 117,700 112,400 108,000 115,800 117,900
Number of fuel and service card
transactions (in thousands) 56,000 51,400 47,300 45,600 44,100
Gallons of fuel processed
(in thousands) 1,069,000 1,136,000 1,073,000 1,039,000 1,076,000
REAL ESTATE SERVICES
The Company provides real estate services principally to large
international corporations, government agencies and financial institutions,
and to members of affinity groups in the United States, Canada, the United
Kingdom and
2
the Republic of Ireland through PHH Real Estate Services. The Company also
has capabilities in Mexico and throughout Europe. Principal services consist of
counseling transferred employees of clients and the purchase, management and
resale of their homes. The Company's real estate services offer clients the
opportunity to reduce employee relocation costs and facilitate employee
relocation.
The Company pays a transferring employee his/her equity in a home based upon a
value determined by independent appraisals or based on a contract to sell which
has been agreed with the employee. The employee's mortgage is generally
retired concurrently with the purchase of the equity; otherwise the Company
normally accepts the administrative responsibility for making payments on
any mortgages. Following payment to the employee, the corporate client
normally pays the Company an advance billing to cover costs to be
incurred during the period the home is held for resale, including debt service
on any existing mortgage. These costs are paid by the Company and, after
ultimate resale, a settlement is made with the corporate client reconciling the
advance billing and the expense payments. Under the terms of the client
contracts, the Company is generally protected against losses from changes in
market conditions.
Funds to finance the purchase of homes are provided primarily through the
issuance of commercial paper and medium-term notes and through unsecured
borrowings under revolving credit agreements and bank lines of credit, or may be
provided by the client. Interest costs are billed directly to the Company's
clients. See the Liabilities Under Management Programs note in Notes to
Consolidated Financial Statements.
The Company's real estate services subsidiaries also offer programs which
provide the planning and implementation for group moves of corporate clients,
home marketing assistance, property management, movement of household goods,
destination services and asset management for financial institutions.
Competitive Conditions
The principal methods of competition within real estate services are service
quality and price. In the United States, Canada and the United Kingdom, an
estimated 22% of the market for real estate services is served by third-party
providers.
In each of the United States, Canada and the United Kingdom, there are 4 major
national providers of such services. There are an estimated several dozen local
and regional competitors in each such country. The Company is the market leader
in the United States and Canada, and third in the United Kingdom.
The following sets forth certain statistics concerning real estate services in
the United States, Canada and the United Kingdom for the fiscal years shown:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Asset-based services:
Home purchase authorizations 32,400 31,000 31,800 31,800 30,400
Transferee homes sold 27,900 25,300 28,900 28,400 28,100
Average value of US transferee
homes sold (1) $177,000 $171,000 $165,000 $156,000 $156,600
Fee-based services transactions:
Home finding 25,890 24,020 23,180 15,620 10,540
Household goods moves 17,310 14,700 13,720 8,730 7,170
Property dispositions 8,580 7,250 4,180 3,610 2,690
-------- ------- ------- ------ ------
51,780 45,970 41,080 27,960 20,400
(1) Revenues for real estate services in the United States are significantly
determined based on the value of homes sold, while revenues for the
United Kingdom and Canadian segments are not related to the value of
homes sold; therefore, this table only includes the average value of U.S.
homes sold.
MORTGAGE BANKING SERVICES
The Company provides U.S. residential mortgage banking services through PHH
Mortgage Services. These services consist of the origination, sale and servicing
of residential first mortgage loans. A variety of first mortgage products are
marketed to consumers through relationships with corporations, affinity groups,
financial institutions, real estate brokerage firms and other mortgage banks.
3
PHH Mortgage Services is a centralized mortgage lender conducting business in
all 50 states. It utilizes its computer system and an extensive telemarketing
operation to allow the consumer to complete the entire application process
over the telephone. Utilizing local appraisers, title companies and closing
attorneys, the Company can effectively administer its products and services
anywhere in the nation.
The mortgage unit 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 the Federal National Mortgage Association (FNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), or the Government National Mortgage
Association (GNMA) while generally retaining mortgage servicing rights. The
guarantees provided by FNMA and FHLMC are on a non-recourse basis to the
Company. Guarantees provided by GNMA are to the extent recoverable from certain
government insurance programs.
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.
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. The Company
ranked 15th among loan originators for calendar year 1995.
The following sets forth certain statistics concerning mortgage banking services
for the fiscal years shown:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Mortgage loan closings
(in millions) $ 7,853 $ 3,432 $ 8,074 $ 5,618 $3,797
Mortgage servicing portfolio at April 30
(in millions) $21,676 $16,017 $16,645 $11,047 $7,517
Delinquency rate 1.4% 1.3% 1.2% 1.1% 1.8%
Item 2. Properties
The corporate offices of the Company are located at 11333 McCormick Road, Hunt
Valley, Maryland, in an eight-story building which is owned by the Company and
contains approximately 163,000 square feet of office space.
The offices of PHH Vehicle Management Services North American operations are
located throughout the US 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, having 59,400 square
feet, leased until February 2003. Other facilities include office space totaling
10,400 square feet in five cities leased as full-service branch offices for
fleet management activities for various terms to April 2003; two dealerships,
one located in Williamsburg, Virginia, having 101,000 square feet, leased until
March 1998 and the other in Edenton, North Carolina, having 337,100 square feet,
leased until December 1998; and regional offices located in Montreal, Calgary,
Vancouver, Mississauga & Quebec, Canada, having a total of 43,100 square feet,
leased for various terms to December 2002.
The offices of PHH Real Estate Services North American operations are located
throughout the US and Canada. Primary office facilities are located in offices
located in Danbury, Connecticut, having 92,600 square feet, leased until January
2000 and offices in Danbury, Connecticut, having 30,000 square feet, leased
until November 1998. Other facilities include office space totaling 59,200
square feet in Oak Brook, Illinois leased until April 2003; 23,350 square feet
in Concord, California leased until October 1998; 47,800 square feet in Irving,
Texas leased until November 1998; 29,300 square feet in eight other cities for
various terms to June 2002; and office space totaling 43,320 square feet in
Toronto, Calgary, Montreal, Vancouver, Ottawa and Nova Scotia, leased for
various terms to May 2004.
The offices of PHH Fantus are located in Princeton, New Jersey, in offices
having 5,700 square feet, leased until 2001 and offices in Chicago, Illinois
having 8,800 square feet, leased until September 2004.
4
The offices of PHH Mortgage Services are located primarily in a 127,000 square
foot building in Mount Laurel, New Jersey, which is owned by the Company; and
offices in Mount Laurel, New Jersey, having 88,000 square feet, leased until
April 2002 and in Englewood, Colorado, having 27,900 square feet, leased until
June 1997.
The offices of Vehicle Management Services and Real Estate Services operations
located in the United Kingdom and Europe are as follows: a 129,000 square foot
building which is owned by the Company located in Swindon, United Kingdom; and
field offices having 35,400 square feet located in Swindon and Manchester,
United Kingdom; Munich, Germany; and Dublin, Ireland, are leased for various
terms to February 2016.
The Company considers that its properties are generally in good condition and
well maintained and are generally suitable and adequate to carry on the
Company's business.
Item 3. Legal Proceedings
The Company is party to various litigation arising in the ordinary course of
business and is plaintiff in several collection matters which are not considered
material either individually or in the aggregate.
Item 4. Results of Votes of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended April 30, 1996.
5
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is publicly traded on the New York Stock Exchange
under the symbol "PHH". The common stock is entitled to dividends when and as
declared by the Board of Directors. The payment of future dividends will depend
upon earnings, the financial condition of the Company and other relevant
factors. At April 30, 1996, there were 1,733 holders of common stock. The
dividends and high and low closing prices for each quarter during the Company's
1996 and 1995 fiscal years were as follows:
Dividend Price
Paid High Low
1996
First quarter $.17 $23 3/4 $19 5/8
Second quarter $.17 $23 3/8 $21
Third quarter $.17 $25 3/4 $21 7/8
Fourth quarter $.17 $28 3/8 $24 1/2
1995
First quarter $.16 $19 3/8 $17 1/2
Second quarter $.16 $19 $17 3/8
Third quarter $.16 $19 $16 3/4
Fourth quarter $.16 $20 1/4 $17 5/8
On June 24, 1996, the Board of Directors voted to increase the dividend on
common stock by 12% and authorized a two-for-one common stock split. The
new quarterly dividend of $.19, adjusted for the common stock split, will be
payable on July 31, 1996. The cash dividend and the common stock split will
apply to stockholders of record on July 5, 1996. The shares outstanding
and all references to net income, dividends or stock price per common share
in this report reflect the two-for-one common stock split.
6
Item 6. Selected Financial Data
(In thousands except per share data)
Years ended April 30, 1996 1995 1994 1993 1992
Revenues:
Vehicle management services $ 1,371,150 $ 1,257,696 $ 1,162,483 $ 1,069,484 $ 992,514
Real estate services 812,851 686,836 816,261 829,336 849,871
Mortgage banking services 195,599 126,094 155,935 122,111 89,099
- - - ---------------------------------------------------------------------------------------------------------------------------
$ 2,379,600 $ 2,070,626 $ 2,134,679 $ 2,020,931 $ 1,931,484
- - - ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 139,148 $ 121,318 $ 109,796 $ 94,238 $ 83,117
- - - ---------------------------------------------------------------------------------------------------------------------------
Net income $ 81,620 $ 71,662 $ 64,558 $ 56,417 $ 49,979
- - - ---------------------------------------------------------------------------------------------------------------------------
Net income per share* $ 2.33 $ 2.08 $ 1.82 $ 1.63 $ 1.46
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share* $ .68 $ .64 $ .60 $ .60 $ .60
- - - ---------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data
As of April 30, 1996 1995 1994 1993 1992
- - - ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,672,990 $ 5,039,533 $ 4,766,783 $ 4,613,028 $ 4,365,031
Assets under management programs $ 3,783,032 $ 3,464,889 $ 3,241,508 $ 3,391,755 $ 3,113,120
Liabilities under management programs $ 3,438,804 $ 3,079,629 $ 2,841,905 $ 2,900,934 $ 2,771,250
Other debt $ 903,442 $ 735,886 $ 719,822 $ 511,128 $ 405,017
Stockholders' equity $ 608,496 $ 539,951 $ 498,313 $ 457,483 $ 423,287
- - - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996. See capital
stock note in Notes to Consolidated Financial Statements.
7
Item 7. Management's Discussion and Analysis of Operations
Results of Operations
All comparisons within the following discussion are to the previous year, unless
otherwise stated.
Consolidated net income increased 14% to $81.6 million in fiscal 1996 while net
income per share increased 12% to $2.33. Increased income in the mortgage
banking services and vehicle management services business segments were
partially offset by a decrease in the real estate services business segment. In
fiscal 1995, net income increased 11% to $71.7 million and net income per share
increased 14% to $2.08, reflecting increases in the vehicle management services
and real estate services business segments which were partially offset by a
decrease in the mortgage banking services business segment.
The Board of Directors, meeting on June 24, 1996, authorized a two-for-one
common stock split which will be distributed on July 31, 1996, and will apply to
stockholders of record on July 5, 1996. The shares outstanding and all
references to net income, dividends or stock price per common share in this
report reflect the two-for-one common stock split.
Consolidated revenues increased 15% to $2.4 billion in fiscal 1996 and decreased
3% to $2.1 billion in fiscal 1995.
The Company incurs and pays certain costs on behalf of its clients which include
payments to third parties as a component of its service delivery. These direct
costs are billed to clients and recognized as both revenue and expense.
Additionally, other direct costs include depreciation on vehicles under
operating leases and amortization of mortgage servicing fees. Management
analyzes its business results in terms of net revenue and total operating
expenses. Net revenue, as defined by the Company, includes revenue earned
reduced by the direct costs described above and by related interest required to
fund assets. Operating expenses are all other costs incurred in delivering
services to clients.
Operating Income (in thousands) 1996 1995 1994
- - - --------------------------------------------------------------------------------
Net revenues $592,661 $518,332 $542,059
Operating expenses 453,513 397,014 432,263
- - - --------------------------------------------------------------------------------
Operating income $139,148 $121,318 $109,796
- - - --------------------------------------------------------------------------------
Net revenues increased 14% to $592.7 million in fiscal 1996, and operating
income increased 15% to $139.1 million. Mortgage banking services and vehicle
management services achieved increases in both net revenue and operating income
while real estate services, which increased net revenues, experienced a decrease
in operating income. In fiscal 1995 net revenues decreased 4% to $518.3 million
while operating income increased 10% to $121.3 million due to increases in the
vehicle management and real estate business segments offset by a decline in the
mortgage banking segment. The following discussion is an analysis by business
segment for net revenues and operating income.
Vehicle Management Services
Vehicle management services are offered to corporate clients and government
agencies to assist them in effectively managing their vehicle fleet costs,
reducing in-house administrative costs and enhancing driver productivity.
Asset-based services generally require an investment by the Company in the
vehicle and include new vehicle purchasing, open- and closed-end operating
leasing, direct finance leasing and used vehicle marketing. Fee-based services
include maintenance management programs, expense reporting, fuel management
programs, accident and safety programs and other driver services for managing
clients' vehicle fleets.
Operating Income (in thousands) 1996 1995 1994
- - - --------------------------------------------------------------------------------
Net revenues:
Asset-based $131,326 $134,933 $140,395
Fee-based 115,098 105,215 94,411
Sale of subsidiary 11,688 -- --
- - - --------------------------------------------------------------------------------
Total net revenues 258,112 240,148 234,806
Operating expenses 193,576 184,480 188,576
- - - --------------------------------------------------------------------------------
Operating income $ 64,536 $ 55,668 $ 46,230
- - - --------------------------------------------------------------------------------
Fiscal 1996 Results
Net revenues for vehicle management services represent revenues earned and
billed to clients reduced by depreciation on vehicles under operating leases and
related interest. Total net revenues for this segment increased 8% to $258.1
million. Net revenues derived from asset-based products decreased 3% to $131.3
million due primarily to the anticipated decline in the volume and gains on the
sale of vehicles under closed-end operating leases and the effect of interest
received from a US federal income tax refund in 1995 attributable to this
segment. The decrease was partially offset by an increase in management fees per
vehicle and the effect of increases in total vehicles under management. Net
revenues derived from fee-based services increased 9% to $115.1 million in
fiscal 1996. The increase was due to growth in fuel and maintenance management
programs reflecting increased market penetration in the US and UK, and continued
growth in accident management programs and other driver services in North
America and the UK. The increase was partially offset by the loss of net
revenues of the Company's North American truck fuel management operation since
its sale in February 1996. The sale of the Company's subsidiary resulted in a
net gain of $11.7 million, which is reflected in net revenues.
Vehicle management services operating income increased 16% to $64.5 million in
fiscal 1996. This was due to the increase in net revenues described above which
was partially offset by higher operating expenses. These increases reflect costs
incurred in support of the volume growth in fee-based services partially offset
by the decrease in the North American truck fuel management subsidiary expenses
as a result of its sale, as described above, and the effects of the costs
incurred in 1995 associated with office space consolidation.
Key Operating Factors 1996 1995 1994
- - - --------------------------------------------------------------------------------
Number of vehicles
purchased 117,700 112,400 108,000
Percent change 5% 4% (7%)
Number of fuel and
service card transactions
(in thousands) 56,000 51,400 47,300
Percent change 9% 9% 4%
Gallons of fuel processed
(in thousands) 1,069,000 1,136,000 1,073,000
Percent change (6%) 6% 3%
Number of vehicles under
management 482,600 462,300 450,400
Percent change 4% 3% (1%)
- - - --------------------------------------------------------------------------------
8
The Company's profitability from vehicle management services is affected by the
number of vehicles managed and related services provided for clients. Therefore,
profitability can be negatively affected by the general economy as corporate
clients exercise a higher degree of fiscal caution by decreasing the size of
their vehicle fleets or by extending the service period of existing fleet
vehicles. Conversely, operating results are positively affected as clients
increasingly choose to outsource their vehicle management service operations to
the Company and through further penetration of fee-based services. Results can
also be enhanced as the Company expands into new markets, increases its product
diversity, broadens its client base and continues its productivity and quality
improvement efforts.
Fiscal 1995 Results
Net revenues for this segment increased 2% to $240.1 million in fiscal 1995. Net
revenues derived from asset-based products decreased 4% to $134.9 million due to
a slight decrease in the number of leased vehicles under management and
reduction in revenues due to the benefit in the prior year of certain vehicle
manufacturer incentive programs. The decrease in net revenues from asset-based
products was somewhat offset by an increase in management fees per vehicle
resulting from a higher average cost of vehicles managed, and the effect of
interest received from a US federal income tax refund attributable to this
segment, as well as the results of a favorable US and UK resale market for
disposition of vehicles under closed-end operating leases. Net revenues derived
from fee-based services increased 11% to $105.2 million in fiscal 1995. The
increase was due to growth in fuel management programs reflecting increased
market penetration in the US and UK, growth in accident management programs,
primarily in the UK, and growth in other driver services in North America and
the UK.
Vehicle management services operating income increased 20% to $55.7 million in
fiscal 1995. This was due to the increase in net revenues described above as
well as an overall reduction in operating expenses. Cost reductions were
achieved primarily in the area of information technology, slightly offset by
one-time costs associated with office space consolidation, other costs incurred
to integrate our US and Canadian operations and higher operating expenses in
support of volume growth in fee-based services.
Real Estate Services
Real estate services primarily consist of the purchase, management and resale of
homes for transferred employees of corporate clients, government agencies and
members of affinity group clients. Asset-based services are defined as
relocation services involving the purchase and resale of a home. Fee-based
services include assistance in selecting homes at destination locations,
marketing homes, moving household goods, property disposition services to
financial institutions and other consulting services.
Operating Income (in thousands) 1996 1995 1994
- - - --------------------------------------------------------------------------------
Net revenues:
Asset-based $116,722 $108,903 $116,190
Fee-based 88,133 80,031 68,986
- - - --------------------------------------------------------------------------------
Total net revenues 204,855 188,934 185,176
Operating expenses 173,014 153,715 163,676
- - - --------------------------------------------------------------------------------
Operating income $ 31,841 $ 35,219 $ 21,500
- - - --------------------------------------------------------------------------------
Fiscal 1996 Results
Real estate services net revenues consist of revenues earned and billed to
clients reduced by direct costs paid on behalf of clients and related interest.
Total real estate services net revenues increased 8% to $204.9 million.
Asset-based net revenues increased 7% to $116.7 million primarily due to an
increase in the number of transferee homes sold in the US and UK, and the
product mix of homes sold compared to the prior year. Asset-based net revenues
also benefited from an increase in the average value of transferee homes sold in
the US. Fee-based net revenues increased 10% to $88.1 million primarily due to
increased levels of household goods moves in the US, home finding services for
relocating employees and affinity group members, and increased referral fees
from our network of brokers in the US and UK, partially offset by a decrease in
the volume of units managed in Canada.
Real estate services operating income decreased 10% to $31.8 million as a 13%
increase in operating expenses more than offset the increase in net revenues
discussed above. The increase in operating expenses was related to the increased
volume growth in fee-based services and increases in systems costs in our
domestic asset management operations and in our Canadian operations.
Key Operating Factors 1996 1995 1994
- - - --------------------------------------------------------------------------------
Asset-based services:
Home purchase
authorizations 32,400 31,000 31,800
Percent change 4% (2%) --
Transferee homes sold 27,900 25,300 28,900
Percent change 10% (12%) 2%
Average value of US
homes sold $177,000 $171,000 $165,000
Percent change 4% 4% 6%
Fee-based services
transactions:
Home finding 25,890 24,020 23,180
Household goods 17,310 14,700 13,720
Property dispositions 8,580 7,250 4,180
- - - --------------------------------------------------------------------------------
Total 51,780 45,970 41,080
Percent change 13% 12% 47%
- - - --------------------------------------------------------------------------------
The Company is generally not at risk on its carrying value of homes should there
be a downturn in the housing market. Operating results may be negatively
affected should clients reassess their relocation plans as part of cost control
measures and authorize fewer home purchase transactions, utilizing a greater
portion of fee-based real estate services. At the same time, operating results
should be affected positively as clients increasingly choose to outsource their
real estate services to the Company and utilize a greater portion of fee-based
services and as the Company expands into new markets, enhances its product
diversity, broadens its client base and continues its productivity and quality
improvement efforts.
Fiscal 1995 Results
Real estate services net revenues increased 2% to $188.9 million in fiscal 1995.
Asset-based net revenues decreased 6% to $108.9 million. The decrease was
primarily due to a reduction
9
in margins reflecting a shift in product mix to more diversified, lower-priced
products in response to client demand and to meet clients' changing relocation
benefits offered to their transferring employees, a reduction in the number of
transferee homes sold, and a lower level of funding provided to clients for
equity advances. Asset-based net revenues benefited from an increase in the
average value of transferee homes sold in the US. Fee-based net revenues
increased 16% to $80.0 million primarily due to increased levels of residential
properties managed for financial institutions, household goods moves and home
finding services for relocating employees and affinity group members.
Real estate services operating income increased 64% to $35.2 million. The
increase was due to improvements in net revenues described above and, to a
larger extent, to a 6% reduction in operating expenses resulting from
productivity improvements, a reduction in cost structure corresponding to the
changing product mix for relocation services on a global basis and a decrease in
costs associated with the integration of an acquisition in Canada in the prior
year.
Mortgage Banking Services
Mortgage banking services primarily consist of the origination, sale and
servicing of residential first mortgage loans. The Company markets a variety of
first mortgage products to consumers through relationships with corporations,
affinity groups, government agencies, financial institutions, real estate
brokerage firms and other mortgage banks.
Operating Income (in thousands) 1996 1995 1994
- - - --------------------------------------------------------------------------------
Net revenues:
Servicing $ 57,030 $ 50,296 $ 21,056
Production 69,238 (3,136) 101,021
Sale of servicing rights 3,426 42,090 --
- - - --------------------------------------------------------------------------------
Total net revenues 129,694 89,250 122,077
Operating expenses 86,923 58,819 80,011
- - - --------------------------------------------------------------------------------
Operating income $ 42,771 $ 30,431 $ 42,066
- - - --------------------------------------------------------------------------------
Fiscal 1996 Results
Mortgage banking services net revenues, measured as revenues earned reduced by
direct costs for amortization and payments to third-party service providers on
behalf of clients, increased 45% to $129.7 million in fiscal 1996. The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting
for Mortgage Servicing Rights," effective May 1, 1995. This statement requires
that originated mortgage servicing rights be recognized as income when the loan
is sold and servicing is retained. As a result, the Company recognized
originated servicing rights, net of related amortization and valuation
allowances, of $82.2 million in 1996, which is included in net revenues earned
from loan production. The effect of this change in accounting was partially
offset by a decrease in margins realized on loans sold. This decline in margins
reflects the competition in the industry to capture the demand for mortgages
created by the changes in interest rates during 1996.
Mortgage loan closings increased from $3.4 billion to $7.9 billion in 1996. Home
purchase mortgage closings increased $2.3 billion to $5.4 billion in 1996
compared to $3.1 billion in 1995, while refinancing closings increased $2.2
billion to $2.5 billion in 1996 from $.3 billion in 1995. These increases
resulted from the increased consumer demand discussed above and the Company's
increased market share due primarily to expanded relationships with affinity
groups which represented 29% of the total increase, and with financial
institutions which represented 24% of the total increase. Servicing net revenue
increased 13% as a result of an increase in the average servicing portfolio
partially offset by increased amortization of servicing rights.
Mortgage banking services operating income increased 41% to $42.8 million. The
increase was due to higher net revenues associated with the capitalization of
originated mortgage servicing rights, which was $82.2 million as described
above. Such revenues were partially offset by a significant reduction in the
gain on sale of servicing rights of $38.7 million due to the decrease in sales
of the Company's servicing portfolio from $3.6 billion in 1995 to $295 million
in 1996. In addition, operating expenses increased as the Company responded to
the increase in loan production volume and the increased servicing portfolio.
Key Operating Factors 1996 1995 1994
- - - --------------------------------------------------------------------------------
Mortgage loan applications
(in millions) $ 11,021 $ 4,413 $ 8,799
Percent change 150% (50%) 15%
Mortgage loan closings
(in millions) $ 7,853 $ 3,432 $ 8,074
Percent change 129% (57%) 44%
Servicing portfolio
(in millions)
Closings $ 7,853 $ 3,432 $ 8,074
Purchases 1,301 1,104 1,453
Payoffs (3,200) (1,553) (3,929)
Sales (295) (3,611) --
- - - --------------------------------------------------------------------------------
Ending balance $ 21,676 $ 16,017 $ 16,645
Percent change 35% (4%) 51%
Delinquency rate 1.4% 1.3% 1.2%
- - - --------------------------------------------------------------------------------
The Company's profitability from mortgage banking services will be affected by
such external factors as the level of interest rates, the strength of the
economy, and the related condition of residential real estate markets. The
Company's broad-based marketing strategies, including further penetration of
existing affinity groups and financial institutions, signing new clients, and
maintaining its system of delivering mortgages in a cost-efficient manner,
should positively affect operating results in the future.
Fiscal 1995 Results
Mortgage banking services net revenues decreased 27% to $89.3 million in fiscal
1995 primarily due to the decline in production net revenue. The sharp increase
in mortgage rates greatly reduced refinance and home purchase loan activity
creating intense competition within the industry for remaining market share.
Such competition, accompanied by a consumer shift to adjustable rate mortgage
products, served to reduce margins. As the margins declined on production
volume, the Company responded to the market's increased demand for servicing
rights and sold $3.6 billion of its servicing portfolio at a gain of $42.1
million. Servicing fee revenue increased as a result of an increase in the
average servicing portfolio as well as the significantly reduced effect of
portfolio prepayments and payoffs which, in fiscal 1995, required unscheduled
amortization of $11.3 million of excess mortgage servicing fees.
Mortgage banking services operating income decreased 28% to $30.4 million in
fiscal 1995. The decrease was due to the decline in net revenues as described
above, significantly offset by a reduction in operating expenses as the Company
responded to the change in loan production volume.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, effective in 1997, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Application of this statement will
require the Company to review long-lived assets and certain intangibles for
impairment whenever events or changes in circumstances indi-
10
cate that the carrying amount of an asset may not be recoverable. This statement
is not expected to significantly affect the consolidated financial statements of
the Company.
The Company uses the intrinsic value method to account for stock-based employee
compensation plans. Under this method, compensation cost is recognized for
awards of shares of common stock to employees under compensatory plans only if
the quoted market price of the stock at the grant date (or other measurement
date, if later) is greater than the amount the employee must pay to acquire the
stock. In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement permits companies to adopt a new fair
value-based method to account for stock-based employee compensation plans or to
continue using the intrinsic value method. If the intrinsic value method is
used, information concerning the pro forma effects on net income and net income
per share of adopting the fair value-based method is required to be presented in
the notes to the financial statements. The Company intends to continue using the
intrinsic value method and will provide disclosures about its stock-based
employee compensation plans in its 1997 financial statements, as required by
Statement No. 123.
Liquidity and Capital Resources
The Company manages its 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. (See Operating Activities
and Investing Activities in the Company's Consolidated Statements of Cash
Flows.)
Using historical information, the Company projects the time period that a
client's vehicle will be in service or the length of time that a home will be
held in inventory before being sold on behalf of a client. Once the relevant
asset characteristics are projected, the Company generally matches 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. (See Liabilities Under
Management Programs in Notes to Consolidated Financial Statements.) Within
mortgage banking services, the Company funds the mortgage loans on a short-term
basis until sale 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.
The Company has maintained broad access to global capital markets by maintaining
the quality of its 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, the Company utilizes the
United States, Euro and Canadian commercial paper markets, as well as other
cost-effective short-term instruments. In addition, the Company utilizes the
public and private debt markets to issue unsecured senior corporate debt.
Augmenting these sources, the Company has reduced outstanding debt by the sale
or transfer of managed assets to third parties while retaining fee-related
servicing responsibility. The Company's aggregate commercial paper outstanding
totaled $2.2 billion and $2.3 billion at April 30, 1996, and April 30, 1995,
respectively. At April 30, 1996, $2.1 billion in medium-term notes and $54
million in other debt securities were outstanding compared to $1.4 billion and
$153 million, respectively, in fiscal 1995. (See Financing Activities in the
Company's Consolidated Statements of Cash Flows.) From a risk management
standpoint, borrowings not in the local currency of the business unit are
converted to the local currency through the use of foreign currency forward
contracts. The Company has maintained a leverage ratio between 7 to 1 and 8 to 1
over each of the last three years.
To provide additional financial flexibility, the Company's current policy is to
ensure that minimum committed bank facilities aggregate 80% of the average
amount of outstanding commercial paper. Committed revolving credit agreements
totaling $2.4 billion and uncommitted lines of credit aggregating $359 million
are currently in place with 33 domestic and international banks. Management
closely evaluates not only the credit quality of the banks but the maturity of
the various agreements to ensure ongoing availability. Of the Company's $2.4
billion in committed facilities at April 30, 1996, the full amount was undrawn
and available. Management believes that its current policy provides adequate
protection should volatility in the financial markets limit the Company's access
to commercial paper or medium-term note funding.
These established means of effectively matching floating and fixed interest rate
and maturity characteristics of funding to related assets, the variety of short-
and long-term domestic and international funding sources, and the committed
banking facilities minimize the Company's exposure to interest rate and
liquidity risk.
11
Item 8. Financial Statements and Supplementary Data
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
PHH Corporation:
We have audited the consolidated financial statements of PHH Corporation and
subsidiaries as listed in the accompanying index on page 28. In connection with
our audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
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 financial position of PHH Corporation and
subsidiaries as of April 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended April
30, 1996, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in the notes to the consolidated financial statements, the Company
adopted the provisions of statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," in 1996.
KPMG Peat Marwick LLP
Baltimore, Maryland
May 17, 1996, except for
the note on capital stock
as to which the date is
June 24, 1996
To the Stockholders and Board of Directors
PHH Corporation:
We consent to incorporation by reference in the Registration Statements on Form
S-3 (No. 2-90026, No. 33-63627, No. 33-48125, and No. 33-52669) and Form S-8
(No. 33-38309, No. 33-53282 and No. 33-64617) of PHH Corporation of our report
dated May 17, 1996, except for the note on capital stock as to which the date
is June 24, 1996, relating to the consolidated balance sheets of PHH
Corporation and subsidiaries as of April 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended April 30, 1996, and the
related schedule, which report appears in the April 30, 1996 annual report on
Form 10-K of PHH Corporation.
KPMG Peat Marwick LLP
Baltimore, Maryland
July 26, 1996
12
PHH Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands except per share data)
Years ended April 30, 1996 1995 1994
- - - ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Vehicle management services $ 1,371,150 $ 1,257,696 $ 1,162,483
Real estate services 812,851 686,836 816,261
Mortgage banking services 195,599 126,094 155,935
- - - ---------------------------------------------------------------------------------------------------------------------------
2,379,600 2,070,626 2,134,679
Expenses:
Depreciation on vehicles under operating leases 944,187 872,495 808,894
Costs, including interest, of carrying and reselling homes 681,589 576,385 717,793
Direct costs of mortgage banking services 68,985 40,924 57,091
Interest 223,847 173,094 138,617
Selling, general and administrative 321,844 286,410 302,488
- - - ---------------------------------------------------------------------------------------------------------------------------
2,240,452 1,949,308 2,024,883
Income before income taxes 139,148 121,318 109,796
Income taxes 57,528 49,656 45,238
- - - ---------------------------------------------------------------------------------------------------------------------------
Net income $ 81,620 $ 71,662 $ 64,558
- - - ---------------------------------------------------------------------------------------------------------------------------
Net income per share* $ 2.33 $ 2.08 $ 1.82
- - - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996, described in
the capital stock note.
See Notes to Consolidated Financial Statements.
13
PHH Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands)
As of April 30, 1996 1995
- - - ---------------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 9,288 $ 3,412
Accounts receivable, less allowance for doubtful
accounts of $5,478 in 1996 and $6,689 in 1995 468,938 484,230
Carrying costs on homes under management 46,560 45,260
Mortgage loans held for sale 874,794 712,247
Mortgage servicing rights and fees 230,209 98,003
Property and equipment, net 93,089 102,399
Goodwill, net 49,081 51,164
Other assets 117,999 77,929
- - - ---------------------------------------------------------------------------------------------------------------------------
1,889,958 1,574,644
- - - ---------------------------------------------------------------------------------------------------------------------------
Assets Under Management Programs:
Net investment in leases and leased vehicles 3,216,224 3,017,231
Equity advances on homes 566,808 447,658
- - - ---------------------------------------------------------------------------------------------------------------------------
3,783,032 3,464,889
- - - ---------------------------------------------------------------------------------------------------------------------------
$ 5,672,990 $ 5,039,533
- - - ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 434,109 $ 424,438
Advances from clients and deferred revenue 96,439 101,229
Other debt 903,442 735,886
Deferred income taxes 191,700 158,400
- - - ---------------------------------------------------------------------------------------------------------------------------
1,625,690 1,419,953
- - - ---------------------------------------------------------------------------------------------------------------------------
Liabilities Under Management Programs 3,438,804 3,079,629
- - - ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 3,000,000 shares -- --
Common stock, no par value, authorized
50,000,000 shares; issued and outstanding
34,661,524* shares in 1996 and 16,890,212
shares in 1995 96,081 79,210
Cumulative foreign currency translation adjustment (23,483) (16,913)
Retained earnings 535,898 477,654
- - - ---------------------------------------------------------------------------------------------------------------------------
608,496 539,951
- - - ---------------------------------------------------------------------------------------------------------------------------
$ 5,672,990 $ 5,039,533
- - - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996, described in
the capital stock note.
See Notes to Consolidated Financial Statements.
14
PHH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Years ended April 30, 1996 1995 1994
- - - ---------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 81,620 $ 71,662 $ 64,558
Adjustments to reconcile income to cash
provided by operating activities:
Depreciation on vehicles under operating leases 944,187 872,495 808,894
Other depreciation and amortization 30,020 32,095 29,000
Amortization and write-down of
servicing rights and fees 37,640 20,089 29,132
Additions to originated mortgage servicing rights (91,134) -- --
Additions to excess mortgage servicing fees (66,432) (27,869) (39,042)
Deferred income taxes 33,585 41,530 25,694
Gain on sale of subsidiary (11,688) -- --
Changes in:
Accounts receivable (31,211) (5,913) (72,536)
Carrying costs on homes under management (1,507) (9,011) 15,544
Mortgage loans held for sale (162,547) (6,359) (227,230)
Accounts payable and accrued expenses 32,951 (93,033) (28,835)
Advances from clients and deferred revenue (4,208) 21,790 (27,146)
All other operating activity (18,592) 12,983 (5,368)
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 772,684 930,459 572,665
- - - ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Investment in leases and leased vehicles (1,909,805) (1,785,923) (1,578,721)
Repayment of investment in leases and leased vehicles 582,487 579,835 549,262
Proceeds from sales and transfers of leases and
leased vehicles to third parties 163,172 109,859 105,087
Value of homes acquired (4,649,297) (6,603,355) (4,101,894)
Value of homes sold 4,530,106 6,631,414 4,301,529
Purchases of mortgage servicing rights (13,316) (13,826) (14,223)
Additions to property and equipment, net of dispositions (17,650) (16,429) (32,719)
Acquisitions accounted for as a purchase -- -- (2,594)
Proceeds from sale of subsidiary 33,618 -- --
All other investing activities (34,583) (21,114) 1,348
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (1,315,268) (1,119,539) (772,925)
- - - ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in borrowings with terms of less than 90 days (150,349) 114,462 172,255
Proceeds from issuance of other borrowings 1,914,461 1,195,147 1,040,092
Principal payment on other borrowings (1,223,110) (1,074,230) (1,011,673)
Stock option plan transactions 16,871 4,090 9,554
Repurchases of common shares -- (17,019) (8,721)
Payment of dividends (23,376) (21,809) (20,850)
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 534,497 200,641 180,657
- - - ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 13,963 (8,174) 19,106
- - - ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 5,876 3,387 (497)
Cash at beginning of period 3,412 25 522
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 9,288 $ 3,412 $ 25
- - - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
15
PHH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Cumulative
Foreign
Currency
(Dollars in thousands except per share data) Common Stock Translation Retained
Years Ended April 30, 1996, 1995 and 1994 Shares Amount Adjustment Earnings
- - - ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1993 17,197,785 $ 91,306 $ (17,916) $ 384,093
Net income 64,558
Cash dividends declared ($.60 per share)* (20,850)
(20,850)
Foreign currency translation adjustment (3,711)
Stock option plan transactions,
net of related income tax benefits 305,062 9,554
Repurchases of common shares (257,174) (8,721)
- - - ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1994 17,245,673 92,139 (21,627) 427,801
Net income 71,662
Cash dividends declared ($.64 per share)* (21,809)
(21,809)
Foreign currency translation adjustment 4,714
Stock option plan transactions,
net of related income tax benefits 129,660 4,090
Repurchases of common shares (485,121) (17,019)
- - - ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1995 16,890,212 79,210 (16,913) 477,654
Net income 81,620
Cash dividends declared ($.68 per share)* (23,376)
(23,376)
Foreign currency translation adjustment (6,570)
Stock option plan transactions,
net of related income tax benefits 440,550 16,871
Two-for-one common stock split* 17,330,762
- - - ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1996 34,661,524 $ 96,081 $ (23,483) $ 535,898
- - - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996, described in
the capital stock note.
See Notes to Consolidated Financial Statements.
16
PHH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands except per share data)
Accounting Policies
The accounting policies of PHH Corporation conform to generally accepted
accounting principles. The consolidated financial statements include the
accounts of PHH Corporation and its wholly owned domestic and foreign
subsidiaries (the Company). Policies outlined below include all policies
considered significant. All significant intercompany balances and transactions
have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosures of
contingencies at the date of the financial statements, and revenues and expenses
recognized during the reporting period. Actual results could differ from those
estimates.
Vehicle Management Services
Vehicle management 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. Revenues from
these services other than leasing are taken into income over the periods in
which the services are provided and the related expenses are incurred.
The Company leases vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements. The initial lease term typically covers
a period of twelve months or more and thereafter may be extended at the option
of the lessee. The Company records the cost of leased vehicles as an "investment
in leases and leased vehicles." Amounts charged to lessees for interest on the
unrecovered investment are credited to income on a level yield method which
approximates the contractual terms.
Real Estate Services
Real estate services primarily consist of the purchase, management and resale of
homes for transferred employees of corporations and government agencies. The
Company pays transferring employees their equity based on an appraised value of
their homes, determined by independent appraisers, after deducting any
outstanding mortgages. The Company normally retires the mortgage concurrently
with the purchase of the equity; but, in certain circumstances, the Company
accepts administrative responsibility for making payments on the mortgages.
These mortgages are retired at settlement when the homes are resold, which
generally is within six months.
The client normally pays an advance billing for a portion of the costs to be
incurred during the period the home is held for resale. These advances are
included in "advances from clients." These costs are paid by the Company and are
identified as "carrying costs on homes under management" until resale. After
resale, a settlement of actual costs and the advance billing is made with the
client.
Revenues and the related "costs, including interest, of carrying and reselling
homes" are recognized at closing on the resale of a home. Under the terms of
contracts with clients, 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, destination services, property dispositions for financial
institutions and government agencies and strategic management consulting.
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 Banking Services
Mortgage banking services primarily include the origination, sale and servicing
of residential first mortgage loans. The Company markets a variety of first
mortgage products to consumers through relationships with corporations, affinity
groups, financial institutions, real estate brokerage firms and other mortgage
banks. Loan origination fees, commitment fees paid in connection with the sale
of loans, and direct loan origination costs associated with loans held for
resale, are deferred until the loan is sold. 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.
Sales of mortgage loans are generally recorded on the date a loan is delivered
to an investor. Sales of mortgage securities are recorded on the settlement
date. 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. Beginning in 1996, the carrying value of the loans excludes
the cost assigned to originated servicing rights. (See note for mortgage
servicing rights and fees). Such gains and losses are also increased or
decreased by the amount of deferred mortgage servicing fees recorded.
The Company acquires mortgage servicing rights and excess servicing fees by
originating or purchasing mortgage loans and selling those loans with servicing
retained, or it may purchase mortgage servicing rights separately. The carrying
value of mortgage servicing rights and excess servicing fees is amortized over
the estimated life of the related loan portfolio.
Gains or losses on the sale of mortgage servicing rights are recognized when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
The Company reviews the recoverability of excess servicing fees by discounting
anticipated future excess servicing cash flows at original discount rates
utilizing externally published prepayment rates. If the discounted value is less
than the recorded balance due to higher than expected prepayments, the
difference is recognized as a write-down in the consolidated statement of
income.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is provided by charges to
income over the estimated useful lives of such assets. Buildings are depreciated
using the straight-line method (25 to 50 years); building improvements, using
the straight-line method (10 to 20 years); equipment and leasehold improvements,
using either the double-declining balance or straight-line method (3 to 10
years); and externally developed software is capitalized and amortized using the
straight-line method (5 years). Expenditures for improvements that increase
17
PHH Corporation and Subsidiaries
value or that extend the life of the assets are capitalized; maintenance and
repairs are charged to operations. Gains or losses from retirements and
disposals of property and equipment are included in selling, general and
administrative expense.
Goodwill, Net
Goodwill, net represents the excess of cost over the net tangible and intangible
assets of businesses acquired net of accumulated amortization. It is being
amortized by the straight-line method over various periods up to 40 years and
such amortization is included in selling, general and administrative expense.
Assets Under Management Programs
Assets under management programs are held subject to leases or other client
contracts. The effective interest rates and maturity characteristics of the
leases and other contracts are generally matched with the characteristics of the
overall funding program.
Translation of Foreign Currencies
Assets and liabilities of the foreign subsidiaries are translated at the
exchange rates as of the balance sheet dates; equity accounts are translated at
historical exchange rates. Revenues, expenses and cash flows are translated at
the average exchange rates for the periods presented. Translation gains and
losses are included in stockholders' equity including, for years prior to 1991,
transaction gains and losses resulting from forward exchange contracts on
foreign equity amounts net of income tax effects. Gains and losses resulting
from the change in exchange rates realized upon settlement of foreign currency
transactions are substantially offset by gains and losses realized upon
settlement of forward exchange contracts. Therefore, the resulting net income
effect of transaction gains and losses in fiscal years 1994 through 1996 was not
significant.
Interest
Interest expense consists of interest on debt incurred to fund working capital
requirements and to finance vehicle leasing activities, real estate services and
mortgage banking operations. Interest on borrowings used to finance equity
advances on homes is included in "costs, including interest, of carrying and
reselling homes" and was $29,119 in 1996, $21,102 in 1995, and $23,491 in 1994.
Total interest paid, including amounts within "costs, including interest, of
carrying and reselling homes," was $273,198 in 1996, $211,206 in 1995, and
$165,406 in 1994.
Income Taxes
The provision for income taxes includes deferred income taxes resulting from
items reported in different periods for income tax and financial statement
purposes. Deferred tax assets and liabilities represent the expected future tax
consequences of the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The effects
of changes in tax rates on deferred tax assets and liabilities are recognized in
the period that includes the enactment date. No provision has been made for US
income taxes on cumulative undistributed earnings of foreign subsidiaries since
it is the present intention of management to reinvest the undistributed earnings
indefinitely in foreign operations. Undistributed earnings of the foreign
subsidiaries at April 30, 1996, were approximately $105,000. The determination
of unrecognized deferred US tax liability for unremitted earnings is not
practicable. However, it is estimated that foreign withholding taxes of
approximately $5,500 may be payable if such earnings were remitted.
Net Income Per Share
Net income per share is based on the weighted average number of shares of common
stock outstanding during the year and common stock equivalents arising from the
assumed exercise of outstanding stock options under the treasury stock method.
The number of shares used in the calculations, adjusted to reflect the
two-for-one common stock split, (see note for capital stock), were 35,074,920
for 1996, 34,505,686 for 1995, and 35,482,068 for 1994.
Derivative Financial Instruments
As a matter of policy, the Company does not engage in derivatives trading or
market-making activities. Rather, derivative financial instruments such as
interest rate swaps are used by the Company principally in the management of its
interest rate exposures and foreign currency exposures on intercompany
borrowings. Additionally, the Company enters into forward delivery contracts,
financial futures programs and options to reduce the risks of adverse price
fluctuation with respect to both mortgage loans held for sale and anticipated
mortgage loan closings arising from commitments issued.
Amounts to be paid or received under interest rate swap agreements are accrued
as interest rates change and are recognized over the life of the swap agreements
as an adjustment to interest expense. The fair value of the swap agreements is
not recognized in the consolidated financial statements since they are accounted
for as hedges. Market value gains and losses on the Company's foreign currency
transaction hedges are recognized in income and substantially offset the foreign
exchange gains and losses on the underlying transactions. Market value gains and
losses on positions used as hedges in the mortgage banking services operations
are deferred and considered in the valuation of the lower of cost or market
value of mortgage loans held for sale.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements for comparative purposes.
New Accounting Pronouncements
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective in
1997. Application of this statement will require the Company to review
long-lived assets and certain intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. This statement is not expected to significantly affect the
consolidated financial statements of the Company.
The Company uses the intrinsic value method to account for stock-based employee
compensation plans. Under this method, compensation cost is recognized for
awards of shares of common stock to employees under compensatory plans only if
the quoted market price of the stock at the grant date (or other measurement
date, if later) is greater than the amount the employee must pay to acquire the
stock. In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement permits companies to adopt a new fair
value-based method to account for stock-based employee compensation plans or to
continue using the intrinsic value method. If the intrinsic value method is
used, information concerning the pro forma effects on net income and net income
per share of adopting the fair value-based method is required to be
18
PHH Corporation and Subsidiaries
presented in the notes to the financial statements. The Company intends to
continue using the intrinsic value method and will provide disclosures about its
stock-based employee compensation plans in its 1997 financial statements, as
required by Statement No. 123.
Divestiture
In February 1996 the Company sold its North American truck fuel and management
operations resulting in a net gain of $11,688, which is reflected in vehicle
management services revenues.
Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated by the Company
and held pending sale to permanent investors. Such mortgage loans are recorded
at the lower of cost or market value as determined by outstanding commitments
from investors or current investor yield requirements calculated on the
aggregate loan basis.
The Company issues mortgage-backed certificates insured or guaranteed by the
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Government National Mortgage Association (GNMA) and other
private insurance agencies. The insurance provided by FNMA and FHLMC and other
private insurance agencies are on a non-recourse basis to the Company. However,
the guarantee provided by GNMA is only to the extent recoverable from insurance
programs of the Federal Housing Administration and the Veterans Administration.
The outstanding principal balance of mortgages backing GNMA certificates issued
by the Company aggregated approximately $2,483,000 and $1,699,000 at April
30, 1996 and 1995, respectively. Additionally, the Company sells mortgage
loans as part of various mortgage-backed security programs sponsored by FNMA,
FHLMC and GNMA. Certain of these sales are subject to recourse or
indemnification provisions in the event of default by the borrower. As of April
30, 1996, mortgage loans sold with recourse amounted to $113,000. The Company
believes adequate reserves are maintained to cover all potential losses.
Mortgage Servicing Rights and Fees
Mortgage servicing rights and fees at April 30 consisted of the following:
1996 1995
- - - --------------------------------------------------------------------------------
Excess servicing fees $122,045 $ 78,848
Purchased mortgage servicing rights 25,977 19,155
Originated mortgage servicing rights 83,500 --
Valuation allowance (1,313) --
- - - --------------------------------------------------------------------------------
$230,209 $ 98,003
- - - --------------------------------------------------------------------------------
Excess servicing fees represent the present value of the differential between
the actual servicing fees and normal servicing fees which are capitalized at the
time loans are sold with servicing rights retained. Purchased servicing rights
represent the cost of acquiring the rights to service mortgage loans for others.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights" (SFAS No. 122). This Statement
requires that mortgage servicing rights be recognized when a mortgage loan is
sold and servicing rights are retained. The Company adopted SFAS No. 122
effective May 1, 1995, and, accordingly, capitalized originated servicing
rights, net of amortization and valuation allowances, of $82,187 in 1996.
SFAS No. 122 requires that a portion of the cost of originating a mortgage loan
be allocated to the mortgage servicing rights based on the servicing rights'
fair value relative to the loan as a whole. To determine the fair value of
mortgage servicing rights, the Company uses market prices for comparable
mortgage servicing, when available, or alternatively uses a valuation model that
calculates the present value of future net servicing income using assumptions
that market participants would use in estimating future net servicing income.
SFAS No. 122 also requires the impairment of originated and purchased servicing
rights to be measured based on the difference between the carrying amount and
current fair value of the servicing rights. In determining impairment, the
Company aggregates all mortgage servicing rights, excluding those capitalized
prior to the adoption of SFAS No. 122, and stratifies them based on the
predominant risk characteristic of interest rate band. For each risk
stratification, a valuation allowance is maintained for any excess of amortized
book value over the current fair value by a charge or credit to income.
Property and Equipment
Property and equipment at April 30 consisted of the following:
1996 1995
- - - --------------------------------------------------------------------------------
Land $ 9,082 $ 9,584
Buildings and leasehold improvements 55,215 58,305
Equipment 102,353 111,909
Accumulated depreciation
and amortization (81,607) (87,342)
- - - --------------------------------------------------------------------------------
85,043 92,456
Capitalized software costs, net 8,046 9,943
- - - --------------------------------------------------------------------------------
$ 93,089 $102,399
- - - --------------------------------------------------------------------------------
Other Assets
Other assets at April 30 consisted of the following:
1996 1995
- - - --------------------------------------------------------------------------------
Mortgage-related notes receivable $ 62,242 $ 27,659
Residential properties held for resale 11,048 14,596
Other 44,709 35,674
- - - --------------------------------------------------------------------------------
$117,999 $ 77,929
- - - --------------------------------------------------------------------------------
Mortgage-related notes receivable are loans secured by residential real estate.
Residential properties held for resale are located primarily in the US and are
carried at the lower of cost or net realizable value.
Assets Under Management Programs
Net Investment in Leases and Leased Vehicles
The net investment in leases and leased vehicles at April 30 consisted of the
following:
1996 1995
- - - --------------------------------------------------------------------------------
Vehicles under open-end
operating leases $2,519,731 $2,357,425
Vehicles under closed-end
operating leases 347,645 288,582
Direct financing leases 348,043 370,234
Accrued interest on leases 805 990
- - - --------------------------------------------------------------------------------
$3,216,224 $3,017,231
- - - --------------------------------------------------------------------------------
The Company leases vehicles for initial periods of twelve months or more under
either operating or direct financing lease agreements. The Company's experience
indicates that the full term of the leases may vary considerably due to
extensions beyond the minimum lease term. Lessee repayments of investments in
leases and leased vehicles for 1996 and 1995 were $1,527,000 and $1,452,000,
respectively; and the ratio of such repayments to the average net investment in
leases and leased vehicles was 49% in 1996 and 50% in 1995.
19
PHH Corporation and Subsidiaries
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
vehicles under this type of lease agreement have consistently been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost of vehicles under this type of operating lease at April 30, 1996
and 1995, was $4,387,000 and $3,898,000, respectively.
Under the other type of operating lease, closed-end operating leases, resale of
the vehicles on termination of the lease is for the account of the Company. The
lessee generally pays for or provides maintenance, vehicle licenses and
servicing. The original cost of vehicles under these agreements at April 30,
1996 and 1995, was $483,000 and $391,000, respectively. The Company believes
adequate reserves are maintained in the event of loss on vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee. Maintenance
and repairs of these vehicles are the responsibility of the lessee.
Leasing revenues are included in revenues from vehicle management services.
Following is a summary of leasing revenues for years ended April 30:
1996 1995 1994
- - - --------------------------------------------------------------------------------
Operating leases $1,111,812 $1,017,521 $939,297
Direct financing leases,
primarily interest 42,460 40,937 28,852
- - - --------------------------------------------------------------------------------
$1,154,272 $1,058,458 $968,149
- - - --------------------------------------------------------------------------------
The Company has transferred existing managed vehicles and related leases to
unrelated investors and has retained servicing responsibility. Credit risk for
such agreements is retained by the Company to a maximum extent in one of two
forms: excess assets transferred, which were $10,088 and $8,389 at April 30,
1996 and 1995, respectively; or guarantees to a maximum extent of $21 and $907
at April 30, 1996 and 1995, respectively. All such credit risk has been included
in the Company's consideration of related reserves. The outstanding balances
under such agreements aggregated $237,104 and $166,379 at April 30, 1996 and
1995, respectively.
Other managed vehicles with balances aggregating $155,723 and $175,111 at April
30, 1996 and 1995, respectively, are included in special purpose entities whose
ownership is deemed unrelated to the Company and whose credit and residual value
risk characteristics are ultimately not the Company's responsibility.
Equity Advances on Homes
Equity advances on homes represent advances paid to transferring employees of
clients for their equity based on appraised values of their homes.
Other Debt
Other debt at April 30 consisted of the following:
1996 1995
- - - --------------------------------------------------------------------------------
Commercial paper $803,442 $635,886
Medium-term note 100,000 100,000
- - - --------------------------------------------------------------------------------
$903,442 $735,886
- - - --------------------------------------------------------------------------------
Commercial paper programs are more fully described in the note for Liabilities
Under Management Programs. The medium-term note represents an unsecured
obligation having a fixed interest rate of 6.5% with interest payable
semi-annually and a term of seven years payable in full in fiscal 2000.
Income Taxes
Provisions (credits) for income taxes for the years ended April 30 were
comprised as follows:
1996 1995 1994
- - - --------------------------------------------------------------------------------
Current income taxes:
Federal $ 12,305 $ (2,958) $ 7,550
State and local 3,783 3,464 9,938
Foreign 8,140 6,979 2,739
- - - --------------------------------------------------------------------------------
24,228 7,485 20,227
- - - --------------------------------------------------------------------------------
Deferred income taxes:
Federal 27,700 39,600 24,452
State and local 5,400 4,500 (1,033)
Foreign 200 (1,929) 1,592
- - - --------------------------------------------------------------------------------
33,300 42,171 25,011
- - - --------------------------------------------------------------------------------
$ 57,528 $ 49,656 $ 45,238
- - - --------------------------------------------------------------------------------
Deferred income taxes are recorded based upon differences between the financial
statement and the tax bases of assets and liabilities and available tax credit
carryforwards. There was no valuation allowance relating to deferred tax assets.
Net deferred tax liabilities as of April 30 were comprised as follows:
1996 1995
- - - --------------------------------------------------------------------------------
Depreciation $(208,100) $(197,800)
Accrued liabilities and deferred income 47,500 41,900
Unamortized mortgage servicing rights (31,100) (2,500)
- - - --------------------------------------------------------------------------------
$(191,700) $(158,400)
- - - --------------------------------------------------------------------------------
The portions of the 1996 income tax liability and provision classified as
current and deferred are subject to final determination based on the actual 1996
income tax returns. The liability and provision amounts for 1995 have been
reclassified to reflect the final determination made in filing the 1995 income
tax returns.
The Company received net income tax refunds of $1,330 in 1996 and paid income
taxes of $26,049 in 1995 and $35,739 in 1994.
A summary of the differences between the statutory federal income tax rate and
the Company's effective income tax rate follows:
1996 1995 1994
- - - --------------------------------------------------------------------------------
Federal income tax
statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.3 4.5 5.3
Amortization of goodwill .6 1.0 0.7
Rate increase
on deferred taxes -- -- 3.0
Adjustments of tax
accruals -- -- (3.0)
Foreign tax in excess of
(less than) domestic rate 1.1 (0.1) --
Other .3 0.5 0.2
- - - --------------------------------------------------------------------------------
Effective tax rate 41.3% 40.9% 41.2%
- - - --------------------------------------------------------------------------------
The Company's US federal income tax returns have been examined by the Internal
Revenue Service through April 30, 1993.
20
PHH Corporation and Subsidiaries
Liabilities Under Management Programs
Borrowings to fund assets under management programs are classified as
"liabilities under management programs" and, at April 30, consisted of the
following:
1996 1995
- - - --------------------------------------------------------------------------------
Commercial paper $ 1,404,094 $1,665,193
Medium-term notes 1,981,200 1,261,000
Limited recourse debt 8,595 8,357
Secured notes payable on
vehicles under lease 11,570 39,446
Other unsecured debt 33,345 105,633
- - - --------------------------------------------------------------------------------
$ 3,438,804 $3,079,629
- - - --------------------------------------------------------------------------------
Commercial paper, all of which matures within 90 days, is supported by committed
revolving credit agreements described below and short-term lines of credit. The
weighted average interest rates on the Company's outstanding commercial paper
were 5.5% and 6.3% at April 30, 1996 and 1995, respectively.
Medium-term notes represent unsecured loans which mature in 1997. The weighted
average interest rates on medium-term notes were 5.5% and 6.4% at April 30, 1996
and 1995, respectively.
Limited recourse debt and secured notes payable on vehicles under lease
primarily consist of secured loans arranged for certain clients for their
convenience. The lenders hold a security interest in the lease payments and the
clients' leased vehicles. The debt and notes payable mature concurrently with
the related lease payments. The aggregate lease payments due from the lessees
exceed the loan repayment requirements. The weighted average interest rates on
secured debt were 5.2% and 6.4% at April 30, 1996 and 1995, respectively.
The Company has unsecured committed credit agreements with various banks
totaling $2,377,000. These agreements have both fixed and evergreen maturities
ranging from June 13, 1996, to April 30, 1999. The evergreen revolving credit
agreements require a notice of termination of one to three years. Interest rates
under all revolvers are either at fixed rates or vary with the prime rate or the
London Interbank Offered Rate. Under these agreements, the Company is obligated
to pay annual commitment fees which were $2,471 and $2,904 in 1996 and 1995,
respectively. The Company has other unused lines of credit of $341,000 and
$262,000 at April 30, 1996 and 1995, respectively, with various banks.
Other unsecured debt, all of which matures in 1997, includes other borrowings
under short-term lines of credit and other bank facilities. The weighted average
interest rates on unsecured debt was 6.2% at both April 30, 1996 and 1995.
Although the period of service for a vehicle is at the lessee's option, and the
period a home is held for resale varies, management estimates, by using
historical information, the rate at which vehicles will be disposed and the rate
at which homes will be resold. These projections of estimated liquidations of
assets under management programs and the related estimated repayment of
liabilities under management programs as of April 30, 1996, as set forth in the
table below, indicate that the actual repayments of liabilities under management
programs will be different than required by contractual maturities.
Assets Under Liabilities Under
Management Programs Management Programs
- - - --------------------------------------------------------------------------------
1997 $ 1,999,332 $ 1,754,684
1998 1,062,884 990,171
1999 480,217 455,905
2000 154,399 153,038
2001 51,583 51,497
2002-2006 34,617 33,509
- - - --------------------------------------------------------------------------------
$ 3,783,032 $ 3,438,804
- - - --------------------------------------------------------------------------------
Stock Option Plans
The Company's employee stock option plan allows for options to be granted to key
employees for the purchase of common stock at prices not less than fair market
value on the date of grant. Either incentive stock options or non-statutory
stock options may be granted under the plans. The Company's Directors' stock
option plan allows for options to be granted to outside Directors of the Company
for the purchase of common stock at prices not less than fair market value on
the date of grant. Options become exercisable after one year from date of grant
on a vesting schedule provided by the plans, and expire ten years after the date
of the grant. Option transactions during 1996, 1995, and 1994 were as follows:
Number of Option Price
Shares per Share
- - - --------------------------------------------------------------------------------
Outstanding April 30, 1993 1,971,570 $18.13 to $39.63
Granted 199,450 $39.00 to $42.00
Exercised (305,062) $18.13 to $37.75
Canceled (97,785) $27.00 to $39.63
- - - --------------------------------------------------------------------------------
Outstanding April 30, 1994 1,768,173 $19.88 to $42.00
Granted 234,700 $35.50 to $37.00
Exercised (129,660) $19.88 to $37.75
Canceled (200,245) $24.50 to $41.13
- - - --------------------------------------------------------------------------------
Outstanding April 30, 1995 1,672,968 $19.88 to $42.00
Granted 190,750 $39.88 to $53.12
Exercised (443,083) $27.00 to $40.62
Canceled (112,650) $27.00 to $39.88
Two-for-one common
stock split 1,307,985
- - - --------------------------------------------------------------------------------
Outstanding April 30, 1996* 2,615,970 $9.94 to $26.56
- - - --------------------------------------------------------------------------------
Exercisable April 30, 1996* 2,256,070 $9.94 to $21.00
- - - --------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared on June 24, 1996, described
in the capital stock note.
In addition to outstanding options, at April 30, 1996, there were 2,543,402
shares of common stock reserved (adjusted for the two-for-one common stock
split), including 1,571,544 shares for issuance under future employee stock
option plan awards, 863,858 shares for future issuance under the employee
investment plan and 108,000 shares for future issuance under the Director's
stock option plan.
Capital Stock
On June 24, 1996, the Board of Directors authorized a two-for-one common stock
split, distributable July 31, 1996, to stockholders of record on July 5, 1996.
All per share amounts herein and data as to outstanding and exercisable common
stock options at April 30, 1996, have been adjusted for the common stock split.
On April 10, 1996, the Company declared a dividend of one preferred share
purchase right for each share of common stock outstanding on April 10, 1996.
This dividend is a continuation of the dividend which expired on April 10, 1996.
Each right entitles the
21
PHH Corporation and Subsidiaries
holder to purchase 1/100th of a share of series A Junior Participating Preferred
Stock at an exercise price of $88 (adjusted for the two-for-one common stock
split), subject to future adjustment. The rights become exercisable in the event
any party acquires or announces an offer to acquire 20% or more of the Company's
common stock. The rights expire April 10, 2006, and are redeemable at $.025
(adjusted for the two-for-one common stock split) per right prior to the time
any party owns 20% or more of the Company's outstanding common stock. In the
event the Company enters into a consolidation or merger after the time rights
are exercisable, the rights provide that the holder will receive, upon exercise
of the right, shares of common stock of the surviving company having a market
value of twice the exercise price of the right. Until the earlier of the time
the rights become exercisable, are redeemed or expire, the Company will issue
one right with each new share of common stock issued. The Company has designated
400,000 (adjusted for the two-for-one common stock split) shares of the
authorized preferred shares as series A Junior Participating Preferred Stock for
issuance upon exercise of the rights.
Pension and Other Employee Benefit Plans
Pension and Supplemental Retirement Plans
The Company has a non-contributory defined benefit pension plan covering
substantially all US employees of the Company and its subsidiaries. The
Company's subsidiary located in the UK has a contributory defined benefit
pension plan, with participation at the employee's option. Under both the US and
UK plans, benefits are based on an employee's years of credited service and a
percentage of final average compensation. The Company's policy for both plans is
to contribute amounts sufficient to meet the minimum requirements plus other
amounts as the Company deems appropriate from time to time. The Company also
sponsors two unfunded supplemental retirement plans to provide certain key
executives with benefits in excess of limits under the federal tax law and to
include annual incentive payments in benefit calculations.
Net costs included the following components for the years ended April 30:
1996 1995 1994
- - - --------------------------------------------------------------------------------
Service cost $ 5,038 $ 4,597 $ 4,604
Interest cost 7,607 6,742 6,181
Actual return on assets (10,977) (3,144) (2,049)
Net amortization and deferral 5,515 (1,698) (2,050)
- - - --------------------------------------------------------------------------------
Net cost $ 7,183 $ 6,497 $ 6,686
- - - --------------------------------------------------------------------------------
A summary of the plans' status and the Company's recorded liability recognized
in the Consolidated Balance Sheets at April 30 follows:
Funded Plans
- - - --------------------------------------------------------------------------------
1996 1995
- - - --------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ 61,766 $ 49,799
Unvested 6,447 6,428
- - - --------------------------------------------------------------------------------
$ 68,213 $ 56,227
- - - --------------------------------------------------------------------------------
Projected benefit obligation $ 88,892 $ 75,537
Funded assets, at fair value (78,851) (60,558)
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions (6,409) (8,906)
Unrecognized prior service cost (62) (94)
Unrecognized net obligation (137) (93)
- - - --------------------------------------------------------------------------------
Recorded liability $ 3,433 $ 5,886
- - - --------------------------------------------------------------------------------
Unfunded Plans
1996 1995
- - - --------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ 12,196 $ 8,591
Unvested 786 965
- - - --------------------------------------------------------------------------------
$ 12,982 $ 9,556
- - - --------------------------------------------------------------------------------
Projected benefit obligation $ 16,167 $ 13,433
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions (1,885) (849)
Unrecognized prior service cost (3,049) (2,598)
Unrecognized net obligation (1,392) (1,624)
Minimum liability adjustment 3,141 1,194
- - - --------------------------------------------------------------------------------
Recorded liability $ 12,982 $ 9,556
- - - --------------------------------------------------------------------------------
Significant percentage assumptions used in determining the cost and obligations
under the US pension and unfunded supplemental retirement plans are as follows:
1996 1995 1994
- - - --------------------------------------------------------------------------------
Discount rate 8.00% 8.50% 8.25%
Rate of increase in
compensation 5.00 5.00 5.00
Long-term rate of
return on assets 9.50 9.50 10.00
- - - --------------------------------------------------------------------------------
Postretirement Benefits Other Than Pensions
The Company provides healthcare and life insurance benefits for certain retired
employees up to the age of 65. Such postretirement benefits costs for 1996, 1995
and 1994 were $1,523, $1,474 and $1,551, respectively. A summary of the plan's
status and the Company's recorded liability recognized in the consolidated
balance sheets at April 30 follows:
1996 1995
- - - --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Active employees $ 5,732 $ 5,574
Current retirees 1,743 1,785
- - - --------------------------------------------------------------------------------
7,475 7,359
Unrecognized transition obligation (4,995) (5,289)
Unrecognized net gain 1,081 248
- - - --------------------------------------------------------------------------------
Recorded liability $ 3,561 $ 2,318
- - - --------------------------------------------------------------------------------
Investment Plan
Under provisions of the Company's employee investment plan, a qualified
retirement plan, eligible employees may generally have up to 10% of their base
salaries withheld and placed with an independent custodian and elect to invest
in common stock of the Company, an index equity fund, a growth equity fund, an
international equity fund, a fixed income fund, an asset allocation fund and/or
a money market fund. The Company's contributions vest proportionately in
accordance with an employee's years of vesting service, with an employee being
100% vested after three years of vesting service. The Company matches, in common
stock of the Company, employee contributions to 3% of their base salaries, with
an additional 3% match available at the end of the year based on the Company's
operating results. The Company's additional matches of employee contributions
greater than 3% up to 6%, were 75% in 1996 and 50% in 1995 and 1994. The
additional match, initially invested in a money market fund, can be redirected
by the employee into any of the investment elections noted above. The Company's
expenses for contributions were $4,810, $4,483, and $4,020 for the years ended
April 30, 1996, 1995 and 1994, respectively.
22
PHH Corporation and Subsidiaries
Lease Commitments
Total rental expenses relating to office facilities and equipment were $23,519,
$24,195, and $27,264 for 1996, 1995 and 1994, respectively. Minimum rental
commitments under non-cancelable leases with remaining terms in excess of one
year are as follows:
- - - --------------------------------------------------------------------------------
1997 $ 14,980 2001 $ 6,406
1998 $ 13,619 2001-2006 $ 13,071
1999 $ 10,395 2007 and thereafter $ 4,158
2000 $ 7,294
- - - --------------------------------------------------------------------------------
These leases provide for additional rentals based on the lessors' increased
property taxes, maintenance and operating expenses.
Contingent Liabilities
The Company and its subsidiaries are involved in pending litigation of the usual
character incidental to the business transacted by them. In the opinion of
management, such litigation will not have a material effect on the Company's
consolidated financial statements.
The Company is contingently liable under the terms of an agreement involving its
discontinued aviation services segment for payment of Industrial Revenue Bonds
issued by local governmental authorities operating at two airports. The Company
believes its allowance for disposition loss is sufficient to cover all potential
liability.
Fair Value of Financial Instruments
and Servicing Rights
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
(bullet) Cash, accounts receivable, certain other assets and commercial paper
borrowings. Due to the short-term nature of these financial instruments, the
carrying value equals or approximates fair value.
(bullet) Mortgage loans held for sale. Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained. Gains (losses) on mortgage-related positions, used to reduce
the risk of adverse price fluctuations, for both mortgage loans held for sale
and anticipated mortgage loan closings arising from commitments issued, are
included in the carrying amount of mortgage loans held for sale.
(bullet) Mortgage servicing rights and fees. Fair value is estimated by
discounting the expected net cash flow of servicing rights and deferred mortgage
servicing fees using discount rates that approximate market rates and externally
published prepayment rates, adjusted, if appropriate, for individual portfolio
characteristics.
(bullet) Borrowings. Fair value of borrowings, other than commercial paper, is
estimated based on quoted market prices or market comparables.
(bullet) Interest rate swaps, foreign exchange contracts, forward delivery
commitments, futures contracts and options. The fair value of interest rate
swaps, foreign exchange contracts, forward delivery commitments, futures
contracts and options is estimated, using dealer quotes, as the amount that the
Company would receive or pay to execute a new agreement with terms identical to
those remaining on the current agreement, considering interest rates at the
reporting date.
The following table sets forth information about financial instruments, except
for those noted above for which the carrying value approximates fair value, at
April 30, 1996 and 1995:
1996 1995
- - - ---------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
Assets:
Mortgage loans held for sale $ -- $ 874,794 $ 874,794 $ -- $ 712,247 $ 712,247
Excess mortgage servicing fees -- 122,045 132,586 -- 78,848 86,982
Originated mortgage servicing rights -- 82,187 88,516 -- -- --
Purchased mortgage servicing rights -- 25,977 34,241 -- 19,155 20,333
Liabilities--Medium-term notes -- 2,081,200 2,080,827 -- 1,361,000 1,361,198
Off balance sheet:
Interest rate swaps 1,858,597 1,740,964
In a gain position -- 3,164 -- 8,350
In a loss position -- (11,192) -- (4,693)
Foreign exchange forwards 125,031 -- (12) 80,600 -- (54)
Mortgage-related positions:*
Forward delivery commitments 1,630,000 (1,156) 11,402 1,089,500 12,951 (3,441)
Option contracts to sell 345,000 1,786 518 143,500 729 (318)
Option contracts to buy 800,000 4,280 148 110,000 483 488
* Gains (losses) on mortgage-related positions are already included in the
determination of market value of mortgage loans held for sale.
23
PHH Corporation and Subsidiaries
Derivative Financial Instruments
The Company employs interest rate swap agreements to match effectively the fixed
or floating rate nature of liabilities to the assets funded. A key assumption in
the following information is that rates remain constant at April 30, 1996
levels. To the extent that rates change, both the maturity and variable interest
rate information will change. However, the net rate the Company pays remains
matched with the assets funded.
The following table summarizes the maturity and weighted average rates of the
Company's interest rate swaps employed at April 30, 1996. These characteristics
are effectively offset within the portfolio of assets funded by the Company.
Maturities
Total 1997 1998 1999 2000 2001 2002
- - - -----------------------------------------------------------------------------------------------------------------------
US
- - - -----------------------------------------------------------------------------------------------------------------------
Commercial Paper:
Pay fixed/receive floating:
Notional value $ 467,301 $ 189,564 $ 152,628 $ 75,786 $ 31,423 $ 11,250 $ 6,650
Weighted average receive rate 5.43% 5.43% 5.43% 5.43% 5.43% 5.43%
Weighted average pay rate 6.22% 6.26% 6.48% 6.56% 6.34% 6.50%
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 150,000 150,000
Weighted average receive rate 6.98%
Weighted average pay rate 5.39%
Pay floating/receive floating:
Notional value 806,200 806,200
Weighted average receive rate 5.49%
Weighted average pay rate 5.37%
Canada
- - - -----------------------------------------------------------------------------------------------------------------------
Commercial Paper:
Pay fixed/receive floating:
Notional value 63,504 33,296 20,212 8,085 1,911
Weighted average receive rate 4.85% 4.85% 4.85% 4.85%
Weighted average pay rate 6.97% 6.85% 6.49% 7.29%
Pay floating/receive floating:
Notional value 76,488 39,078 24,439 10,321 2,261 389
Weighted average receive rate 6.92% 7.24% 7.41% 7.40% 7.70%
Weighted average pay rate 5.22% 5.22% 5.22% 5.22% 5.22%
UK
- - - -----------------------------------------------------------------------------------------------------------------------
Commercial Paper:
Pay fixed/receive floating:
Notional value 295,104 87,521 90,083 67,788 33,141 16,571
Weighted average receive rate 6.07% 6.07% 6.07% 6.07% 6.07%
Weighted average pay rate 7.46% 6.05% 8.11% 6.93% 7.18%
- - - -----------------------------------------------------------------------------------------------------------------------
Total $1,858,597 $1,305,659 $ 287,362 $ 161,980 $ 68,736 $ 28,210 $ 6,650
- - - -----------------------------------------------------------------------------------------------------------------------
For the years ended April 30, 1996 and 1995, the Company's hedging activities
increased interest expense $1,510 and $1,496, respectively, and had no effect on
its weighted average borrowing rate. For the same period in 1994, hedging
activities increased interest expense $12,632 and increased the weighted average
borrowing rate 0.3%.
The Company enters into foreign exchange contracts as hedges against currency
fluctuation on certain intercompany loans. Such contracts effectively offset the
currency risk applicable to approximately $125,031 and $80,600 of obligations at
April 30, 1996 and 1995, respectively.
The Company is exposed to credit-related losses in the event of non-performance
by counterparties to certain derivative financial instruments. The Company
manages such risk by periodically evaluating the financial condition of
counterparties and spreading its positions among multiple counterparties. The
Company presently does not expect non-performance by any of the counterparties.
24
PHH Corporation and Subsidiaries
Business Segments
The Company's operations are classified into three business segments: vehicle
management services, real estate services and mortgage banking services. Vehicle
management services and real estate services are provided in North America and
Europe. Mortgage banking services are provided in the US. Selected information
by business segment and geographic area follows:
Business Segments
(In thousands)
Years Ended April 30, 1996 1995 1994
- - - --------------------------------------------------------------------------------------------------
Revenues:
Vehicle management services $ 1,371,150 $ 1,257,696 $ 1,162,483
Real estate services 812,851 686,836 816,261
Mortgage banking services 195,599 126,094 155,935
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 2,379,600 $ 2,070,626 $ 2,134,679
- - - --------------------------------------------------------------------------------------------------
Income before income taxes:
Vehicle management services $ 64,536 $ 55,668 $ 46,230
Real estate services 31,841 35,219 21,500
Mortgage banking services 42,771 30,431 42,066
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 139,148 $ 121,318 $ 109,796
- - - --------------------------------------------------------------------------------------------------
Identifiable assets:
Vehicle management services $ 3,562,737 $ 3,413,080 $ 3,120,154
Real estate services 841,881 723,698 807,119
Mortgage banking services 1,268,372 902,755 839,510
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 5,672,990 $ 5,039,533 $ 4,766,783
- - - --------------------------------------------------------------------------------------------------
Capital expenditures:
Vehicle management services $ 10,663 $ 8,536 $ 10,250
Real estate services 9,775 9,103 8,839
Mortgage banking services 3,090 1,668 17,023
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 23,528 $ 19,307 $ 36,112
- - - --------------------------------------------------------------------------------------------------
Depreciation and amortization:
Vehicle management services $ 960,584 $ 891,361 $ 825,609
Real estate services 10,290 10,054 8,921
Mortgage banking services 40,973 23,264 32,496
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 1,011,847 $ 924,679 $ 867,026
- - - --------------------------------------------------------------------------------------------------
Geographic Areas
(In thousands)
Years Ended April 30, 1996 1995 1994
- - - --------------------------------------------------------------------------------------------------
Revenues:
North America $ 2,181,805 $ 1,894,050 $ 1,954,106
Europe 197,795 176,576 180,573
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 2,379,600 $ 2,070,626 $ 2,134,679
- - - --------------------------------------------------------------------------------------------------
Income before income taxes:
North America $ 123,957 $ 113,942 $ 106,895
Europe 15,191 7,376 2,901
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 139,148 $ 121,318 $ 109,796
- - - --------------------------------------------------------------------------------------------------
Identifiable assets:
North America $ 5,086,009 $ 4,492,213 $ 4,211,169
Europe 586,981 547,320 555,614
- - - --------------------------------------------------------------------------------------------------
Consolidated $ 5,672,990 $ 5,039,533 $ 4,766,783
- - - --------------------------------------------------------------------------------------------------
25
PHH Corporation and Subsidiaries
Quarterly Financial Data (Unaudited)
(In thousands except per share data) Year ended April 30, 1996
- - - ---------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth Year
Revenues $ 581,857 $ 589,770 $ 586,717 $ 621,256 $ 2,379,600
Income before income taxes $ 31,663 $ 33,217 $ 33,080 $ 41,188 $ 139,148
Net income $ 18,301 $ 19,564 $ 19,482 $ 24,273 $ 81,620
- - - ---------------------------------------------------------------------------------------------------------------------------
Net income per share* $ .52 $ .57 $ .54 $ .70 $ 2.33
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share* $ .17 $ .17 $ .17 $ .17 $ .68
- - - ---------------------------------------------------------------------------------------------------------------------------
Closing price range of stock:*
High $ 23 3/4 $ 23 3/8 $ 25 3/4 $ 28 3/8 $ 28 3/8
Low $ 19 5/8 $ 21 $ 21 7/8 $ 24 1/2 $ 19 5/8
- - - ---------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 1995
- - - ---------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth Year
Revenues $ 520,308 $ 510,137 $ 494,141 $ 546,040 $ 2,070,626
Income before income taxes $ 28,035 $ 29,874 $ 28,254 $ 35,155 $ 121,318
Net income $ 16,515 $ 17,612 $ 16,762 $ 20,773 $ 71,662
- - - ---------------------------------------------------------------------------------------------------------------------------
Net income per share* $ .47 $ .51 $ .49 $ .61 $ 2.08
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share* $ .16 $ .16 $ .16 $ .16 $ .64
- - - ---------------------------------------------------------------------------------------------------------------------------
Closing price range of stock:*
High $ 19 3/8 $ 19 $ 19 $ 20 1/4 $ 20 1/4
Low $ 17 1/2 $ 17 3/8 $ 16 3/4 $ 17 5/8 $ 16 3/4
- - - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996. See capital
stock note in Notes to Consolidated Financial Statements.
26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors is contained on pages 2 through 6 of
the Registrant's Proxy Statement for its 1996 Annual Meeting of Stockholders,
which information is hereby incorporated by reference.
Executive Officers of the Registrant
An Executive Officer
Office Held Name---Age Since Fiscal Year
Chairman of the Board, President
and Chief Executive Officer Robert D. Kunisch - 55 1982
Senior Vice President William F. Adler - 52 1986
Senior Vice President Eugene A. Arbaugh - 58 1987
Senior Vice President, Chief Financial Officer
and Treasurer Roy A. Meierhenry - 57 1987
Senior Vice President H. Robert Nagel - 52 1992
Vice President and Secretary Samuel H. Wright - 50 1983
Vice President David T. Aldridge - 49 1996
Vice President Donna C. Easton - 48 1988
Vice President Terence W. Edwards - 41 1995
Vice President Terry E. Kridler - 49 1986
Vice President Edwin F. Miller - 53 1990
Corporate Controller Nan A. Grant - 44 1991
Officers are elected by the Board of Directors to serve at the pleasure of the
Board. There is no family relationship between any of such persons. Each of the
persons named above has been employed by the Company or one of its subsidiaries
for more than the past five years except David Aldridge, who was Executive Vice
President and Chief Information Officer for Banc One Mortgage and was Vice
President and Chief Technology Officer for Banc One Diversified Services
Corporation.
Item 11. Executive Compensation
Information with respect to executive compensation is contained on pages 9
through 17 of the Registrant's Proxy Statement for its 1996 Annual Meeting of
Stockholders, which information is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners and
management is contained on pages 7 and 8 of the Registrant's Proxy Statement for
its 1996 Annual Meeting of Stockholders, which information is hereby
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
PAGE
NUMBER
(a) 1. Index to Financial Statements
Report and Consent of Independent Auditors 12
Consolidated Financial Statements of PHH Corporation
and Subsidiaries and related notes:
Consolidated Statements of Income for the years ended April 30,
1996, 1995, and 1994 13
Consolidated Balance Sheets at April 30, 1996 and 1995 14
Consolidated Statements of Cash Flows for the years ended April 30,
1996, 1995 and 1994 15
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 1996, 1995 and 1994 16
Notes to Consolidated Financial Statements 17
2. Index to Financial Statement Schedules
Consolidated Schedules of PHH Corporation and Subsidiaries for the
years ended April 30, 1996, 1995 and 1994:
Schedule II--Valuation and Qualifying Accounts 32
All schedules not listed have been omitted because of the absence of
the conditions under which they are required or the required
information is included elsewhere in the financial statements or notes
thereto.
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.
Exhibit No.
3-1 Charter of PHH Corporation, as amended(*).
3-2 By-Laws of PHH Corporation, as amended October 1990(*).
4-1 Indenture between the Company and Bank of Boston, Trustee,
dated as of March 1, 1984, filed as Exhibit 4(a) to
Registration No. 2-90026 (*).
4-2 Master Credit Agreements of various dates among the Company
and various commercial banks filed as Exhibit 4-4 to Form 10-K
for fiscal year ended April 30, 1990(*).
4-3 Credit Agreements of various dates among the Company and
various commercial banks filed as Exhibit 4-5 to Form 10-K for
fiscal year ended April 30, 1990(*).
4-4 Indenture between the Company and Bank of New York, Trustee,
dated as of May 1, 1992, filed as Exhibit 4(a)(iii) to
Registration Statement 33-48125(*).
4-5 Indenture between the Company and First National Bank of
Chicago, Trustee, dated as of March 1, 1993, filed as Exhibit
4(a)(i) to Registration Statement 33-59376 (*).
4-6 Policy on confidential proxy voting and Independent Tabulation
and Inspection of Elections adopted by resolution of the Board
of Directors on June 17, 1991, filed as Exhibit 4-8 to Form
10-K for fiscal year ended April 30, 1991 (*).
10-1 Amended and Restated Stock Compensation Plan of 1990 filed as
Exhibit 4(a) to Registration No. 33-53282 (*)
10-2 Outside Directors Stock Option Plan filed as Exhibit 4(b) to
Registration No. 33-38309 (*).
10-3 Amended and Restated Employee Investment Plan filed as Exhibit
4 to Registration Statement No. 33-64617 (*).
10-4 Amended and Restated Directors Deferred Compensation Plan for
Corporate Directors filed as Exhibit 10-3 to Form 10-K for
fiscal year ended April 30, 1993 and as amended on April 18,
1994 and as amended on February 26, 1996 (**).
28
10-5 Directors Deferred Stock Plan filed as Exhibit 10-4 to Form
10-K for fiscal year ended April 30, 1994 and as amended on
April 18, 1994 and by Amendment No. 2 on June 24, 1996 (**).
10-6 Executive Deferred Compensation Plan and Form of Executive
Deferred Compensation Plan Trust Agreement filed as Exhibit
10-5 to Form 10-K for fiscal year ended April 30, 1994, as
amended by Amendment No. 1 on February 28, 1994, filed as
Exhibit 10-6 to Form 10-K for fiscal year ended April 30, 1995
and Amendment No.2 on February 26, 1996 (**).
10-7 Long-Term Incentive Plan (FY 95-96-97) filed as Exhibit 10-7
to Form 10-K for fiscal year ended April 30, 1994 (*).
10-8 Long-Term Incentive Plan (FY 97-98-99) (**).
10-9 Corporate Incentive Plan (FY 97) and CEO & President Incentive
Plan (FY97) (**).
10-10 Amended and Restated Supplemental Executive Retirement Plan,
filed as Exhibit 10-10 to Form 10-K for fiscal year ended
April 30, 1989, as amended by First Amendment on June 18,
1990, filed as Exhibit 10-12 to Form 10-K for fiscal year
ended April 30, 1990, by Second Amendment on November 11,
1991, filed as Exhibit 10-8 to Form 10-K for fiscal year ended
April 30, 1993, by Third Amendment on February 28, 1994 filed
as Exhibit 10-10 for fiscal year April 30, 1994 and by Fourth
Amendment on April 10, 1995, filed as Exhibit 10-11 to Form
10-K for fiscal year ended April 30, 1995 (*).
10-11 Form of Amended and Restated Supplemental Executive Retirement
Agreement filed as Exhibit 10-11 to Form 10-K for fiscal year
ended April 30, 1994 (*).
10-12 Amended and Restated Excess Benefit Plan filed as Exhibit
10-12 to Form 10-K for fiscal year ended April 30, 1994 and as
amended by Amendment No. 1 on February 26, 1996 (**).
10-13 Form of Amended and Restated Deferred Compensation Trust
Agreement for Supplemental Executive Retirement Plan and
Excess Benefit Plan filed as Exhibit 10-13 to Form 10-K for
fiscal year ended April 30, 1994 (*).
10-14 Amended and Restated Senior Executive Severance Plan filed as
Exhibit 10-14 to Form 10-K for fiscal year ended April 30,
1990 (*).
10-15 Form of Distribution Agreement between the Company and The
First Boston Corporation; Goldman, Sachs & Co., Merrill Lynch
& Co.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated;
and J.P. Morgan Securities, Inc., dated March 26, 1993, filed
as Exhibit 1 to Registration Statement 33-59376 (*).
10-16 Form of Distribution Agreement between the Company and
Goldman, Sachs & Co.; Merrill Lynch & Co.; Merrill Lynch,
Pierce, Fenner & Smith, Incorporated; and J.P. Morgan
Securities, Inc., dated July 5, 1994, filed as Exhibit 1 to
Registration Statement 33-52669 (*).
10-17 Form of 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.
10-18 Form of Rights Agreement between the Company and Maryland
National Bank dated as of March 17, 1986, filed as an exhibit
to the Form 8-K for the month of March 1986 and amended
January 16, 1989, filed as an exhibit to Form 8-K for the
month of January 1989 and amended April 6, 1992, filed as
Exhibit 10-15 to Form 10-K for the fiscal year ended April 30,
1992 (*).
10-19 Form of Rights Agreement between the Company and First Chicago
Trust Company of New York dated as of March 15, 1996, filed as
an exhibit to the Form 8-K and Form 8-A for the month of March
1996 (*)
11 Schedule containing information used in the computation of net
income per share(**).
12 Schedule containing information used in the computation of the
ratio of earnings to fixed charges(**).
21 Subsidiaries of the registrant(**).
24 Power of Attorney(**).
27 Financial Data Schedule (filed electronically only).
29
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.
(b) Reports on Form 8-K
There was one report on Form 8-K filed during the fourth quarter of
fiscal 1996.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By ROBERT D. KUNISCH
Robert D. Kunisch
Chairman of the Board,
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:
ROBERT D. KUNISCH July 26, 1996
Robert D. Kunisch
Chairman of the Board,
Chief Executive Officer
and President
Principal Financial Officer:
ROY A. MEIERHENRY July 26, 1996
Roy A. Meierhenry
Senior Vice President,
Chief Financial Officer and Treasurer
Principal Accounting Officer:
NAN A. GRANT July 26, 1996
Nan A. Grant
Corporate Controller
Majority of the Board of Directors:
Robert D. Kunisch, James S. Beard,
Andrew F. Brimmer, George L. Bunting, Jr.,
Alan P. Hoblitzell, Jr., Paul X. Kelley,
L. Patton Kline, Francis P. Lucier, Kent C. Nelson,
Donald J. Shepard, Anne M. Tatlock,
Alexander B. Trowbridge
ROBERT D. KUNISCH July 26, 1996
Robert D. Kunisch
As Attorney-in-fact
31
PHH Corporation and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED APRIL 30, 1996, 1995 and 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
CHARGED
BALANCE AT (CREDITED) BALANCE
BEGINNING OF TO OPERATING AT END
DESCRIPTION YEAR EXPENSES OTHERS (a) DEDUCTIONS(b) OF YEAR
VALUATION ACCOUNTS DEDUCTED
IN THE BALANCE SHEET FROM
ASSETS TO WHICH THEY APPLY
Accounts receivable $ 6,689,000 $ 3,099,000 $ (977,000) $ 3,333,000 $ 5,478,000
Net investment in leases and
leased vehicles 8,486,000 1,160,000 -- 284,000 9,362,000
Carrying costs on homes under
management 1,650,000 -- -- 1,650,000
Mortgages held for sale and
mortgage-related notes receivable 11,883,000 25,227,000 -- 18,563,000 18,547,000
Real estate management programs 974,000 264,000 -- 898,000 340,000
-------------- ------------ ----------- ------------ -----------
YEAR ENDED APRIL 30, 1996 $ 29,682,000 $29,750,000 $ (977,000) $ 23,078,000 $35,377,000
============== ============ =========== ============ ===========
Accounts receivable $ 6,525,000 $ 2,708,000 -- $ 2,544,000 $ 6,689,000
Net investment in leases and
leased vehicles 5,862,000 2,648,000 -- 24,000 8,486,000
Carrying costs on homes under
management 1,650,000 -- -- -- 1,650,000
Mortgages held for sale and
mortgage-related notes receivable 6,352,000 11,122,000 5,591,000 11,883,000
Real estate management programs 1,732,000 (758,000) -- -- 974,000
-------------- ------------ ----------- ------------ -----------
YEAR ENDED APRIL 30, 1995 $ 22,121,000 $ 15,720,000 $ -- $ 8,159,000 $29,682,000
============== ============ =========== ============ ===========
Accounts receivable $ 8,453,000 $3,299,000 $ 22,000 $ 5,249,000 $ 6,525,000
Net investment in leases and
leased vehicles 8,282,000 (1,669,000) -- 751,000 5,862,000
Carrying costs on homes under
management 1,301,000 349,000 -- -- 1,650,000
Mortgages held for sale and
mortgage-related notes receivable 7,530,000 8,000 -- 1,186,000 6,352,000
Real estate management programs 2,001,000 (269,000) -- -- 1,732,000
-------------- ------------ ----------- ------------ -----------
YEAR ENDED APRIL 30, 1994 $ 27,567,000 $ 1,718,000 $ 22,000 $ 7,186,000 $22,121,000
============== ============ =========== ============ ===========
NOTES: (a) Amounts relate to acquisitions, divestitures and reclassifications
of prior year amounts.
(b) Deductions from reserves represent accounts charged off, less
recoveries, and foreign translation gains and losses.
(c) Amounts have been restated for comparative purposes.
32