SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 1-7797
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PHH Corporation
(Exact name of Registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive (Zip Code)
office)
(973) 428-9700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if applicable)
------------
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [T] No [ ]
The Company meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is, therefore, filing this Form with the reduced
disclosure format.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents .............................................................. $ 48,629 $ 2,102
Restricted cash ........................................................................ 23,842 23,727
Accounts and notes receivable,
net of allowance for doubtful accounts .............................................. 648,384 570,755
Other assets ........................................................................... 376,484 425,786
---------- ----------
Total assets exclusive of assets under programs ........................................ 1,097,339 1,022,370
---------- ----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles ........................................ 3,812,610 3,659,049
Relocation receivables .............................................................. 649,673 775,284
Mortgage loans held for sale ........................................................ 1,795,783 1,636,341
Mortgage servicing rights ........................................................... 408,933 373,049
---------- ----------
6,666,999 6,443,723
---------- ----------
Total assets ........................................................................... $7,764,338 $7,466,093
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Liabilities and shareholder's equity
Accounts payable and accrued liabilities .............................................. $ 736,731 $ 698,500
Deferred revenue ...................................................................... 59,166 53,324
----------- -----------
Total liabilities exclusive of liabilities under programs ............................. 795,897 751,824
----------- -----------
Liabilities under management and mortgage programs
Debt ............................................................................... 5,796,886 5,602,600
----------- -----------
Deferred income taxes .............................................................. 298,513 295,707
----------- -----------
Total liabilities ..................................................................... 6,891,296 6,650,131
----------- -----------
Commitments and contingencies
Shareholder's equity
Preferred stock - authorized 3,000,000 shares ......................................... -- --
Common stock, no par value - authorized 75,000,000 shares;
issued and outstanding 100 shares .................................................. 289,157 289,157
Retained earnings ..................................................................... 607,998 544,244
Accumulated other comprehensive loss .................................................. (24,113) (17,439)
----------- -----------
Total shareholder's equity ............................................................ 873,042 815,962
----------- -----------
Total liabilities and shareholder's equity ............................................ $ 7,764,338 $ 7,466,093
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
Revenues
Fleet management services ................................................. $ 60,031 $ 65,476
Relocation services, net of interest ..................................... 99,653 85,245
Mortgage services (net of amortization of
mortgage servicing rights and
interest of $48,076, and $28,010, respectively ......................... 77,996 33,632
-------- --------
Service fees - net .......................................................... 237,680 184,353
Fleet leasing (net of depreciation and interest
costs of $315,564 and $286,075, respectively ............................. 15,296 15,319
-------- --------
Net revenues ................................................................ 252,976 199,672
-------- --------
Expenses
Operating ................................................................ 110,083 89,505
General and administrative ............................................... 38,936 44,248
Depreciation and amortization ............................................ 7,102 6,979
-------- --------
Total expenses .............................................................. 156,121 140,732
-------- --------
Income before income taxes .................................................. 96,855 58,940
Provision for income taxes .................................................. 33,101 24,300
-------- --------
Net income .................................................................. $ 63,754 $ 34,640
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
Net income ............................................................................. $ 63,754 $ 34,640
Merger-related payments ................................................................ (53,431) --
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................................................... 7,102 6,979
Other .................................................................................. 26,435 60,496
Management and mortgage programs:
Depreciation and amortization ....................................................... 278,460 281,412
Mortgage loans held for sale ........................................................ (159,442) 32,876
----------- -----------
Net cash provided by operating activities .............................................. 162,878 416,403
----------- -----------
Investing Activities
Additions to property and equipment - net .............................................. (27,758) (5,962)
Other .................................................................................. 6,916 1,519
Management and mortgage programs:
Investment in leases and leased vehicles ............................................ (626,170) (690,212)
Payments received on investment in leases and leased vehicles ....................... 222,021 268,790
Proceeds from sales and transfers of leases and leased vehicles
to third parties .................................................................. 27,284 84,825
Equity advances on homes under management ........................................... (1,436,765) (900,583)
Repayment of advances on homes under management ..................................... 1,564,453 962,122
Additions to mortgage servicing rights .............................................. (109,486) (41,691)
Proceeds from sales of mortgage servicing rights .................................... 39,852 --
----------- -----------
Net cash used in investing activities .................................................. (339,653) (321,192)
----------- -----------
Financing Activities
Proceeds received from parent company capital contribution ............................. 46,000 --
Other .................................................................................. -- (1,278)
Management and mortgage programs:
Proceeds from debt issuance or borrowings ........................................... 983,808 324,508
Principal payments on borrowings .................................................... (449,096) (880,064)
Net change in short-term borrowings ................................................. (340,426) 422,622
----------- -----------
Net cash provided by (used in) financing activities .................................... 240,286 (134,212)
----------- -----------
Effect of exchange rates on cash and cash equivalents .................................. (16,984) 38,366
----------- -----------
Increase (decrease) in cash ............................................................ 46,527 (635)
Cash and cash equivalents at beginning of period ....................................... 2,102 13,779
----------- -----------
Cash and cash equivalents at end of period ............................................. $ 48,629 $ 13,144
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
PHH Corporation, together with its wholly-owned subsidiaries, (the
"Company") is a leading provider of corporate relocation, fleet management
and mortgage services. In April 1997, the Company merged with HFS
Incorporated ("HFS") (the "HFS Merger") and on December 17, 1997, HFS
merged with CUC International Inc. ("CUC") with CUC surviving and changing
its name to Cendant Corporation (the "Cendant Merger"). Effective upon
Cendant Merger, the Company became a wholly-owned subsidiary of Cendant
Corporation (the "Parent Company"). However, pursuant to certain covenant
requirements under the indentures in which the Company issues debt, the
Company continues to operate and maintain its status as a separate public
reporting entity, which is the basis under which the accompanying financial
statements and footnotes are presented.
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company included in this Form 10-Q reflect all
adjustments necessary for a fair presentation of such financial statements.
There were no adjustments of an unusual nature recorded during the
three-months ended March 31, 1998 and 1997. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the
Company's annual consolidated financial statements. The December 31, 1997
consolidated balance sheet was derived from the Company's audited financial
statements. This Form 10-Q should be read in conjunction with the Company's
audited financial statements and notes thereto, included in the Company's
December 31, 1997 Form 10-K.
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the presentation used in 1998.
2. Comprehensive Income
The Company adopted Statement of Accounting Standard No. 130 "Reporting
Comprehensive Income" effective January 1, 1998. The statement establishes
standards for the reporting and display of an alternative income
measurement and its components in the financial statements.
The components of comprehensive income are summarized as follows:
Three Months Ended March 31,
1998 1997
-------- --------
(In thousands)
Net income ............................... $ 63,754 $ 34,640
Other comprehensive loss:
Currency translation adjustment ........ (6,674) (6,009)
-------- --------
Comprehensive income ..................... $ 57,080 $ 28,631
======== ========
3. Merger-Related Charges
In connection with the HFS Merger and the Cendant Merger, the Company
incurred aggregate merger-related charges of $262.2 million ($208.8
million, after tax) which are summarized by type as follows:
Cendant Merger Charge
Coincident with the Cendant Merger, the Company recorded a merger-related
charge (the "Cendant Merger Charge") during the fourth quarter of 1997 of
$46.4 million ($32.5 million after tax). The Cendant Merger Charge was
substantially paid as of March 31, 1998.
HFS Merger Charge
In connection with the HFS Merger, the Company recorded a merger-related
charge (the "HFS Merger Charge") during the second quarter of 1997 of
$215.8 million ($176.3 million after tax).
The Company anticipates that approximately $174.3 million will be paid in
cash in connection with the HFS Merger Charge of which $119.0 million was
paid through March 31, 1998. The payments were partially funded with a
capital infusion from HFS of $136.0 million, $90.0 million of which was
paid in the third quarter of 1997 and the balance of which was paid in the
first quarter of 1998. The cash portion of the HFS Merger Charge remaining
at March 31, 1998 will be financed from cash generated from operations or
borrowings under the Company's credit facilities. It is currently
anticipated that the restructuring plan will be completed in the second
quarter of 1998. Revenue and operating results from activities that will
not be continued are not material to the results of operations of the
Company.
4. Subsequent Event-Parent Company Litigation
On April 15, 1998, the Parent Company announced that it had discovered
accounting irregularities in certain former CUC business units, which are
part of the Parent Company's Alliance Marketing segment (formerly the
Membership segment) and the Audit Committee of the Parent Company's Board
of Directors has initiated an investigation into such matters. Accordingly,
the Parent Company will restate annual and quarterly net income and
earnings per share for 1997 and may restate certain other previous periods
related to the former CUC businesses. The investigation is expected to be
completed during the summer of 1998.
Since the aforementioned Parent Company announcement, and pursuant to the
date hereof, fifty-two purported class action lawsuits have been filed
against the Parent Company, its predecessor, CUC, and certain current and
former officers and directors of the Parent Company and CUC asseting claims
under federal securities law. Forty-five of these actions were filed in the
United States District Court for the District of New Jersey, five were
filed in the United States District Court for the District of Connecticut,
one was filed in the United States District Court for the Eastern District
of Pennsylvania and one has been filed in New Jersey Supreme Court.
Certain of these actions purport to be brought on behalf of purchasers of
CUC or the Parent Company's common stock during various periods from May
28, 1997 through April 15, 1998. Others are brought on behalf of persons
who exchanged common stock of HFS for the Parent Company's common stock
coincident with the Cendant Merger. In addition, five actions, pending in
the United States District Court for the District of New Jersey and one
action pending in New Jersey Superior Court purport to be brought either in
their entirety or in part on behalf of purchasers of the Parent Company's
PRIDES securities offering. These actions were all commenced subsequent to
the aforementioned Parent Company announcement. The complaints allege,
among other things, that as a result of accounting irregularities, the
Parent Company and CUC's previously issued financial statements were
materially false and misleading and that the defendants knew or should have
known that these financial statements caused CUC's and the Parent Company's
common stock prices to rise artificially. The actions variously allege
violations of Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and SEC Rule 10b-5 promulgated thereunder, Section 14(a) of
the Exchange Act and SEC Rule 14a-9 promulgated thereunder, Section 20(a)
of the Exchange Act, and Sections 11, 12 and 15 of the Securities Act of
1933. Certain actions also allege violations of common law.
In addition, on April 27, 1998 a shareholder derivative complaint was filed
in the United States District Court for The District of New Jersey against
certain of the Company's directors, current or former officers, The Bear
Stearns Companies Inc., Bear Stearns & Co. Inc. and, as a nominal party,
the Company. The shareholder derivative complaint alleges that individual
officers and directors of the Company have unlawfully profited by selling
shares of the Company's stock while in possession of non-public material
information concerning accounting irregularities. The complaint also
alleges various breaches of fiduciary duty, mismangement, negligence and
corporate waste.
Another action was filed on April 29, 1998 in the Court of Chancery for the
State of Delaware (the "Corwin Action"). The Corwin Action is purportedly
brought on behalf of a class of all shareholders of HFS who exchanged their
HFS shares for CUC shares in connection with the Cendant Merger, and names
as defendants HFS and twelve individuals who were directors of HFS. The
complaint in the Corwin Action alleges that the defendants breached their
fiduciary duties of loyalty, good faith, care and candor in connection with
the Cendant Merger, in that they failed to properly investigate the
operations and financial statements of CUC before approving the Cendant
Merger at an allegedly inadequate price. The Corwin Action seeks, among
other things, recision of the Cendant Merger and compensation for all
losses and damages suffered in connection therewith.
Another action was filed on May 4,1998 in the Superior Court of New Jersey,
Morris County (the "Rosenberg action").The action is brought as a purported
class action on behalf of all purchasers of Income PRIDES, Growth PRIDES,
stock or any other securities issued by Cendant pursuant to the
registration statement and prospectus filed with the SEC on or about
February 25, 1998. The purported class period is February 25, 1998 to April
15, 1998. The Rosenberg action names as defendants Cendant, Cendant Capital
I, E. Kirk Shelton and Walter A. Forbes. The complaint asserts that the
registration statement and prospectus were false and misleading in
violation of Section 11 of the Securities Act of 1933. It seeks damages in
an unspecified amount.
While it is not feasible to predict or determine the final outcome of these
proceedings, an adverse outcome with respect to such proceedings could have
a material adverse impact on the financial position, results of operations
and cash flows of the Parent Company which could have a material adverse
impact on the results of operations or cash flow of the Company.
<PAGE>
Item 2. Management's Narrative Analysis of Results of Operations and Liquidity
and Capital Resources
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements, include, but are not limited to:
uncertainty as to the Company's future profitability; the Company's ability to
develop and implement operational and financial systems to manage rapidly
growing operations; competition in the Company's existing and potential future
lines of business; the Company's ability to integrate and operate successfully
acquired businesses and the risks associated with such businesses; the Company's
ability to obtain financing on acceptable terms to finance the Company's growth
strategy and for the Company to operate within the limitations imposed by
financing arrangements; uncertainty as to the future profitability of acquired
businesses, and other factors. Other factors and assumptions not identified
above were also involved in the derivation of these forward-looking statements,
and the failure of such other assumptions to be realized as well as other
factors may also cause actual results to differ materially from those projected.
The Company assumes no obligation to update these forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
General Overview
PHH Corporation, together with its wholly-owned subsidiaries, (the "Company") is
a leading provider of corporate relocation, fleet management and mortgage
services. In April 1997, the Company merged with HFS Incorporated ("HFS") (the
"HFS Merger") and on December 17, 1997, HFS, merged with CUC International Inc.
("CUC") with CUC surviving and changing its name to Cendant Corporation (the
"Cendant Merger"). Effective upon the Cendant Merger, the Company became a
wholly-owned subsidiary of Cendant Corporation (the "Parent Company"). However,
pursuant to certain covenant requirements under the indentures in which the
Company issues debt, the Company continues to operate and maintain its status as
a separate public reporting entity.
Results of Operations
Net Revenue
Net revenue of the Company increased $53.3 million (27%) from $199.7 million in
1997 to $253.0 million in 1998. The increase reflects higher revenues in the
Company's real estate segment (relocation and mortgage service businesses)
partially offset by a $5.5 million (7%) decrease in fleet management net
revenue. The decrease in fleet management net revenue results from a $12.8
reduction in preferred alliance revenue for the comparative quarters. Excluding
the effects of preferred alliance revenue, fleet management revenue from core
operations increased $7.3 million (12%) due to increases in both service fees
and asset-based fees from its various vehicle management and maintenance
programs. Fleet management revenue does not include $7.4 million of revenue from
the Harpur Group, a fleet management company which was acquired by the Parent
Company in January 1998. Real estate net revenue of $177.6 million in 1998
increased $58.8 million or 49% from 1997. The real estate segment experienced
higher revenue within its underlying relocation and mortgage businesses.
Relocation services net revenue increased 17% from $85.2 million in 1997 to
$99.7 million in 1998 which was primarily attributable to increased transaction
volume. Mortgage services net revenue increased 132% from $33.6 million in 1997
to $78.0 million in 1998 primarily as a result of a $34.5 million (180%)
increase in loan origination revenue, resulting from an increase in the volume
of loan closings and a $14.4 million (63%) increase in loan servicing fees.
Operating Margins
Total Company's operating margin increased from 30% in 1997 to 38% in 1998. Such
margin improvements primarily resulted from the increased volume of service
transactions discussed above as well as operational efficiencies realized
principally from the restructuring of the Company's fleet management and
relocation businesses in connection with the aforementioned mergers.
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.
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 the 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. Within mortgage banking
services, the Company funds the mortgage loans on a short-term basis until the
mortgage loans are sold to unrelated investors, which generally occurs within
sixty days. Interest rate risk on mortgages originated for sale is managed
through the use of forward delivery contracts, financial futures and options.
Financial derivatives are also used as a hedge to minimize earnings volatility
as it relates to mortgage servicing assets.
The Company supports purchases of leased vehicles, equity advances, and mortgage
originations primarily by issuing commercial paper and medium term notes. Such
borrowings are included in liabilities under management and mortgage programs
rather than long-term debt since such debt corresponds directly with high
quality related assets. Accordingly, following the announcement of the HFS
Merger, Standard & Poors Corporation, Moody's Investor's Services and Fitch
Investor Service affirmed investment grade ratings of A+, A2 and A+,
respectively to the Company's debt and A1, P1 and F1, respectively, to the
Company's commercial paper. Such credit ratings remain following the April 15,
1998 Parent Company announcement regarding accounting irregularities discovered
by the Parent company in certain former CUC business units (see "Parent Company
Condition"); however, with negative implications. A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time.
The Company expects to continue to have 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, European and Canadian commercial paper markets, as
well as other cost-effective short-term instruments. In addition, the Company
will continue to utilize the public and private debt markets to issue unsecured
senior corporate debt. Augmenting these sources, the Company will continue to
manage outstanding debt with the potential sale or transfer of managed assets to
third parties while retaining fee-related services. At March 31, 1998, the
Company's outstanding debt was comprised of commercial paper, medium term notes
and other borrowings of $2.2 billion, $3.4 billion, and $.2 billion,
respectively.
To provide additional financial flexibility, the Company's current policy is to
ensure that minimum committed bank facilities aggregate 80 percent of the
average amount of outstanding commercial paper. The Company maintains $2.5
billion of committed and unsecured credit facilities, which is backed by
domestic and foreign banks and is comprised of $1.25 billion of lines maturing
in 364 days or less and $1.25 billion maturing on March 10, 2002. In addition,
the Company has approximately $180 million of uncommitted lines of credit with
various financial institutions. Management closely evaluates not only the credit
quality of the banks but the terms of the various agreements to ensure ongoing
availability. The full amount of the Company's committed facilities at March 31,
1998, 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 notes funding.
The Company currently operates under policies limiting (a) the payment of
dividends on the Company's capital stock to 40% of its net income, excluding the
net of tax impact on non-recurring charges ("Adjusted Net Income") on an annual
basis, less the outstanding principal balance of loans from the Company to the
Parent Company as of the date of any proposed dividend payment, and (b) the
outstanding principal balance of loans from the Company to the Parent Company to
40 percent of its net income on an annual basis, less payment of dividends on
the Company's capital stock during such year.
Cash flow provided by operating activities for the 1998 quarter was $162.9
million compared to $416.4 million for the 1997 quarter. Operating cash flows in
1998 reflects an incremental cash use of $192.3 million versus 1997 related to
the $34.5 billion increase in mortgage loan originations. Cash flow provided by
operating activities for the 1998 quarter also included $53.4 million of
merger-related cash payments associated with the HFS Merger and the Cendant
Merger which occurred during the second and fourth quarters of 1997,
respectively.
The Company filed a shelf registration statement with the Securities and
Exchange Commission which became effective March 2, 1998, for the aggregate
issuance of up to $3 billion of medium-term notes. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds will be used to finance the assets
under management and mortgage programs and for general corporate purposes.
Parent Company Condition
On April 15, 1998, the Parent Company announced that it had discovered
accounting irregularities in certain former CUC business units, which now
comprise part of the Parent Company's Alliance Marketing segment (formerly the
Membership segment). The Parent Company announced that the Audit Committee of
the Parent Company's Board of Directors had initiated an investigation into such
matters. Accordingly, the Parent Company will restate annual and quarterly net
income and earnings per share for 1997 and may restate financial statements for
periods prior to 1997. The investigation is expected to be completed during the
summer of 1998.
Since the aforementioned Parent Company announcement, and pursuant to the
date hereof, fifty-two purported class action lawsuits have been filed against
the Parent Company, its predecessor, CUC, and certain current and former
officers and directors of the Parent Company and CUC asseting claims under the
federal securities law. Forty-five of these actions were filed in the United
States District Court for the District of New Jersey, five were filed in the
United States District Court for the District of Connecticut, one was filed in
the United States District Court for the Eastern District of Pennsylvania and
one has been filed in New Jersey Supreme Court.
Certain of these actions purport to be brought on behalf of purchasers of CUC or
the Parent Company's common stock during various periods from May 28, 1997
through April 15, 1998. Others are brought on behalf of persons who exchanged
common stock of HFS for the Parent Company's common stock coincident with the
Cendant Merger. In addition, five actions, pending in the United States District
Court for the District of New Jersey and one action pending in New Jersey
Superior Court purport to be brought either in their entirety or in part on
behalf of purchasers of the Parent Company's PRIDES securities offering. These
actions were all commenced subsequent to the aforementioned Parent Company
announcement. The complaints allege, among other things, that as a result of
accounting irregularities, the Parent Company and CUC's previously issued
financial statements were materially false and misleading and that the
defendants knew or should have known that these financial statements caused
CUC's and the Parent Company's common stock prices to rise artificially. The
actions variously allege violations of Section 10(b) of the Securities Exchange
Act of 1934 (the "Exchange Act") and SEC Rule 10b-5 promulgated thereunder,
Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder,
Section 20(a) of the Exchange Act, and Sections 11, 12 and 15 of the Securities
Act of 1933. Certain actions also allege violations of common law.
In addition, on April 27, 1998 a shareholder derivative complaint was filed in
the United States District Court for The District of New Jersey against certain
of the Company's directors, current or former officers, The Bear Stearns
Companies Inc., Bear Stearns & Co. Inc. and, as a nominal party, the Company.
The shareholder derivative complaint alleges that individual officers and
directors of the Company have unlawfully profited by selling shares of the
Company's stock while in possession of non-public material information
concerning accounting irregularities. The complaint also alleges various
breaches of fiduciary duty, mismanagement, negligence and corporate waste.
Another action was filed on April 29, 1998 in the Court of Chancery for the
State of Delaware (the "Corwin Action"). The Corwin Action is purportedly
brought on behalf of a class of all shareholders of HFS who exchanged their HFS
shares for CUC shares in connection with the Cendant Merger, and names as
defendants HFS and twelve individuals who were directors of HFS. The complaint
in the Corwin Action alleges that the defendants breached their fiduciary duties
of loyalty, good faith, care and candor in connection with the Cendant Merger,
in that they failed to properly investigate the operations and financial
statements of CUC before approving the Cendant Merger at an allegedly inadequate
price. The Corwin Action seeks, among other things, recision of the Cendant
Merger and compensation for all losses and damages suffered in connection
therewith.
Another action was filed on May 4,1998 in the Superior Court of New Jersey,
Morris County (the "Rosenberg action").The action is brought as a purported
class action on behalf of all purchasers of Income PRIDES, Growth PRIDES, stock
or any other securities issued by Cendant pursuant to the registration statement
and prospectus filed with the SEC on or about February 25, 1998. The purported
class period is February 25, 1998 to April 15, 1998. The Rosenberg action names
as defendants Cendant, Cendant Capital I, E. Kirk Shelton and Walter A. Forbes.
The complaint asserts that the registration statement and prospectus were false
and misleading in violation of Section 11 of the Securities Act of 1933. It
seeks damages in an unspecified amount.
While it is not feasible to predict or determine the final outcome of these
proceedings, an adverse outcome with respect to such proceedings could have a
material adverse impact on the financial position, results of operations and
cash flows of the Parent Company which could have a material adverse impact on
the results of operations or cash flow of the Company.
Impact of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" effective for annual periods beginning after
December 15, 1997 and interim periods subsequent to the initial year of
application. SFAS No. 131 establishes standards for the way that public business
enterprises report information about their operating segments in their annual
and interim financial statements. It also requires public enterprises to
disclose company-wide information regarding products and services and the
geographic areas in which they operate. The Company will adopt SFAS No. 131
effective for the 1998 calendar year end.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pension and Other Postretirement Benefits" effective for period beginning after
December 15, 1997. The Company will adopt SFAS No. 132 effective for the 1998
calendar year end.
The aforementioned recently issued accounting pronouncements establish standards
for disclosures only and therefore will have no impact on the Company's
financial position or results of operations.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In normal operations, the Company must deal with effects of changes in interest
rates and currency exchange rates. The following discussion presents an overview
of how such changes are managed and a view of their potential effects.
The Company uses various financial instruments, particularly interest rate and
currency swaps, but also options, floors and currency forwards, to manage its
respective interest rate and currency risks. The Company is exclusively an end
user of these instruments, which are commonly referred to as derivatives.
Established practices require that financial instruments relate to specific
asset, liability or equity transactions or to currency exposure.
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rate and currency
exchange in their financial statements. Although the rules offer alternatives
for presenting this information, none of the alternatives is without
limitations. The following discussion is based on so-called "shock tests", which
model effects of interest rate and currency shifts on the reporting company.
Shock tests, while probably the most meaningful analysis permitted, are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to include the
extraordinarily complex market reactions that normally would arise from the
market shifts modeled. While the following results of shock tests for interest
rate and currencies may have some limited use as benchmarks, they should not be
viewed as forecasts.
One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net earnings
resulting from a hypothetical 10% change in interest rates across all
maturities (sometimes referred to as a "parallel shift in the yield
curve"). Under this model, it is estimated that, all else constant, such an
increase, including repricing effects in the securities portfolio, would
not materially effect the 1998 net earnings of the Company based on current
positions.
One means of assessing exposure to changes in currency exchange rates is
to model effects on reported earnings using a sensitivity analysis. Period
ended March 31, 1998 consolidated currency exposures, including financial
instruments designated and effective as hedges, were analyzed to identify
the Company's assets and liabilities denominated in other than their
relevant functional currency. Net unhedged exposures in each currency were
then remeasured assuming a 10% change in currency exchange rates compared
with the U.S. dollar. Under this model, it is estimated that, all else
constant, such a change would not materially effect the 1998 net earnings
of the Company based on current positions.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) The Company filed a report on Form 8-K on March 3, 1998 reporting in
Item 5 the launching of a new medium term
note program and in Item 7 the exhibits related thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: May 15, 1998 By: /s/ Scott E. Forbes
------------------------
Scott E. Forbes
Executive Vice President and
Chief Accounting Officer
PHH Corporation and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended
------------------------------------------------------------------------
Three Months Ended December 31 January 31
March 31, -------------------------- -----------------------------------------
1998 1997 1996 1996 1995 1994
---------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
income taxes $ 96,855 $ (1,558) $ 176,288 $ 133,115 $ 116,758 $ 106,943
Plus: Fixed charges 86,481 294,294 268,960 253,481 202,659 182,596
---------------- ----------- ----------- ----------- ----------- -----------
Earnings available to
cover fixed charges 183,336 292,736 445,248 386,596 319,417 289,539
---------------- ----------- ----------- ----------- ----------- -----------
Fixed charges (1):
Interest including
amortization of
deferred loan costs 84,539 286,527 260,765 245,641 194,594 173,508
Interest portion of
rental payment 1,942 7,767 8,195 7,840 8,065 9,088
---------------- ----------- ----------- ----------- ----------- -----------
Total fixed charges $ 86,481 $ 294,294 $ 268,960 $ 253,481 $ 202,659 $ 182,596
================ =========== =========== =========== =========== ===========
Ratio of earnings to
fixed charges 2.12x (*) x 1.66x 1.53x 1.58x 1.59x
================= =========== ============ =========== ============ ============
</TABLE>
(1) Fixed charges consist of interest expense on all indebtedness (including
amortization of deferred financing costs) and the portion of operating
lease rental expense that is representative of the interest factor
(deemed to be one-third of operating lease rentals). The substantial
portion of interest expense in incurred on debt, which is used to finance
the Company's fleet leasing, mortgage service and relocation service
activities.
(*) Earnings are inadequate to cover fixed charges (deficiency of $1.6
million) for the year ended December 31, 1997. Loss before income taxes
includes non-recurring merger-related charges associated with business
combinations in the amount of $262.2 million ($208.8 million after-tax).
Excluding the charges, the ratio of earnings to fixed charges would be
1.89x.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of operations of the Company as of an for the quarter ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements. Amounts are in thousands, except per share data.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 72,471
<SECURITIES> 0
<RECEIVABLES> 648,384
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,097,339
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,764,338
<CURRENT-LIABILITIES> 736,731
<BONDS> 0
0
0
<COMMON> 289,157
<OTHER-SE> 583,885
<TOTAL-LIABILITY-AND-EQUITY> 7,764,338
<SALES> 0
<TOTAL-REVENUES> 252,976
<CGS> 0
<TOTAL-COSTS> 156,121
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 96,855
<INCOME-TAX> 33,101
<INCOME-CONTINUING> 63,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,754
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
