UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the year ended December 31, 1998 Commission file number 1-7797
PHH CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6 Sylvan Way, Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip Code)
(973) 428-9700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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/A or any amendment to
this Form 10-K/A [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1998: $0
Number of shares of PHH Corporation outstanding on December 31, 1998: 1000
PHH Corporation meets the conditions set forth in General Instructions I (1) (a)
and (b) to Form 10-K/A and is therefore filing this form with the reduced
disclosure format.
<PAGE>
PHH CORPORATION
PART I
Item 1. Business
Except as expressly indicated or unless the context otherwise requires, the
"Company", "PHH", "we", "our", or "us" means PHH Corporation, a Maryland
Corporation, and its subsidiaries.
Pursuant to a merger with HFS Incorporated ("HFS"), effective April 30, 1997, we
became a wholly owned subsidiary of HFS (the "HFS Merger"). On December 17,
1997, pursuant to a merger agreement between CUC International Inc. ("CUC") and
HFS, HFS was merged into CUC (the "Cendant Merger"), with CUC surviving and
changing its name to Cendant Corporation ("Cendant" or the "Parent Company"). As
a result of the Cendant Merger, we became a wholly owned subsidiary of Cendant.
In connection with the HFS Merger, our fiscal year was changed from a year
ending on April 30 to a year ending on December 31.
GENERAL
We operate in two business segments: relocation and mortgage. Our businesses
provide a range of complementary consumer and business services. Our businesses
provide home buyers with mortgages and assist in employee relocations. In the
mortgage segment, our Cendant Mortgage Corporation ("Cendant Mortgage")
subsidiary originates, sells and services residential mortgage loans in the
United States, marketing such services to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms and mortgage banks. In the relocation segment, our Cendant Mobility
Services Corporation subsidiary is the largest provider of corporate relocation
services in the world, offering relocation clients a variety of services in
connection with the transfer of a client's employees.
Additional information related to our business segments, including financial
data is included in Note 16 - Segment Information in the notes to consolidated
financial statements.
Certain statements in this Annual Report on Form 10-K/A, including without
limitation certain matters discussed in "Item 7. Management's Narrative Analysis
of Results of Operations and Liquidity and Capital Resources," constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance, or achievements to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Important assumptions and other important factors
that could cause actual results to differ materially from those in the
forward-looking statements, include, but are not limited to: the effect of
economic and market conditions, the ability to obtain financing, the level and
volatility of interest rates, outcome of the pending litigation relating to the
accounting irregularities at Cendant, our ability and our vendors to complete
the necessary actions to achieve a year 2000 conversion for our computer systems
as applications, the effect of any corporate transactions, and other risks and
uncertainties. Other factors and assumptions not identified above were also
involved in the derivation of these forward-looking statements, and the failure
of such other assumptions to be realized as well as other factors may also cause
actual results to differ materially from those projected. The Company assumes no
obligation to update these forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting such
forward-looking statements.
Principal Executive Offices
Our principal executive offices are located at 6 Sylvan Way, Parsippany, NJ
07054 (telephone 973-428-9700).
RECENT DEVELOPMENTS
Sale of our fleet segment; Contributions of fuel card subsidiaries from Cendant
In connection with Cendant's previously announced plan to divest
non-strategic assets, on June 30, 1999 we completed the disposition of our fleet
segment, which included PHH Vehicle Management Services Corporation, The Harpur
Group, Ltd. ("Harpur"), Wright Express Corporation, ("WEX") and other
subsidiaries pursuant to an agreement between Avis Rent A Car, Inc. ("ARAC") and
us which was executed on May 22, 1999. Prior to the disposition of our fleet
segment, WEX and Harpur (formerly Cendant's fuel card subsidiaries) were
contributed to our fleet segment by Cendant in April 1999. Pursuant to the
agreement, ARAC acquired the net assets of our fleet segment through the
assumption and subsequent repayment of $1.44 billion of intercompany debt and
the issuance of $360.0 million of convertible preferred stock of Avis Fleet
Leasing and Management Corporation ("Avis Fleet"), a wholly-owned subsidiary of
ARAC. The convertible preferred stock of Avis Fleet is convertible into common
stock of ARAC at our option upon the satisfaction of certain conditions,
including the per share price of ARAC Class A common stock equaling or exceeding
$50 per share and the fleet segment attaining certain EBITDA (earnings before
interest, taxes, depreciation and amortization) thresholds, as defined. There
are additional circumstances upon which the shares of Avis Fleet convertible
preferred stock are automatically or mandatorily convertible into ARAC common
stock. The transaction followed a competitive bidding process. In connection
with the disposition of our fleet segment, we recorded an after-tax gain on sale
of discontinued operations of $871.2 million in the second quarter of 1999. The
fleet segment disposition was structured in accordance with applicable tax law
to be treated as a tax-free reorganization and, accordingly, no tax provision
has been recorded on a majority of the gain. Should the transaction be deemed
taxable, the resultant tax liability could be material. The fleet segment has
been classified as a discontinued operation herein and will be presented as such
when we report financial information. In July 1999, utilizing the cash proceeds
from the fleet segment disposition, we made a cash dividend payment to Cendant
in the amount of $1,033.0 million. Such dividend was in compliance with the
dividend restriction covenant pursuant to the Indenture under which we issue
medium-term notes.
RELOCATION SEGMENT
General. Our Relocation Segment represented approximately 55%, 70% and
73% of our net revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. Our Cendant Mobility Services Corporation subsidiary ("Cendant
Mobility") is the largest provider of employee relocation services in the world.
Cendant Mobility assists more than 100,000 transferring employees annually,
including approximately 15,000 employees internationally each year in 92
countries and 300 destination cities. At December 31, 1998, we employed
approximately 3,300 people in our relocation business.
Services. The employee relocation business offers a variety of services
in connection with the transfer of our clients' employees. The relocation
services provided to our customers include primarily evaluation, inspection and
selling of transferees' homes or purchasing a transferee's home which is not
sold for at least a price determined on the estimated value within a specified
time period, equity advances (generally guaranteed by the corporate customer),
certain home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services. In
certain transactions, the Company will assume the risk of loss on the sale of
homes; however, in such transactions, the Company will control all facets of the
resale process, thereby limiting its exposure.
Corporate clients pay a fee for the services performed. Another source
of revenue is interest on the equity advances. Generally, all costs associated
with such services are reimbursed by the corporate client, including repayment
of equity advances and reimbursement of losses on the sale of homes purchased.
As a result of the obligations of most corporate clients to pay the losses and
guarantee repayment of equity advances, our exposure on such items is limited to
the credit risk of the corporate clients of our relocation businesses and not on
the potential changes in value of residential real estate. We believe such risk
is minimal, due to the credit quality of the corporate clients of our relocation
subsidiaries. In certain transactions, the Company will assume the risk of loss
on the sale of homes; however, in such transactions, the Company will control
all facets of the resale process, thereby, limiting its exposure.
The homesale program service is the core service for many domestic and
international programs. This program gives employees guaranteed offers for their
homes and assists clients in the management of employees' productivity during
their relocation. Cendant Mobility allows clients to outsource their relocation
programs by providing clients with professional support for planning and
administration of all elements of their relocation programs. The majority of new
proposals involve outsourcing due to corporate downsizing, cost containment, and
increased need for expense tracking.
Our relocation accounting services supports auditing, reporting, and
disbursement of all relocation-related expense activity.
Our group move management services provides coordination for moves
involving a number of employees. Services include planning, communications,
analysis, and assessment of the move. Policy consulting provides customized
consultation and policy review, as well as industry data, comparisons and
recommendations. Cendant Mobility also has developed and/or customized numerous
non-traditional services including outsourcing of all elements of relocation
programs, moving services, and spouse counseling.
Our moving service, with nearly 70,000 shipments annually, provides
support for all aspects of moving an employee's household goods. We also handle
insurance and claim assistance, invoice auditing, and control the quality of van
line, driver, and overall service.
Our marketing assistance service provides assistance to transferees in
the marketing and sale of their own home. A Cendant Mobility professional
assists in developing a custom marketing plan and monitors its implementation
through the broker. The Cendant Mobility contact also acts as an advocate, with
the local broker, for employees in negotiating offers which helps clients'
employees benefit from the highest possible price for their homes.
Our affinity services provides value-added real estate and relocation
services to organizations with established members and/or customers.
Organizations, such as insurance and airline companies, that have established
members offer our affinity services' to their members at no cost. This service
helps the organizations attract new members and to retain current members.
Affinity services provides home buying and selling assistance, as well as
mortgage assistance and moving services to members of applicable organizations.
Personal assistance is provided to over 40,000 individuals with approximately
17,500 real estate transactions annually.
Our international assignment service provides a full spectrum of
services for international assignees. This group coordinates the services
previously discussed; however, they also assist with immigration support,
candidate assessment, intercultural training, language training, and
repatriation coaching.
Vendor Networks. Cendant Mobility provides relocation services through
various vendor networks that meet the superior service standards and quality
deemed necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 340 principal
brokers and 420 associate brokers. Our van line, insurance, appraisal and
closing networks allow us to receive deep discounts while maintaining control
over the quality of service provided to clients' transferees.
Competitive Conditions. The principal methods of competition within
relocation services are service, quality and price. In the United States, there
are two major national providers of such services. We are the market leader in
the United States and third in the UK.
Seasonality. Our principal sources of relocation service revenue are
based upon the timing of transferee moves, which are lower in the first and last
quarter each year, and at the highest levels in the second quarter.
MORTGAGE SEGMENT
General. Our Mortgage Segment represented approximately 44%, 30% and
27% of our net revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. Through our Cendant Mortgage Corporation subsidiary, we are the
tenth largest originator of residential first mortgage loans in the United
States as reported by Inside Mortgage Finance for 1998, and, on a retail basis,
we are the sixth largest originator in 1998. We offer services consisting of the
origination, sale and servicing of residential first mortgage loans. A full line
of first mortgage products are marketed to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms, including CENTURY 21(R), Coldwell Banker(R) and ERA(R) franchisees, and
other mortgage banks. Cendant Mortgage is a centralized mortgage lender
conducting its business in all 50 states. At December 31, 1998, Cendant Mortgage
had approximately 4,000 employees.
Cendant Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation certificates
issued or guaranteed by Fannie Mae Corp., the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association. Cendant Mortgage
also services mortgage loans. We earn revenue from the sale of the mortgage
loans to investors, as well as from fees earned on the servicing of the loans
for investors. Mortgage servicing consists of collecting loan payments,
remitting principal and interest payments to investors, holding escrow funds for
payment of mortgage-related expenses such as taxes and insurance, and otherwise
administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Teleservices. Mortgages are offered to consumers through an
800 number teleservices operation based in New Jersey under
programs including Phone In-Move In(R) for real estate
organizations, private label programs for financial
institutions and for relocation clients in conjunction with
the operations of Cendant Mobility. The teleservices operation
provides us with retail mortgage volume which contributes to
Cendant Mortgage ranking as the sixth largest retail
originator (Inside Mortgage Finance) in 1998.
o Point of Sale. Mortgages are offered to consumers through 175
field sales professionals with all processing, underwriting
and other origination activities based in New Jersey. These
field sales professionals generally are located in real estate
offices and are equipped with software to obtain product
information, quote interest rates and prepare a mortgage
application with the consumer. Originations from these point
of sale offices are generally more costly than teleservices
originations.
o Wholesale/Correspondent. We purchase closed loans from
financial institutions and mortgage banks after underwriting
the loans. Financial institutions include banks, thrifts and
credit unions. Such institutions are able to sell their closed
loans to a large number of mortgage lenders and generally base
their decision to sell to Cendant Mortgage on price, product
menu and/or underwriting. We also have wholesale/correspondent
originations with mortgage banks affiliated with real estate
brokerage organizations. Originations from our
wholesale/correspondent platform are more costly than point of
sale or teleservices originations.
Strategy. Our strategy is to increase market share by expanding all of
our sources of business with emphasis on the Phone In-Move In(R) program. Phone
In-Move In(R) was developed for real estate firms approximately 21 months ago
and is currently established in over 4,000 real estate offices at December 31,
1998. We are well positioned to expand our relocation and financial institutions
business channels as it increases our linkage to Cendant Mobility clients and
works with financial institutions which desire to outsource their mortgage
originations operations to Cendant Mortgage. Each of these market share growth
opportunities is driven by our low cost teleservices platform which is
centralized in Mt. Laurel, New Jersey. The competitive advantages of using a
centralized, efficient and high quality teleservices platform allows us to
capture a higher percentage of the highly fragmented mortgage market more cost
effectively.
Competitive Conditions. The principal methods of competition in
mortgage banking services are service, quality and price. There are an estimated
20,000 national, regional or local providers of mortgage banking services across
the United States. Cendant Mortgage has increased its mortgage origination
market share in the United States to 1.8% in 1998 from 0.9% in 1996. The market
share leader reported a 7.7% market share in the United States according to
Inside Mortgage Finance for 1998.
Seasonality. The principal sources of mortgage services segment revenue
are based principally on the timing of mortgage origination activity which is
based upon the timing of residential real estate sales. Real estate sales are
lower in the first calendar quarter each year and relatively level the other
three quarters of the year. As a result, our revenue from the mortgage services
business is less in the first calendar quarter of each year.
DISCONTINUED OPERATIONS
On June 30, 1999, pursuant to Cendant's program to divest non-strategic
businesses and assets, we completed the disposition of our fleet segment for
aggregate consideration of $1.8 billion.
General. Through our PHH Vehicle Management Services Corporation, PHH
Management Services PLC, Cendant Business Answers PLC, The Harpur Group Ltd. and
Wright Express subsidiaries, we offered a full range of fully integrated fleet
management services to corporate clients and government agencies comprising over
780,000 vehicles under management on a worldwide basis. These services included
vehicle leasing, advisory services and fleet management services for a broad
range of vehicle fleets. Advisory services included fleet policy analysis and
recommendations, benchmarking, and vehicle recommendations and specifications.
In addition, we provided managerial services which included ordering and
purchasing vehicles, arranging for their delivery through dealerships located
throughout the United States, Canada, United Kingdom ("UK"), Germany and the
Republic of Ireland, as well as capabilities throughout Europe, administration
of the title and registration process, tax and insurance requirements, pursuing
warranty claims with vehicle manufacturers and remarketing used vehicles. We
also offered various leasing plans for our vehicle leasing programs, financed
primarily through the issuance of commercial paper and medium-term notes and
through unsecured borrowings under revolving credit agreements, securitized
financing arrangements and bank lines of credit. At December 31, 1998, we
employed approximately 1,800 people in our fleet businesses.
Through our PHH Vehicle Management Services and Wright Express
subsidiaries in the United States and our Harpur Group Ltd. subsidiary in the
UK, we also offered fuel and expense management programs to corporations and
government agencies for the effective management and control of automotive
business travel expenses. By utilizing our service cards issued under the fuel
and expense management programs, a client's representatives were able to
purchase various products and services such as gasoline, tires, batteries, glass
and maintenance services at numerous outlets. Service fees were earned for
billing, collection and record keeping services and for assuming credit risk.
These fees were paid by the vendor and were based upon the total dollar amount
of fuel purchased or the number of transactions processed.
Products. Our fleet management services were divided into two principal
products: (1) Asset Based Products, and (2) Fee Based Products.
Asset Based Products represented the services our clients required to
lease a vehicle which included vehicle acquisition, vehicle remarketing,
financing, and fleet management consulting. We leased in excess of 350,000 units
on a worldwide basis through both open-end lease structures and closed-end lease
structures. Open-end leases were the prevalent structure in North America
representing 96% of the total vehicles financed in North America and 86% of the
total vehicles financed worldwide. The open-end leases could be structured on
either a fixed rate or floating rate basis (where the interest component of the
lease payment changed month to month based upon an index) depending upon client
preference. The open-end leases were typically structured with a 12 month
minimum lease term, with month to month renewals thereafter. The typical unit
remained under lease for approximately 34 months. A client received a full range
of services in exchange for a monthly rental payment which included a management
fee. The residual risk on the value of the vehicle at the end of the lease term
remained with the lessee under an open-end lease, except for a small amount
which was retained by the lessor.
Closed-end leases were structured with a fixed term with the lessor
retaining the vehicle residual risk. The most prevalent lease terms are 24
months, 36 months, and 48 months. The closed-end lease structure was preferred
in Europe due to certain accounting regulations. The closed-end lease structure
was utilized by approximately 71% of the vehicles leased in Europe, but only 14%
of the vehicles leased on a worldwide basis. We utilized independent third party
valuations and internal projections to set the residuals utilized for these
leases.
The Fee Based Products were designed to effectively manage costs and
enhance driver productivity. The three main Fee Based Products were Fuel
Services, Maintenance Services and Accident Management. Fuel Services
represented the utilization of our proprietary cards to access fuel through a
network of franchised and independent fuel stations. The cards operated as a
universal card with centralized billing designed to measure and manage costs.
We offered customer vehicle maintenance charge cards that were used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provided customers with benefits such as (1) negotiated discounts off full
retail prices through our convenient supplier network, (2) access to our
in-house team of certified maintenance experts that monitored each card
transaction for policy compliance, reasonability, and cost effectiveness, and
(3) inclusion of vehicle maintenance card transactions in a consolidated
information and billing database that helped to evaluate overall fleet
performance and costs. We maintained an extensive network of service providers
in the United States, Canada, and the United Kingdom to ensure ease of use by
the client's drivers.
We also provided our clients with comprehensive accident management
services such as (1) providing immediate assistance after receiving the initial
accident report from the driver (i.e. facilitating emergency towing services and
car rental assistance, etc.) (2) organizing the entire vehicle appraisal and
repair process through a network of preferred repair and body shops, and (3)
coordinating and negotiating potential accident claims. Customers received
significant benefits from our accident management services such as (1)
convenient coordinated 24-hour assistance from our call center, (2) access to
our leverage with the repair and body shops included in our preferred supplier
network (the largest in the industry), which typically provided customers with
extremely favorable repair terms and (3) expertise of our damage specialists,
who ensured that vehicle appraisals and repairs were appropriate,
cost-efficient, and in accordance with each customer's specific repair policy.
Competitive Conditions. The principal factors for competition in
vehicle management services were quality of service and price. We were
competitively positioned as a fully integrated provider of fleet management
services with a broad range of product offerings. We ranked second in the United
States in the number of vehicles under management and were a leader in
proprietary fuel and maintenance cards for fleet use in circulation. There were
four other major providers of fleet management service in the United States,
hundreds of local and regional competitors, and numerous niche competitors who
focused on only one or two products and did not offer the fully integrated range
of products provided by us. In the United States, it was estimated that only 45%
of fleets were leased by third party providers. The unpenetrated market and the
continued focus by corporations on cost efficiency and outsourcing will provide
the growth platform in the future.
In the UK, we ranked first in vehicles under management and were a
leader in proprietary fuel and maintenance cards. We continued to compete
against numerous local and regional competitors. The UK operation had been able
to differentiate itself through its breadth of product offerings.
REGULATION
The federal Real Estate Settlement Procedures Act and state real estate
brokerage laws restrict payments which real estate brokers and mortgage brokers
and other parties may receive or pay in connection with the sales of residences
and referral of settlement services (e.g., mortgages, homeowners insurance,
title insurance). Such laws may, to some extent, restrict preferred alliance
arrangements involving our parent's real estate brokerage franchisees and our
mortgage and relocation businesses. Our mortgage banking services business is
also subject to numerous federal, state and local laws and regulations,
including those relating to real estate settlement procedures, fair lending,
fair credit reporting, truth in lending, federal and state disclosure, and
licensing.
EMPLOYEES
As of December 31, 1998, we had approximately 9,100 employees of which 1,800
were employees of our fleet businesses.
On June 30, 1999 Robert D. Kunisch retired as Chief Executive Officer, President
and Director of the Company.
Item 2. Properties
Our relocation operations in North America occupy approximately 519,020 square
feet in various offices located throughout the U.S. The primary office
facilities are located in Danbury, Connecticut, one building having
approximately 230,000 square feet, leased until July, 2008 and two other
buildings totaling 45,546 square feet with leases expiring in 2003 and 2004.
There are four other regional offices located in Irving, Texas, Oakbrook,
Illinois, Mission Viejo, California and Walnut Creek, California for a total
square footage of approximately 170,000.
Our mortgage operations are located in several offices in Mount Laurel, Cherry
Hill and Moorestown, New Jersey occupying approximately 500,000 square feet and
have various lease expiration dates. The primary building consists of 127,000
square feet and the lease expires in November 30, 2002.
We consider that our properties are generally in good condition and well
maintained and are generally suitable and adequate to carry on our business.
<PAGE>
Item 3. Legal Proceedings
We are a party to various litigation matters arising in the ordinary course of
business and a plaintiff in several collection matters which are not considered
material either individually or in the aggregate.
As a result of previously announced accounting irregularities at Cendant, our
parent, Cendant is subject to numerous purported class action lawsuits, two
purported derivative lawsuits and an individual lawsuit asserting various claims
under the federal securities laws and certain state statutory and common laws.
In addition, the staff of the Securities and Exchange Commission ("SEC") and the
United States Attorney for the District of New Jersey are conducting
investigations relating to Cendant's accounting issues. The staff of the SEC has
advised Cendant that its inquiry should not be construed as an indication by the
SEC or its staff that any violations of law occurred. (See Note 12 to the
consolidated financial statements).
Item 4. Results of Votes of Security Holders
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Not Applicable
Item 6. Selected Financial Data
Not Applicable
Item 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES
We are a leading provider of mortgage and relocation services. In April 1997, we
merged with a wholly-owned subsidiary of HFS Incorporated ("HFS") (the "HFS
Merger"), and in December 1997, HFS was merged with and into CUC International,
Inc. ("CUC") (the "Cendant Merger") to form Cendant Corporation ("Cendant" or
the "Parent Company"). Effective upon the Cendant Merger, we became a
wholly-owned subsidiary of Cendant. However, pursuant to certain covenant
requirements in the indentures under which we issue debt, we continue to operate
and maintain our status as a separate public reporting entity.
On June 30, 1999, pursuant to Cendant's previously announced program to divest
non-strategic businesses and assets, we completed the disposition of our fleet
segment for aggregate consideration of $1.8 billion. The fleet segment has been
classified as a discontinued operation herein and will be presented as such when
we report financial information (see "Discontinued Operations").
Results of Operations - Year Ended December 31, 1998
vs.
Year Ended December 31, 1997
This discussion should be read in conjunction with the information contained in
our Consolidated Financial Statements and accompanying Notes thereto appearing
elsewhere in this Annual Report on Form 10-K/A.
The underlying discussion of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before (i) non-operating interest;
(ii) income taxes and (iii) depreciation and amortization (exclusive of
depreciation and amortization on assets under management and mortgage programs),
adjusted to exclude merger-related costs and other unusual charges (credits)
("Unusual Charges (Credits)") which were incurred in connection with the HFS
Merger and the Cendant Merger. Such Unusual Charges are of a non-recurring or
unusual nature and are not measured in assessing segment performance or are not
segment specific. We believe such discussion is the most informative
representation of how our management evaluates performance. We determined that
we have two reportable operating segments comprising our continuing operations
based primarily on the types of services we provide, the consumer base to which
marketing efforts are directed and the methods we use to sell services. For
additional information, including a description of the services provided in each
of our reportable operating segments, see Note 16 to the consolidated financial
statements.
Revenues increased $218.8 million (37%) from $588.7 million in 1997 to $807.5
billion in 1998. In addition, Adjusted EBITDA which excludes Unusual Charges
(Credits) of ($18.9) million and $189.9 million in 1998 and 1997, respectively,
increased $168.4 million (114%) from $147.1 million in 1997 to $315.5 million in
1998. The Adjusted EBITDA margin in 1998 was 39%, an improvement of 14
percentage points over 1997.
Revenues and Adjusted EBITDA within the Mortgage segment increased $174.1
million (97%) and $110.9 million (148%), respectively, in 1998 over 1997.
Mortgage origination grew across all lines of business, including increased
refinancing activity and a shift to more profitable sales and processing
channels and was responsible for substantially all of the segment's revenue
growth. Mortgage closings increased $14.3 billion (122%) and average origination
fees increased 12 basis points, resulting in a $180.3 million increase in
origination revenues. Operating expenses increased in all areas, reflecting
increased hiring and expansion of capacity in order to support continued growth;
however, revenue growth marginally exceeded such infrastructure enhancements
thereby contributing to an improvement in the Adjusted EBITDA margin from 42% in
1997 to 53% in 1998.
Revenues and Adjusted EBITDA within the Relocation segment increased $34.6
million (8%) and $34.8 million (39%), respectively, in 1998 over 1997, while the
Adjusted EBITDA margin improved from 22% to 28%. The primary source of revenue
growth was a $29.3 million increase in revenues from the relocation of
government employees. In addition, the divestiture of certain niche-market
property management operations accounted for other revenue of $8.2 million in
1998. Expenses associated with government relocations increased in conjunction
with volume and revenue growth, but economies of scale and a reduction in
overhead and administrative expenses resulted in the improvement in Adjusted
EBITDA margin.
Discontinued Operations
Contribution of Fuel Card Business Subsidiaries by Cendant. Cendant contributed
its fuel card subsidiaries, Wright Express Corporation ("WEX") and The Harpur
Group, Ltd. ("Harpur"), to us in April 1999. As both entities were under common
control, such transaction has been accounted for in a manner similar to a
pooling of interests. Accordingly, our historical financial results have been
restated as if the Company, WEX and Harpur had operated as one entity since
inception. The operating results of Harpur are included from January 20, 1998,
the date on which Harpur was acquired by Cendant pursuant to a purchase business
combination and, accordingly, when common control was established.
Divestiture. On June 30, 1999, we completed the disposition of our fleet
segment, which included PHH Vehicle Management Services Corporation, The Harpur
Group, Ltd., Wright Express Corporation and other subsidiaries, pursuant to an
agreement between Avis Rent A Car, Inc. ("ARAC") and us which was executed on
May 22, 1999. Pursuant to the agreement, ARAC acquired the net assets of our
fleet segment through the assumption and subsequent repayment of $1.44 billion
of intercompany debt and the issuance of $360.0 million of convertible preferred
stock of Avis Fleet Leasing and Management Corporation ("Avis Fleet"), a
wholly-owned subsidiary of ARAC. The convertible preferred stock of Avis Fleet
is convertible into common stock of ARAC at our option upon the satisfaction of
certain conditions, including the per share price of ARAC Class A common stock
equaling or exceeding $50 per share and the fleet segment attaining certain
EBITDA (earnings before interest, taxes, depreciation and amortization)
thresholds, as defined. There are additional circumstances upon which the shares
of Avis Fleet convertible preferred stock are automatically or mandatorily
convertible into ARAC common stock. The transaction followed a competitive
bidding process. In connection with the disposition of our fleet segment, we
recorded an after-tax gain on sale of discontinued operations of $871.2 million
in the second quarter of 1999. The fleet segment disposition was structured in
accordance with applicable tax law to be treated as a tax-free reorganization
and, accordingly, no tax provision has been recorded on a majority of the gain.
Should the transaction be deemed taxable, the resultant tax liability could be
material. In July 1999, utilizing the cash proceeds from the fleet segment
disposition, we made a cash dividend payment to Cendant in the amount of
$1,033.0 million. Such dividend was in compliance with the dividend restriction
covenant pursuant to the Indenture under which we issue medium-term notes. (See
"Restrictions on dividends to Cendant")
Coincident to the closing of the transaction, ARAC refinanced the assumed debt
under management programs, which was payable to us. Accoridngly, on June 30,
1999, in addition to the consideration received for the net assets of the
business, we received cash payments and a note receivable from ARAC of $3,016.9
million and $30.6 million, respectively, which collectively were equal to our
outstanding balances of fleet segment financing arrangements with third parties
on such date.
Inclusive of the fuel card subsidiaries contributed by Cendant, revenues and net
income within our fleet segment increased $58.5 million and $80.4 million,
respectively, in 1998 over 1997. Excluding Unusual Charges (Credits) of ($1.3)
million (($0.9) million, after tax) in 1998 and $61.1 million ($44.3 million,
after-tax) in 1997, net income increased $35.2 million. Such Unusual Charges
were principally due to business termination charges representing costs to exit
certain activities incurred in connection with the HFS and Cendant Mergers.
Harpur contributed incremental revenues and net income in 1998 of $31.8 million
and 8.9 million, respectively. The revenue increase was further attributable to
a 12% increase in fleet leasing fees and a 31% increase in service fee revenue.
The fleet leasing revenue increase was due to a 5% increase in pricing and a 7%
increase in the number of vehicles leased, while the service fee revenue
increase was the result of a 40% increase in number of fuel cards and vehicle
maintenance cards partially offset by a 7% decline in pricing.
Liquidity and Capital Resources - Continuing Operations
We manage our funding sources to ensure adequate liquidity. The sources of
liquidity fall into three general areas: ongoing liquidation of assets under
management, global capital markets, and committed credit agreements with various
high-quality domestic and international banks. In the ordinary course of
business, the liquidation of assets under management programs, as well as cash
flows generated from operating activities, provide the cash flow necessary for
the repayment of existing liabilities. Financial covenants are designed to
ensure our self-sufficient liquidity status. Financial covenants include
restrictions on dividends payable to the Parent Company and Parent Company
loans, limitations on the ratio of debt to equity, and other separate financial
restrictions.
Our exposure to interest rate and liquidity risk is minimized by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities. Using historical information, we will project the relevant
characteristics of assets under management programs and generally match the
projected dollar amount, interest rate and maturity characteristics of the
assets within the overall funding program. This is accomplished through stated
debt terms or effectively modifying such terms through other instruments,
primarily interest rate swap agreements and revolving credit agreements. In our
relocation business, we project the length of time that a home will be held
before being sold on behalf of the client. Within our mortgage services
business, we fund the mortgage loans on a short-term basis until the mortgage
loans are sold to unrelated investors, which generally occurs within sixty days.
Interest rate risk on mortgages originated for sale is managed through the use
of forward delivery contracts, financial futures and options. Financial
derivatives are also used as a hedge to minimize earnings volatility as it
relates to mortgage servicing assets.
We support originated mortgages and advances under relocation contracts
primarily by issuing commercial paper, medium term notes and by maintaining
securitized obligations. Such financing is included in liabilities under
management and mortgage programs since such debt corresponds directly with high
quality related assets. We continue to pursue opportunities to reduce our
borrowing requirements by securitizing increasing amounts of our high quality
assets. Additionally, we entered into a three year agreement effective May 1998
and expanded in December 1998 under which an unaffiliated buyer, Bishops Gate
Residential Mortgage Trust, a special purpose entity (the "Buyer") committed to
purchase, at our option, mortgage loans originated by us on a daily basis, up to
the Buyer's asset limit of $2.4 billion. Under the terms of this sale agreement,
we retain the servicing rights on the mortgage loans sold to the Buyer and
provide the Buyer with the option to sell or securitize the mortgage loans into
the secondary market. At December 31, 1998, we were servicing approximately $2.0
billion of mortgage loans owned by the Buyer.
Following the May 22, 1999 executed agreement providing for us to divest our
fleet business segment, Fitch IBCA lowered our long-term debt rating from A+ to
A and affirmed our short-term debt rating at F1, and Standard and Poor's
Corporation affirmed our long-term and short-term debt ratings at A-/A2. Also,
in connection with the closing of the transaction, Duff and Phelps Credit Rating
Co. lowered our long-term debt rating from A+ to A and our short-term debt
rating was reaffirmed at D1. Moody's Investor Service lowered our long-term debt
rating from A3 to Baa1 and affirmed our short-term debt rating at P2. (A
security rating is not a recommendation to buy, sell or hold securities and is
subject to revision or withdrawal at any time).
We expect to continue to maximize our access to global capital markets by
maintaining the quality of our assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. Depending upon asset growth and financial market conditions, we utilize
the United States and European commercial paper markets, as well as other
cost-effective short-term instruments. In addition, we will continue to utilize
the public and private debt markets as sources of financing. Augmenting these
sources, we will continue to manage outstanding debt with the potential sale or
transfer of managed assets to third parties while retaining fee-related
servicing responsibility. At December 31, 1998, aggregate borrowings were
comprised of commercial paper, medium-term notes, securitized obligations and
other borrowings of $2.5 billion, $2.3 billion, $1.9 billion, and $0.2 billion,
respectively, of which $3.2 billion related to our discontinued fleet business
segment.
We filed a shelf registration statement with the Securities and Exchange
Commission ("SEC"), effective March 2, 1998, for the aggregate issuance of up to
$3.0 billion of medium-term note debt securities. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds will be used to finance assets we
manage for our clients and for general corporate purposes. As of December 31,
1998, we had approximately $1.6 billion of medium-term notes outstanding under
this shelf registration statement.
Securitized Obligations
We maintain three separate financing facilities for our continuing operations,
the outstanding borrowings of which are securitized by corresponding assets
under management and mortgage programs. The collective weighted average interest
rate on such facilities was 5.9% at December 31, 1998. Such securitized
obligations are described below.
Mortgage Facility. In December 1998, we entered into a 364-day financing
agreement to sell mortgage loans under an agreement to repurchase (the "Mortgage
Agreement") such mortgages. The Mortgage Agreement is collateralized by the
underlying mortgage loans held in safekeeping by the custodian to the Mortgage
Agreement. The total commitment under this Mortgage Agreement is $500.0 million
and is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Mortgage loans financed under this
Mortgage Agreement at December 31, 1998 totaled $378.0 million.
Relocation Facilities. We entered into a 364-day asset securitization agreement
effective December 1998 under which an unaffiliated buyer has committed to
purchase an interest in the rights to payment related to certain of our
relocation receivables. The revolving purchase commitment provides for funding
up to a limit of $325.0 million and is renewable on an annual basis at the
discretion of the lender in accordance with the securitization agreement. Under
the terms of this agreement, we retain the servicing rights related to the
relocation receivables. At December 31, 1998, we were servicing $248.0 million
of assets which were funded under this agreement.
We also maintain an asset securitization agreement, with a separate unaffiliated
buyer, which has a purchase commitment up to a limit of $350.0 million. The
terms of this agreement are similar to the aforementioned facility, whereby we
retain the servicing rights on the rights of payment related to certain of our
relocation receivables. At December 31, 1998, we were servicing $171.0 million
of assets eligible for purchase under this agreement.
Other Credit Facilities
To provide additional financial flexibility, our current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average
outstanding commercial paper. This policy will be maintained subsequent to the
divestiture of the fleet businesses. We maintain $2.65 billion of unsecured
committed credit facilities, which are backed by domestic and foreign banks. The
facilities are comprised of $1.25 billion of syndicated lines of credit maturing
in March 2000 and $1.25 billion of syndicated lines of credit maturing in the
Year 2002. In addition, we have a $150.0 million revolving credit facility,
which matures in December 1999, and other uncommitted lines of credit with
various financial institutions, which were unused at December 31, 1998. We
closely evaluate not only the credit of the banks, but also the terms of the
various agreements to ensure ongoing availability. The full amount of our
committed facilities at December 31, 1998 was undrawn and available. We believe
that our current policy provides adequate protection should volatility in the
financial markets limit our access to commercial paper or medium-term notes
funding. We continually seek additional sources of liquidity to accommodate
asset growth and to provide further protection from volatility in the financial
markets.
Restrictions on dividends to Cendant
Pursuant to a covenant in our Indenture with The First National Bank of Chicago,
as trustee, relating to our medium-term notes, we are restricted from paying
dividends, making distributions or making loans to Cendant to the extent that
such payments are collectively in excess of 40% of our consolidated net income
(as defined in the covenant) for each fiscal year, provided however, that we can
distribute to Cendant 100% of any extraordinary gains from asset sales and
capital contributions previously made to us by Cendant. Notwithstanding the
foregoing, we are prohibited under such covenant from paying dividends or making
loans to Cendant if upon giving effect to such dividends and/or loan, our debt
to equity ratio exceeds 8 to 1, at the time of the dividend or loan, as the case
may be.
Liquidity and Capital Resources - Discontinued Operations
The purchases of leased vehicles have principally been supported by our issuance
of commercial paper and medium-term notes, coincident with financing our other
assets under management and mortgage programs, and by the fleet segment
maintaining secured financing facilities. Proceeds from public debt issuances
have historically been loaned to the fleet segment, pursuant to Parent Company
loan agreements, consistent with the funding requirements necessary for the
purchases of leased vehicles. At December 31, 1998, aggregate outstanding debt
obligations applicable to the fleet segment consisted of corporate loans of $2.0
billion, securitized obligations of $1.1 billion and other borrowings of $0.1
billion.
Cash Flow
Net cash used in operating activities improved $133.6 million from $218.3
million in 1997 to $84.7 million in 1998. Net cash used in investing activities
increased $140.8 million in 1998 over 1997 primarily as a result of a $71.8
million increase in capital expenditures. In 1998, $106.2 million was invested
in property and equipment, which included the development of integrated business
systems within the Relocation segment as well as systems and office expansion to
support growth in the Mortgage segment. Net cash provided by financing
activities increased $239.0 million in 1998 over 1997 primarily due to temporary
funding requirements associated with increased mortgage loans held for sale on
the balance sheet at December 31, 1998.
Litigation
Since the April 15, 1998 announcement by our Parent Company of the discovery
of potential accounting irregularities in the former business units of CUC more
than 70 lawsuits claiming to be class actions, two lawsuits claiming to be
brought derivatively on the Parent Company's behalf and several other lawsuits
and arbitration proceedings have commenced in various courts and other forums
against the Parent Company and other defendants by or on behalf of persons
claiming to have purchased or otherwise acquired securities or options issued
by CUC or Cendant between May 1995 and August 1998. The Court has ordered
consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Parent Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. As
a result of the findings from the investigations, the Parent Company made all
adjustments considered necessary which are reflected in its financial
statements. The Parent Company does not expect that additional adjustments will
be necessary as a result of these government investigations.
The Parent Company does not believe it is feasible to predict or determine the
final outcome or resolution of these proceedings or to estimate the amounts or
potential range of loss with respect to these proceedings and investigations. In
addition, the timing of the final resolution of these proceedings and
investigations is uncertain. The possible outcomes or resolutions of these
proceedings and investigations could include judgments against the Parent
Company or settlements and could require substantial payments by the Parent
Company. We believe that material adverse outcomes with respect to such Parent
Company proceedings could have a material adverse impact on our financial
position or cash flows.
Impact of New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities". We will adopt SFAS No. 133 effective January 1, 2001. SFAS
No. 133 requires us to record all derivatives in the consolidated balance sheet
as either assets or liabilities measured at fair value. If the derivative does
not qualify as a hedging instrument, the change in the derivative fair values
will be immediately recognized as gain or loss in earnings. If the derivative
does qualify as a hedging instrument, the gain or loss on the change in the
derivative fair values will either be recognized (i) in earnings as offsets to
the changes in the fair value of the related item being hedged or (ii) be
deferred and recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged transactions
occur. We have not yet determined what impact the adoption of SFAS No. 133 will
have on our financial statements.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", effective for the first fiscal quarter after
December 15, 1998. We have adopted SFAS No. 134 effective January 1, 1999. SFAS
No. 134 requires that after the securitization of mortgage loans, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other interests based on its ability and intent to sell or hold
those investments. As of January 1, 1999, we reclassified mortgage-backed
securities and other interests retained after the securitization of mortgage
loans from the trading to the available for sale category. Subsequent to the
adoption of SFAS No. 134, such securities and interests are accounted for in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities". The adoption of SFAS No. 134 did not have a material impact
on our financial statements.
Year 2000 Compliance
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after January
1, 2000. To minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we are continually identifying, evaluating,
implementing and testing changes to our computer systems, applications and
software necessary to achieve Year 2000 compliance. We selected a team of
managers to identify, evaluate and implement a plan to bring all of our critical
business systems and applications into Year 2000 compliance prior to December
31, 1999. The Year 2000 initiative consists of four phases: (i) identification
of all critical business systems subject to Year 2000 risk (the "Identification
Phase"); (ii) assessment of such business systems and applications to determine
the method of correcting any Year 2000 problems (the "Assessment Phase"); (iii)
implementing the corrective measures (the "Implementation Phase"); and (iv)
testing and maintaining system compliance (the "Testing Phase"). We have
substantially completed the Identification and Assessment Phases and have
identified and assessed five areas of risk: (i) internally developed business
applications; (ii) third party vendor software, such as business applications,
operating systems and special function software; (iii) computer hardware
components; (iv) electronic data transfer systems between our customers and us;
and (v) embedded systems, such as phone switches, check writers and alarm
systems. Although no assurance can be made, we believe that substantially all of
our systems, applications and related software that are subject to Year 2000
compliance risk have been identified and that we have either implemented or
initiated the implementation of a plan to correct such systems that are not Year
2000 compliant. In addition, as part of our assessment process we are developing
contingency plans as considered necessary. Substantially all of our mission
critical systems have been remediated during 1998. However, we cannot directly
control the timing of certain Year 2000 compliant vendor products and in certain
situations, exceptions to the December 1998 date have been authorized. We are
closely monitoring those situations and intend to complete testing efforts and
any contingency implementation efforts prior to December 31, 1999. Although we
have begun the Testing Phase, we do not anticipate completion of the Testing
Phase until sometime prior to December 1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded and
other systems and other key services. Interruption of those services due to Year
2000 issues could have a material adverse impact on our operations. We initiated
an evaluation of the status of such third party service providers' efforts to
determine alternative and contingency requirements. While approaches to reducing
risks of interruption of business operations vary by business unit, options
include identification of alternative service providers available to provide
such services if a service provider fails to become Year 2000 compliant within
an acceptable timeframe prior to December 31, 1999.
The total cost of our Year 2000 compliance plan is anticipated to be $8.2
million. Approximately $5.3 million of these costs had been incurred through
December 31, 1998, and we expect to incur the balance of such costs to complete
the compliance plan. We are expensing and capitalizing the costs to complete the
compliance plan in accordance with appropriate accounting policies. Variations
from anticipated expenditures and the effect on our future results of operations
are not anticipated to be material in any given year. However, if Year 2000
modifications and conversions are not made, including modifications by our third
party service providers, or are not completed in time, the Year 2000 problem
could have a material impact on our operations, cash flows and financial
condition. At this time, we believe the most likely "worst case" scenario
involves potential disruptions in our operations as a result of the failure of
services provided by third parties.
The estimates and conclusions herein are forward-looking statements and are
based on our best estimates of future events. Risks of completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of our service providers to bring their
systems into Year 2000 compliance.
Forward-Looking Statements
We make statements about our future results in this annual report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a number
of risks and uncertainties that are difficult to predict. Our actual results
could differ materially from those expressed or implied in the forward-looking
statements. Important assumptions and other important factors that could cause
our actual results to differ materially from those in the forward-looking
statements, include, but are not limited to:
o The resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities at the Parent Company;
o Our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
o Competition in our existing and potential future lines of business;
o Our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by financing
arrangements; and
o Our ability and our vendors' and customers' ability to complete the
necessary actions to achieve a Year 2000 conversion for computer systems
and applications.
We derive the forward-looking statements in this annual report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In normal operations, we must consider the effects of changes in interest rates.
The following discussion presents an overview of how such changes are managed
and a view of their potential effects.
We use various financial instruments, particularly interest rate swaps, future
options and floors to manage our respective interest rate risks. We are
exclusively an end user of these instruments, which are commonly referred to as
derivatives. Established practices require that derivative financial instruments
relate to specific asset, liability or equity transactions. More detailed
information about these financial instruments, as well as the strategies and
policies for their use, is provided in Notes 10 and 11.
The SEC requires that registrants include information about potential effects of
changes in interest rates on 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 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 complex
market reactions that normally would arise from the market shifts modeled. While
the following results of shock tests for interest rate shifts 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 our 1999 net earnings
based on year-end 1998 positions.
Item 8. Financial Statements and Supplementary Data
See Financial Statement and Financial Statement Schedule Index commencing on
page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Not applicable.
Item 11. Executive Compensation
Not applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not applicable.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14(a)(1) Financial Statements
See Financial Statement and Financial Statement Schedule Index commencing on
page F-1 hereof.
Item 14(a)(2) Financial Statement Schedules
See Financial Statement and Financial Statement Schedule Index commencing on
page F-1 hereof.
Item 14(a)(3) Exhibits
The exhibits identified by an asterisk (*) are on file with the Commission and
such exhibits are incorporated by reference from the respective previous
filings. The exhibits identified by a double asterisk (**) are being filed with
this report.
Item 14(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1998.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By: /s/ Richard A. Smith
Richard A. Smith
President
August 13, 1999
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:
/s/ Richard A. Smith
Richard A. Smith
President August 13, 1999
Principal Financial Officer:
/s/ David M. Johnson August 13, 1999
David M. Johnson
Senior Executive Vice President,
Chief Financial Officer and Assistant Treasurer
Principal Accounting Officer:
/s/ Jon F. Danski August 13, 1999
Jon F. Danski
Executive Vice President, Finance
Board of Directors:
/s/ James E. Buckman August 13, 1999
James E. Buckman
Director
/s/ Stephen P. Holmes August 13, 1999
Stephen P. Holmes
Director
<PAGE>
Exhibit No.
- -----------
2-1 Agreement and Plan of Merger dated as of November 10, 1996,by and among
HFS Incorporated, PHH Corporation and Mercury Acquisition Corp., filed
as Annex 1 in the Joint Proxy Statement/Prospectus included as part of
Registration No.
333-24031(*).
3-1 Charter of PHH Corporation, as amended August 23, 1996 (filed as
Exhibit 3-1 to the Company's Transition Report on Form 10-K filed on
July 29, 1997)(*).
3-2 By-Laws of PHH Corporation, as amended October (filed as Exhibit 3-1 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997). (*)
4-1 Indenture between PHH Corporation and Bank of New York, Trustee, dated
as of May 1, 1992, filed as Exhibit 4(a)(iii) to Registration Statement
33-48125(*).
4-2 Indenture between PHH Corporation and First National Bank of Chicago,
Trustee, dated as of March 1, 1993, filed as Exhibit 4(a)(i) to
Registration Statement 33-59376(*).
4-3 Indenture between PHH Corporation and First National Bank of Chicago,
Trustee, dated as of June 5, 1997, filed as Exhibit 4(a) to
Registration Statement 333-27715(*).
4-4 Indenture between PHH Corporation and Bank of New York, Trustee dated
as of June 5, 1997, filed as Exhibit 4(a)(11) to Registration Statement
333-27715(*).
10.1 364-Day Credit Agreement Among PHH Corporation, PHH Vehicle Management
Services, Inc., the Lenders, the Chase Manhattan Bank, as
Administrative Agent and the Chase Manhattan Bank of Canada, as
Canadian Agent, Dated March 4, 1997 as amended and restated through
March 5, 1999, incorporated by reference to Exhibit 10.24 (a) to
Cendant Corporation's Form 10-K for the year ended December 31, 1998.
10.2 Five-year Credit Agreement among PHH Corporation, the Lenders, and
Chase Manhattan Bank, as Administrative Agent, dated March 4, 1997
filed as Exhibit 10.2 to Registration Statement 333-27715(*).
10.3 SECOND AMENDMENT, dated as of September 26, 1997 (the "Second
Amendment"), to (i) 364-day Competitive Advance and Revolving Credit
Agreement, dated as of March 4, 1997 (as heretofore and hereafter
amended, supplemented or otherwise modified from time to time, the
"364-Day Credit Agreement"), PHH Corporation (the "Borrower"), PHH
Vehicle Management Services, Inc., the Lenders referred to therein, the
Chase Manhattan Bank of Canada, as agent for the US Lenders (in such
capacity, the "Administrative Agent"), and The Chase Manhattan Bank of
Canada, as administrative agent for the Canadian Lenders (in such
capacity, the "Canadian Agent"); and (ii) the Five Year Competitive
Advance and Revolving Credit Agreement, dated as of March 4, 1997,
among the Borrower, the Lenders referred to therein and the
Administrative Agent (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997).(*)
10.4 Third Amendment to PHH Credit Agreements (Incorporated by reference to
PHH Incorporated's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997, Exhibit 10.1 (*).
10.5 Fourth Amendment, dated as of November 2, 1998, to PHH Five-Year Credit
Agreement incorporated by reference to Exhibit 10.24(a) to Cendant
Corporation's Form 10-K for the year ended December 31, 1998 (*).
10-6 Distribution Agreement between the Company and CS First Boston
Corporation; Goldman, Sachs & Co.; Merrill Lynch & Co.; Merrill Lynch,
Pierce, Fenner & Smith, Incorporated; and J.P. Morgan Securities, Inc.
dated November 9, 1995, filed as Exhibit 1 to Registration Statement
33-63627(*).
10-7 Distribution Agreement between the Company and Credit Suisse; First
Boston Corporation; Goldman Sachs & Co. and Merrill Lynch & Co., dated
June 5, 1997 filed as Exhibit 1 to Registration Statement 333-27715(*).
10-8 Distribution Agreement, dated March 2, 1998, among PHH Corporation,
Credit Suisse First Boston Corporation, Goldman Sachs & Co., Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
J.P. Morgan Securities, Inc. filed as Exhibit 1 to Form 8-K dated March
3, 1998, File No. 1-07797 (*)
10-9 Loan and Security Agreement, dated as of December 17, 1998 among Trac
Funding, Inc. as borrower, Preferred Receivables Funding Corporation,
the financial institutions party thereto and The First National Bank of
Chicago, as Agent filed as Exhibit 10-9 to Form 10-K for the year ended
December 31, 1998 (*).
10-10 Loan and Security Agreement, dated as of December 28, 1998, among Trac
Funding II, Inc., as borrower, Quincy Capital Corporation and
Receivables Capital Corporation, as Lenders, and Bank of America
National Trust and Savings Association, as Administrator filed as
Exhibit 10-10 to Form 10-K for the year ended December 31, 1998 (*).
10-11 Agreement and Plan of Merger and Reorganization dated May 22, 1998, by
and among PHH Corporation, PHH Holdings Corporation and Avis Rent A
Car, Inc. and Avis Fleet Leasing and Management Corporation, filed as
Exhibit (C) to Cendant Corporation's Schedule 13E-4 dated June 16,
1998.
12 Schedule containing information used in the computation of the ratio of
earnings to fixed charges (**)
23.1 Consent of Deloitte & Touche LLP (**)
23.2 Consent of KPMG LLP (**)
27 Financial Data Schedule (filed electronically only). (**)
The registrant hereby agrees to furnish to the Commission upon request
a copy of all constituent instruments defining the rights of holders of
long-term debt of the registrant and all its subsidiaries for which
consolidated or unconsolidated financial statements are required to be
filed under which instruments the total amount of securities authorized
does not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis.
* Incorporated by reference
** Filed herewith
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports ................................... F-2
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996............................................ F-4
Consolidated Balance Sheets as of December 31, 1998 and 1997 .... F-5
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1998, 1997 and 1996 .............................. F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996............................................ F-7
Notes to Consolidated Financial Statements ...................... F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of PHH Corporation
We have audited the consolidated balance sheet of PHH Corporation and its
subsidiaries (a wholly-owned subsidiary of Cendant Corporation), (the "Company")
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholder's equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, such consolidated financial statements above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1998 and 1997 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
We also audited the adjustments to the December 31, 1996 financial
statements described in Notes 3 and 4 that were applied to restate the
consolidated financial statements to give effect to the merger of Cendant
Corporation's relocation business and fuel card business with the Company, which
has been accounted for in a manner similar to a pooling-of-interests and the
classification of the Company's fleet segment as a discontinued operation.
Additionally, we also audited the reclassifications described in Note 3 that
were applied to restate the December 31, 1996 consolidated financial statements
to conform to the presentation used by Cendant Corporation. In our opinion, such
adjustments and reclassifications are appropriate and have been properly
applied.
As discussed in Note 4 to the consolidated financial statements, the
Company discontinued the fleet business segment of its operations when the
Company disposed of its fleet business. The results prior to the disposition are
included in income from discontinued operations in the accompanying consolidated
financial statements.
\s\ Deloitte & Touche LLP
Parsippany, New Jersey
August 11, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHH Corporation
We have audited the consolidated statements of income, shareholder's equity and
cash flows of PHH Corporation and subsidiaries for the year ended December 31,
1996, before the restatements and reclassifications described in Notes 3 and 4
to the consolidated financial statements. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements before the restatements
and reclassifications described in Notes 3 and 4 to the consolidated financial
statements referred to above present fairly, in all material respects, the
results of operations of PHH Corporation and subsidiaries and their cash flows
for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
\s\ KPMG LLP
Baltimore, Maryland
April 30, 1997
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Net revenues
Service fees:
Relocation services (net of interest costs of
$26.9, $32.0 and $35.0) $ 435.8 $ 409.4 $ 342.1
Mortgage services (net of amortization of mortgage
servicing rights and interest costs of $221.4, $180.6
and $116.9) 353.4 179.3 127.7
------------- ------------- -------------
Service fees, net 789.2 588.7 469.8
Other 18.3 - -
------------- ------------- --------------
Net revenues 807.5 588.7 469.8
------------- ------------- -------------
Expenses
Operating 387.2 342.9 268.4
General and administrative 104.8 98.7 94.4
Depreciation and amortization 25.6 13.2 15.4
Merger-related costs and other unusual charges (credits) (18.9) 189.9 -
-------------- ------------- --------------
Total expenses 498.7 644.7 378.2
------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 308.8 (56.0) 91.6
Provision for income taxes 123.6 14.6 36.7
------------- ------------- -------------
Income (loss) from continuing operations 185.2 (70.6) 54.9
Income from discontinued operations, net of tax 107.5 27.1 52.1
------------- ------------- -------------
Net income (loss) $ 292.7 $ (43.5) $ 107.0
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 281.3 $ 2.1
Accounts and notes receivable (net of allowance
for doubtful accounts of $5.0 and $9.3) 457.7 302.9
Property and equipment, net 149.6 75.8
Other assets 256.3 281.9
Net assets of discontinued operations 967.5 703.5
------------- -------------
Total assets exclusive of assets under programs 2,112.4 1,366.2
------------- -------------
Assets under management and mortgage programs
Relocation receivables 659.1 775.3
Mortgage loans held for sale 2,416.0 1,636.3
Mortgage servicing rights 635.7 373.0
------------ -------------
3,710.8 2,784.6
------------ -------------
Total assets $ 5,823.2 $ 4,150.8
============= =============
Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 707.6 $ 487.3
Deferred income 27.4 7.5
------------- -------------
Total liabilities exclusive of liabilities under programs 735.0 494.8
------------- -------------
Liabilities under management and mortgage programs
Debt 3,691.6 2,766.8
------------- -------------
Deferred income taxes 198.3 68.2
------------- -------------
Total liabilities 4,624.9 3,329.8
------------- -------------
Commitments and contingencies (Notes 4 and 11)
Shareholder's Equity
Preferred stock - authorized 3,000,000 shares -- --
Common stock, no par value - authorized 75,000,000 shares;
issued and outstanding 1,000 shares 479.9 289.2
Retained earnings 744.9 549.2
Accumulated other comprehensive loss (26.5) (17.4)
------------- --------------
Total shareholder's equity 1,198.3 821.0
------------- -------------
Total liabilities and shareholder's equity $ 5,823.2 $ 4,150.8
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(In millions, except share data)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Retained Comprehensive Shareholder's
Shares Amount Earnings Income (Loss) Equity
---------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1996 34,487,748 $ 91.5 $ 519.9 $ (23.1) $ 588.3
Less: January 1996 activity:
Comprehensive loss:
Net loss - - (8.3) -
Currency translation adjustment - - - 2.4
Total comprehensive loss January 1996 - - - - (5.9)
Cash dividend declared - - 5.9 - 5.9
Stock option plans transactions, net of
related tax benefits (35,400) (.6) - - (.6)
Comprehensive income:
Net income - - 107.0 -
Currency translation adjustments - - - 12.4
Total comprehensive income - - - - 119.4
Cash dividends declared - - (25.0) - (25.0)
Stock option plan transactions, net of
related tax benefits 504,487 10.3 - - 10.3
----------- ----------- ----------- ------------- -----------
Balance, December 31, 1996 34,956,835 101.2 599.5 (8.3) 692.4
Comprehensive loss:
Net loss - - (43.5) -
Currency translation adjustments - - - (9.1)
Total comprehensive loss - - - - (52.6)
Cash dividends declared - - (6.7) - (6.7)
Stock option plan transactions, net of
related tax benefits 876,264 22.0 - - 22.0
Retirement of common stock (35,832,099) - - - -
Parent Company capital contribution - 166.0 - - 166.0
Other - - (.1) - (.1)
----------- ----------- ------------ ------------- ------------
Balance, December 31, 1997 1,000 289.2 549.2 (17.4) 821.0
Comprehensive income:
Net income - - 292.7 -
Currency translation adjustments - - - (9.1)
Total comprehensive income - - - - 283.6
Cash dividends declared - - (97.0) - (97.0)
Parent Company capital contribution - 190.7 - - 190.7
----------- ----------- ----------- ------------- ------------
Balance, December 31, 1998 1,000 $ 479.9 $ 744.9 $ (26.5) $ 1,198.3
=========== =========== =========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 292.7 $ (43.5) $ 107.0
Income from discontinued operations, net of tax (107.5) (27.1) (52.1)
Merger-related costs and other unusual charges (credits) (18.9) 189.9 -
Payments of merger-related costs and other unusual charge liabilities (35.1) (118.9) -
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 25.6 13.2 15.4
Gain on sales of mortgage servicing rights (19.8) (15.8) (5.2)
Accounts and notes receivable (30.8) (16.9) (38.8)
Accounts payable and other accrued liabilities 202.7 77.8 3.4
Deferred income taxes 165.6 (30.1) 17.4
Other, net 62.7 45.5 (43.8)
------------- ------------- --------------
537.2 74.1 3.3
Management and mortgage programs:
Depreciation and amortization 157.8 95.6 51.1
Origination of mortgage loans (26,571.6) (12,216.5) (8,292.6)
Proceeds on sale and payments from mortgage loans 25,791.9 11,828.5 8,219.3
------------- ------------- -------------
Net cash used in operating activities of continuing operations (84.7) (218.3) (18.9)
-------------- -------------- --------------
Investing Activities
Additions to property and equipment (106.2) (34.4) (11.4)
Funding of grantor trusts - - (89.8)
Other, net 11.6 19.4 (2.8)
------------- ------------- --------------
(94.6) (15.0) (104.0)
Management and mortgage programs:
Equity advances on homes under management (6,484.1) (6,844.5) (4,308.0)
Payments received on advances on homes under management 6,624.9 6,862.6 4,348.9
Additions to mortgage servicing rights (524.4) (270.5) (164.4)
Proceeds from sales of mortgage servicing rights 119.0 49.0 7.1
------------- ------------- -------------
Net cash used in investing activities of continuing operations (359.2) (218.4) (220.4)
-------------- -------------- --------------
Financing Activities
Parent Company capital contribution 46.0 90.0 -
Payment of dividends (97.0) (6.6) (25.0)
Other, net - 22.0 10.3
------------- ------------- -------------
(51.0) 105.4 (14.7)
Management and mortgage programs:
Proceeds from debt issuance or borrowings 3,045.3 2,729.5 1,736.1
Principal payments on borrowings (2,869.0) (1,663.6) (1,735.0)
Net change in short term borrowings (65.3) (514.8) 203.9
Net change in fundings to discontinued operations 635.6 (199.9) (169.3)
------------- -------------- --------------
Net cash provided by financing activities of continuing operations 695.6 456.6 21.0
------------- ------------- -------------
Effect of exchange rates on cash and cash equivalents (6.7) (8.8) 5.4
Cash provided by (used in) discontinued operations 34.2 (22.2) 219.4
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 279.2 (11.1) 6.5
Cash and cash equivalents at beginning of period 2.1 13.2 6.7
------------- ------------- -------------
Cash and cash equivalents at end of period $ 281.3 $ 2.1 $ 13.2
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
The accompanying consolidated financial statements and footnotes of PHH
Corporation, together with its wholly-owned subsidiaries (the "Company")
for the years ended December 31, 1998, 1997 and 1996 set forth herein
have been restated giving effect to: (i) the contribution by Cendant
Corporation ("Cendant" or the "Parent Company") in April 1999 of certain
fuel card subsidiaries; and (ii) the reclassification of the Company's
fleet business segment (the "fleet segment" or "fleet businesses") as a
discontinued operation pursuant to the Company's May 22, 1999 Agreement
and Plan of Merger and Reorganization with Avis Rent A Car, Inc. (the
"Agreement"), which provided for the Company to divest its fleet
segment. The Company subsequently completed the divestiture of its fleet
segment on June 30, 1999 (See Note 4). The restated consolidated
financial statements presented herein are the Company's primary
historical financial statements for the periods presented.
In April 1997, the Company merged with a wholly-owned subsidiary of HFS
Incorporated ("HFS") (the "HFS Merger") and in December 1997, HFS merged
with and into CUC International Inc. ("CUC") (the "Cendant Merger") to
form Cendant. The HFS Merger and the Cendant Merger were both accounted
for as poolings of interests. Effective upon the Cendant Merger, the
Company became a wholly-owned subsidiary of Cendant. However, pursuant
to certain covenant requirements in the indentures under which the
Company issues debt, the Company continues to operate and maintain its
status as a separate public reporting entity, which is the basis under
which the accompanying financial statements and footnotes are presented.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts and
transactions of the Company together with its wholly-owned subsidiaries.
All material intercompany balances and transactions have been eliminated
in consolidation.
<PAGE>
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation is computed by the straight-line method
over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed by the straight-line method over the
estimated useful lives of the related assets or the lease term, if
shorter. The Company periodically evaluates the recoverability of its
long-lived assets, comparing the respective carrying values to the
current and expected future cash flows, on an undiscounted basis, to be
generated from such assets. Property and equipment is evaluated
separately within each business.
Revenue recognition and continuing business operations
Relocation. Relocation services provided by the Company include
facilitating the purchase and resale of the transferee's residence,
providing equity advances on the transferee's residence and home
management services. The home is purchased under a contract of sale and
the Company obtains a deed to the property; however, it does not
generally record the deed or transfer title. Transferring employees are
provided equity advances on their home based on an appraised value
generally determined by independent appraisers, after deducting any
outstanding mortgages. The mortgage is generally retired concurrently
with the advance of the equity and the purchase of the home. Based on
its client agreements, the Company is given parameters under which it
negotiates for the ultimate sale of the home. The gain or loss on resale
is generally borne by the client corporation. In certain transactions,
the Company will assume the risk of loss on the sale of homes; however,
in such transactions, the Company will control all facets of the resale
process, thereby, limiting its exposure.
While homes are held for resale, the amount funded for such homes carry
an interest charge computed at a floating rate based on various indices.
Direct costs of managing the home during the period the home is held for
resale, including property taxes and repairs and maintenance, are
generally borne by the client corporation. The client corporation
normally advances funds to cover a portion of such carrying costs. When
the home is sold, a settlement is made with the client corporation
netting actual costs with any advanced funding.
Revenues and related costs associated with the purchase and resale of a
residence are recognized over the period in which services are provided.
Relocation services revenue is recorded net of costs reimbursed by
client corporations and interest expenses incurred to fund the purchase
of a transferee's residence. Under the terms of contracts with client
corporations, the Company is generally protected against losses from
changes in real estate market conditions. The Company also offers
fee-based programs such as home marketing assistance, household goods
moves and destination services. Revenues from these fee-based services
are taken into income over the periods in which the services are
provided and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection with
the sale of loans, and direct loan origination costs associated with
loans are deferred until such loans are sold. Mortgage loans are
recorded at the lower of cost or market value on an aggregate basis.
Sales of mortgage loans are generally recorded on the date a loan is
delivered to an investor. Gains or losses on sales of mortgage loans are
recognized based upon the difference between the selling price and the
carrying value of the related mortgage loans sold (see Note 7 - Mortgage
Loans Held for Sale).
<PAGE>
Fees received for servicing loans owned by investors are based on the
difference between the weighted average yield received on the mortgages
and the amount paid to the investor, or on a stipulated percentage of
the outstanding monthly principal balance on such loans. Servicing fees
are credited to income when received. Costs associated with loan
servicing are charged to expense as incurred.
The Company recognizes as separate assets the rights to service mortgage
loans for others by allocating total costs incurred between the loan and
the servicing rights retained based on their relative fair values. The
carrying value of mortgage servicing rights ("MSRs") is amortized over
the estimated life of the related loan portfolio in proportion to
projected net servicing revenues. Such amortization is recorded as a
reduction of loan servicing fees in the consolidated statements of
operations. Projected net servicing income is in turn determined on the
basis of the estimated future balance of the underlying mortgage loan
portfolio, which declines over time from prepayments and scheduled loan
amortization. The Company estimates future prepayment rates based on
current interest rate levels, other economic conditions and market
forecasts, as well as relevant characteristics of the servicing
portfolio, such as loan types, interest rate stratification and recent
prepayment experience. MSRs are periodically assessed for impairment,
which is recognized in the consolidated statements of operations during
the period in which impairment occurs as an adjustment to the
corresponding valuation allowance. Gains or losses on the sale of MSRs
are recognized when title and all risks and rewards have irrevocably
passed to the buyer and there are no significant unresolved
contingencies (see Note 8 - Mortgage Servicing Rights).
Income taxes
The Company's income taxes are included in the consolidated federal
income tax return of Cendant. In addition, the Company files unitary,
consolidated, and combined state income tax returns with Cendant in
jurisdictions where required. Income tax expense is based on allocations
from Cendant and is computed as if the Company filed its federal and
state income tax returns on a stand-alone basis. The Company computes
income tax expense and deferred income taxes using the asset and
liability method. No provision has been made for U.S. income taxes on
approximately $7.0 million of cumulative undistributed earnings of
foreign subsidiaries at December 31, 1998 since it is the present
intention of management to reinvest the undistributed earnings
indefinitely in foreign operations. The determination of unrecognized
deferred U.S. tax liability for unremitted earnings is not practicable.
Parent Company stock option plans
Certain executives and employees of the Company participate in stock
option plans sponsored and administered by the Parent Company. The
Company does not sponsor or maintain any stock option plans. Accounting
Principles Board ("APB") Opinion No. 25 is applied in accounting for
options issued under the Parent Company's plans. Under APB No. 25,
because the exercise price of the stock options are equal to or greater
than the market prices of the underlying Parent Company stock on the
date of grant, no compensation expense is recognized.
In accordance with the Agreement, Parent Company stock options
associated with certain employees of the Company's fleet businesses were
immediately vested. Accordingly, additional compensation cost of $13.5
million was recognized and was included in the calculation of the gain
on the sale of discontinued operations (see Note 4).
Translation of foreign currencies
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates in effect as of the balance sheet dates. Equity accounts
are translated at historical exchange rates and revenues, expenses and
cash flows are translated at the average exchange rates for the periods
presented. Translation gains and losses are included as a component of
comprehensive income (loss) in the consolidated statements of
shareholder's equity.
New accounting standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities". The Company will
adopt SFAS No. 133 effective January 1, 2001. SFAS No. 133 requires the
Company to record all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. If the derivative
does not qualify as a hedging instrument, the change in the derivative
fair values will be immediately recognized as a gain or loss in
earnings. If the derivative does qualify as a hedging instrument, the
gain or loss on the change in the derivative fair values will either be
recognized (i) in earnings as offsets to the changes in the fair value
of the related item being hedged or (ii) be deferred and recorded as a
component of other comprehensive income and reclassified to earnings in
the same period during which the hedged transactions occur. The Company
has not yet determined what impact the adoption of SFAS No. 133 will
have on its financial statements.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to the presentation used in 1998.
<PAGE>
3. Historical Adjustments
Certain reclassifications have been made to the historical financial
statements of the Company to conform with the presentation used
subsequent to the HFS Merger. Additionally, the historical financial
statements of the Company were restated to give effect to the June 1997
merger of HFS's relocation business with and into the Company. As both
entities were under common control, such transaction was accounted for
in a manner similar to a pooling of interests. The effects of such
reclassifications and restatement (collectively, the "Adjustments") on
the consolidated statements of income for the year ended December 31,
1996 was as follows:
<TABLE>
<CAPTION>
As previously As restated
reported Adjustments (Prior to Note 4 Restatement)
------------- -------------- -----------------------------
<S> <C> <C> <C>
Net revenues $ 1,938.5 $ (1,212.8) $ 725.7
Total expenses 1,790.3 (1,240.9) 549.4
Provision for income taxes 60.6 11.2 71.8
------------- ------------ ----------------
Net income $ 87.6 $ 16.9 $ 104.5
============= ============ ================
</TABLE>
4. Discontinued Operations
Contribution of Fuel Card Subsidiaries by Parent Company. In April 1999,
the Parent Company contributed its fuel card subsidiaries, Wright
Express Corporation ("WEX") and The Harpur Group, Ltd. ("Harpur"), to
the Company. As both entities were under common control, such
transaction has been accounted for in a manner similar to a pooling of
interests. Accordingly, financial results for the years ended December
31, 1998, 1997 and 1996 have been restated as if the Company, WEX and
Harpur had operated as one entity since inception. However, the
operating results of Harpur are included from January 20, 1998, the date
on which Harpur was acquired by the Parent Company for $190.7 million
pursuant to a purchase business combination and, accordingly, the date
on which common control was established.
Divestiture. On May 22, 1999, the Company executed the Agreement
providing for the disposition of the Company's fleet segment, which
included PHH Vehicle Management Services Corporation, WEX, Harpur and
other subsidiaries to Avis Rent A Car, Inc. ("ARAC"). The Company's
fleet segment primarily consisted of providing fleet and fuel card
related products and services to corporate clients and government
agencies. These services included management and leasing of vehicles,
fuel card payment and reporting and other fee-based services for
clients' vehicle fleets. Vehicles were leased primarily to corporate
fleet users under operating and direct financing lease arrangements.
On June 30, 1999, the Company completed the divestiture of the fleet
businesses. Pursuant to the Agreement, ARAC acquired the net assets of
the Company's fleet businesses through the assumption and subsequent
repayment of $1.44 billion of intercompany debt of PHH Holdings, a
wholly-owned subsidiary of the Company and the issuance of $360 million
in convertible preferred stock of Avis Fleet Leasing and Management
Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC. The
convertible preferred stock of Avis Fleet is convertible into common
stock of ARAC at the Company's option upon the satisfaction of certain
conditions, including the per share price of ARAC Class A common stock
equaling or exceeding $50 per share and the fleet segment attaining
certain EBITDA (earnings before interest, taxes, depreciation and
amortization) thresholds, as defined. There are additional circumstances
upon which the shares of Avis Fleet convertible preferred stock are
automatically or mandatorily convertible into ARAC common stock. The
transaction followed a competitive bidding process. In connection with
the disposition of the Company's fleet segment, the Company recorded an
after-tax gain on sale of discontinued operations of $871.2 million in
the second quarter of 1999. The fleet segment disposition was structured
in accordance with applicable tax law to be treated as a tax-free
reorganization and, accordingly, no tax provision has been recorded on a
majority of the gain. Should the transaction be deemed taxable, the
resultant tax liability could be material. In July 1999, utilizing the
cash proceeds from the fleet segment disposition, the Company made a
cash dividend payment to Cendant in the amount of $1,033.0 million. Such
dividend was in compliance with the dividend restriction covenant
pursuant to the Indenture under which the Company issues medium-term
notes.
In connection with the disposition of the fleet segment, the Company
received cash payments from ARAC equal to the outstanding balances of
fleet segment financing arrangements. The Company partially utilized
such proceeds to repay the outstanding borrowings under the secured
financing facilities as well as other secured loans and borrowings under
unsecured short-term facilities. Corporate debt which had been loaned to
the fleet segment will be retired as it matures.
Summarized financial data of the Company's fleet segment, inclusive of
the merged Parent Company fuel card subsidiaries is as follows:
<TABLE>
<CAPTION>
Statement of Income
(In millions) Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues (net of depreciation and interest costs
of $1,279.4, $1.205.2 and $1.132.4) $ 382.6 $ 324.1 $ 293.5
----------- ----------- -----------
Income before income taxes 151.9 58.9 89.7
Provision for income taxes 44.4 31.8 37.6
----------- ----------- -----------
Net income $ 107.5 $ 27.1 $ 52.1
=========== =========== ===========
Balance Sheet
(In millions) December 31,
1998 1997
------------ --------------
Total assets exclusive of assets under programs $ 893.7 $ 504.8
Assets under management programs 3,801.1 3,659.1
Total liabilities exclusive of liabilities under programs (379.4) (397.1)
Liabilities under management programs (3,347.9) (3,063.3)
------------- --------------
Net assets of discontinued operations $ 967.5 $ 703.5
============ ==============
</TABLE>
The effect on the consolidated financial statements of the restatement
resulting from the Parent Company's contribution of its WEX and Harpur
subsidiaries ("Parent Company Subsidiaries") and the subsequent
reclassification of the fleet segment as a discontinued operation is as
follows:
<PAGE>
Consolidated Statements of Operations
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
----------- --------------- ---------------- --------
<S> <C> <C> <C> <C>
Net revenues $ 1,097.6 $ 92.5 $ (382.6) $ 807.5
--------- ------------- -------------- --------
Expenses
Operating 469.7 29.5 (112.0) 387.2
General and administrative 171.7 31.0 (97.9) 104.8
Depreciation and amortization 36.8 10.9 (22.1) 25.6
Merger-related costs and other
unusual charges (credits) (20.2) - 1.3 (18.9)
---------- ------------- -------------- ---------
Total expenses 658.0 71.4 (230.7) 498.7
--------- ------------- -------------- --------
Income from continuing operations
before income taxes 439.6 21.1 (151.9) 308.8
Provision for income taxes 159.6 8.4 (44.4) 123.6
--------- ------------- -------------- --------
Income from continuing operations 280.0 12.7 (107.5) 185.2
Income from discontinued operations,
net of tax - - 107.5 107.5
--------- ------------- ------------- --------
Net income $ 280.0 $ 12.7 $ - $ 292.7
========= ============= ============= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
----------- --------------- ---------------- --------
<S> <C> <C> <C> <C>
Net revenues $ 860.6 $ 52.2 $ (324.1) $ 588.7
---------- ------------- -------------- -------
Expenses
Operating 422.9 33.6 (113.6) 342.9
General and administrative 164.4 8.5 (74.2) 98.7
Depreciation and amortization 25.7 3.8 (16.3) 13.2
Merger-related costs and other
unusual charges (credits) 251.0 - (61.1) 189.9
--------- ------------- -------------- -------
Total expenses 864.0 45.9 (265.2) 644.7
--------- ------------- -------------- -------
Income (loss) from continuing operations
before income taxes (3.4) 6.3 (58.9) (56.0)
Provision for income taxes 44.2 2.2 (31.8) 14.6
--------- ------------- -------------- -------
Income (loss) from continuing operations (47.6) 4.1 (27.1) (70.6)
Income from discontinued operations,
net of tax - - 27.1 27.1
---------- ------------- ------------- -------
Net income (loss) $ (47.6) $ 4.1 $ - $ (43.5)
========== =========== ============= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
----------- --------------- ---------------- --------
<S> <C> <C> <C> <C>
Net revenues $ 725.7 $ 37.6 $ (293.5) $ 469.8
---------- ------------ --------------- --------
Expenses
Operating 346.9 24.4 (102.9) 268.4
General and administrative 173.9 6.0 (85.5) 94.4
Depreciation and amortization 28.6 2.2 (15.4) 15.4
--------- ------------ --------------- --------
Total expenses 549.4 32.6 (203.8) 378.2
--------- ------------ --------------- --------
Income from continuing operations
before income taxes 176.3 5.0 (89.7) 91.6
Provision for income taxes 71.8 2.5 (37.6) 36.7
--------- ------------ --------------- --------
Income from continuing operations 104.5 2.5 (52.1) 54.9
Income from discontinued operations,
net of tax - - 52.1 52.1
--------- ------------ -------------- --------
Net income $ 104.5 $ 2.5 $ - $ 107.0
========= ============ ============== ========
</TABLE>
<PAGE>
Balance Sheet
(In millions)
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
----------- --------------- ---------------- --------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 233.2 $ 88.8 $ (40.7) $ 281.3
Receivables, net 775.2 176.0 (493.5) 457.7
Property and equipment, net 219.4 21.7 (91.5) 149.6
Other assets 293.2 231.1 (268.0) 256.3
Net assets of discontinued operations - - 967.5 967.5
----------- ------------- --------------- --------
Total assets exclusive of assets under
programs 1,521.0 517.6 73.8 2,112.4
Assets under management and
mortgage programs
Net investment in leases and
leased vehicles 3,801.1 - (3,801.1) -
Relocation receivables 659.1 - - 659.1
Mortgage loans held for sale 2,416.0 - - 2,416.0
Mortgage servicing rights 635.7 - - 635.7
---------- ----------- --------------- ------------
7,511.9 - (3,801.1) 3,710.8
---------- ----------- ---------------- ------------
Total assets $ 9,032.9 $ 517.6 $ (3,727.3) $ 5,823.2
========== =========== ================ ============
Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 752.0 $ 291.6 $ (336.0) $ 707.6
Deferred income 57.0 (4.7) (24.9) 27.4
Long-term debt - 18.5 (18.5) -
---------- ----------- ---------------- -----------
Total liabilities exclusive of liabilities
under programs 809.0 305.4 (379.4) 735.0
---------- ----------- ---------------- -----------
Liabilities under management and
mortgage programs
Debt 6,896.8 - (3,205.2) 3,691.6
---------- ----------- ---------------- -----------
Deferred income taxes 341.0 - (142.7) 198.3
---------- ----------- ---------------- -----------
Total liabilities 8,046.8 305.4 (3,727.3) 4,624.9
---------- ----------- ---------------- -----------
Shareholder's equity
Common stock 289.2 - - 289.2
Additional paid-in capital - 190.7 - 190.7
Retained earnings 727.7 17.2 - 744.9
Accumulated other comprehensive loss (30.8) 4.3 - (26.5)
----------- ----------- --------------- -----------
Total shareholder's equity 986.1 212.2 - 1,198.3
---------- ----------- --------------- -----------
Total liabilities and
shareholder's equity $ 9,032.9 $ 517.6 $ (3,727.3) $ 5,823.2
========== =========== =============== ===========
</TABLE>
<PAGE>
Balance Sheet
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
----------- --------------- ---------------- --------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 2.1 $ 1.6 $ (1.6) $ 2.1
Receivables, net 567.6 112.4 (377.1) 302.9
Property and equipment, net 104.1 10.2 (38.5) 75.8
Other assets 343.0 26.5 (87.6) 281.9
Net assets of discontinued operations - - 703.5 703.5
----------- --------------- -------------- --------
Total assets exclusive of assets under
programs 1,016.8 150.7 198.7 1,366.2
Assets under management and
mortgage programs
Net investment in leases and
leased vehicles 3,659.1 - (3,659.1) -
Relocation receivables 775.3 - - 775.3
Mortgage loans held for sale 1,636.3 - - 1,636.3
Mortgage servicing rights 373.0 - - 373.0
---------- -------------- -------------- --------
6,443.7 - (3,659.1) 2,784.6
---------- -------------- --------------- --------
Total assets $ 7,460.5 $ 150.7 $ (3,460.4) $4,150.8
========== ============== =============== ========
Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 692.4 $ 110.8 $ (315.9) $ 487.3
Deferred income 53.3 0.3 (46.1) 7.5
Long-term debt - 35.1 (35.1) -
---------- -------------- --------------- --------
Total liabilities exclusive of liabilities
under programs 745.7 146.2 (397.1) 494.8
---------- -------------- --------------- --------
Liabilities under management and
mortgage programs
Debt 5,602.6 - (2,835.8) 2,766.8
---------- -------------- --------------- --------
Deferred income taxes 295.7 - (227.5) 68.2
---------- -------------- --------------- --------
Total liabilities 6,644.0 146.2 (3,460.4) 3,329.8
---------- -------------- --------------- --------
Shareholder's equity
Common stock 289.2 - - 289.2
Retained earnings 544.7 4.5 - 549.2
Accumulated other comprehensive loss (17.4) - - (17.4)
----------- --------------- -------------- --------
Total shareholder's equity 816.5 4.5 - 821.0
---------- --------------- -------------- --------
Total liabilities and shareholder's
equity $ 7,460.5 $ 150.7 $ (3,460.4) $4,150.8
========== =============== ================ ========
</TABLE>
<PAGE>
5. Merger-Related Costs and Other Unusual Charges
The Company incurred merger-related costs and other unusual charges
("Unusual Charges") in 1997 of $251.0 million primarily associated with
the HFS Merger and the Cendant Merger of which $189.9 million related to
continuing operations and $61.1 million related to businesses which are
discontinued. Liabilities associated with Unusual Charges are classified
as a component of accounts payable and other current liabilities. The
personnel related liabilities remaining at December 31, 1998 relate to
future severance and benefit payments, and the remaining facility
related liabilities represent future lease termination payments. The
utilization of such liabilities from inception is summarized by category
of expenditure and by merger association as follows:
<TABLE>
<CAPTION>
1998 Activity
Net 1997 Balance at --------------------------------- Balance at
Unusual 1997 December 31, Cash December 31,
(In millions) Charges Reductions 1997 Payments Non-Cash Adjustments 1998
---------- ---------- ----------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Professional fees $ 14.5 $ (13.8) $ 0.7 $ (4.3) $ - $ 3.6 $ -
Personnel related 147.5 (94.5) 53.0 (22.9) - (19.1) 11.0
Business terminations 68.8 (67.3) 1.5 (0.6) 4.7 (5.6) -
Facility related and
other 20.2 (4.7) 15.5 (11.3) - 0.9 5.1
---------- ---------- ----------- --------- -------- ---------- ------------
Total Unusual Charges $ 251.0 $ (180.3) $ 70.7 $ (39.1) $ 4.7 $ (20.2) $ 16.1
Reclassification for
discontinued
operations (61.1) 55.8 (5.3) 4.0 - 1.3 -
---------- --------- ----------- --------- -------- ---------- ------------
Total Unusual Charges
related to continuing
operations $ 189.9 $ (124.5) $ 65.4 $ (35.1) $ 4.7 $ (18.9) $ 16.1
========== ========= ========== ========= ======== =========== ============
HFS Merger $ 208.8 $ (150.3) $ 58.5 $ (24.6) $ 4.7 $ (24.0) $ 14.6
Cendant Merger 42.2 (30.0) 12.2 (14.5) - 3.8 1.5
----------- ---------- ----------- --------- -------- ----------- ------------
Total Unusual Charges $ 251.0 $ (180.3) $ 70.7 $ (39.1) $ 4.7 $ (20.2) $ 16.1
Reclassification for
discontinued
operations (61.1) 55.8 (5.3) 4.0 - 1.3 -
------------ --------- ----------- --------- -------- ----------- ------------
Total Unusual Charges
related to continuing
operations $ 189.9 $ (124.5) $ 65.4 $ (35.1) $ 4.7 $ (18.9) $ 16.1
=========== ========== =========== ========= ======== ============ ============
</TABLE>
HFS Merger Charge
The Company incurred $223.1 million of Unusual Charges in the second
quarter of 1997 primarily associated with the HFS Merger. During the
fourth quarter of 1997, as a result of changes in estimates, the Company
reduced certain merger-related liabilities, which resulted in a $14.3
million credit to Unusual Charges. The Company incurred $110.0 million
of professional fees and executive compensation expenses directly as a
result of the HFS Merger, and also incurred $113.1 million of expenses
resulting from reorganization plans formulated prior to and implemented
as of the merger date. The HFS Merger afforded the combined company, at
such time, an opportunity to rationalize its combined corporate
infrastructure as well as its businesses and enabled the corresponding
support and service functions to gain organizational efficiencies and
maximize profits. Management initiated a plan just prior to the HFS
Merger to continue the downsizing of fleet businesses by reducing
headcount and eliminating unprofitable products. In addition, management
initiated plans to integrate its relocation and mortgage origination
businesses along with the Parent Company's real estate franchise
business to capture additional revenues
<PAGE>
through the referral of one business unit's customers to another.
Management also formalized a plan to centralize the management and
headquarters functions of the world's largest, second largest and other
company-owned corporate relocation business unit subsidiaries. The
aforementioned reorganization plans provided for 450 job reductions
which included the elimination of corporate functions and facilities in
Hunt Valley, Maryland.
Unusual Charges included $135.5 million of personnel-related costs
associated with employee reductions necessitated by the planned and
announced consolidation of the Company's relocation service businesses
worldwide as well as the consolidation of corporate activities.
Personnel related charges also included termination benefits such as
severance, medical and other benefits and provided for retirement
benefits pursuant to pre-existing contracts resulting from a change in
control. Several grantor trusts were established and funded by the
Company in November 1996 to pay such benefits in accordance with the
terms of the PHH merger agreement. Unusual Charges also included
professional fees of $14.5 million which were primarily comprised of
investment banking, accounting and legal fees incurred in connection
with the HFS Merger. The Company incurred business termination charges
of $38.8 million, which represented costs to exit certain activities
primarily within the Company's fleet management business. Such business
termination charges included $35.0 million of asset write-offs of which
$25.0 million related to businesses which are discontinued. Facility
related and other charges totaling $34.5 million included costs
associated with contract and lease terminations, asset disposals and
other charges incurred in connection with the consolidation and closure
of excess office space.
During the year ended December 31, 1998, adjustments of $20.2 million
were made to Unusual Charges of which $18.9 million related to
continuing operations and $1.3 million related to businesses which are
discontinued. Such adjustments primarily included $19.1 million of costs
associated with a change in estimated severance costs.
Cendant Merger Charge
In connection with the Cendant Merger, in 1997 the Company originally
recorded a merger-related charge (the "Cendant Merger Charge") of $42.2
million. During 1998 an additional $3.8 million of professional fees
were expensed as incurred. The Cendant Merger Charge included
approximately $30.0 million of termination costs associated with
discontinued Fleet operations and a non-compete agreement which was
terminated in December 1997 for which $10.7 million of outstanding
obligations were paid in January 1998.
6. Property and Equipment, net
Property and equipment, net consisted of:
<TABLE>
<CAPTION>
Estimated
Useful Lives December 31,
(In millions) In Years 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Land - $ 9.3 $ 2.0
Building and leasehold improvements 5 - 50 19.9 20.3
Furniture, fixtures and equipment 3 - 10 180.7 105.9
------------- -------------
209.9 128.2
Less accumulated depreciation and amortization 60.3 52.4
------------- -------------
$ 149.6 $ 75.8
============= =============
</TABLE>
7. Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. The Company sells
loans insured or guaranteed by various government sponsored entities and
private insurance agencies. The insurance or guarantee is provided
primarily on a non-recourse basis to the Company except where limited by
the Federal Housing Administration and Veterans Administration and their
respective loan programs. As of December 31, 1998 and 1997, mortgage
loans sold with recourse amounted to approximately $58.3 million and
$58.5 million, respectively. The
<PAGE>
Company believes adequate allowances are maintained to cover any
potential losses.
The Company entered into a three year agreement effective May 1998 and
expanded in December 1998 under which an unaffiliated Buyer (the
"Buyer") committed to purchase, at the Company's option, mortgage loans
originated by the Company on a daily basis, up to the Buyer's asset
limit of $2.4 billion. Under the terms of this sale agreement, the
Company retains the servicing rights on the mortgage loans sold to the
Buyer and provides the Buyer with options to sell or securitize the
mortgage loans into the secondary market. At December 31, 1998, the
Company was servicing approximately $2.0 billion of mortgage loans owned
by the Buyer.
8. Mortgage Servicing Rights
Capitalized mortgage servicing rights ("MSRs") activity was as follows:
<TABLE>
<CAPTION>
Impairment
(In millions) MSRs Allowance Total
------------- -------------- -------------
<S> <C> <C> <C>
Balance, January 31, 1996 $ 192.8 $ (1.4) $ 191.4
Less: PHH activity for January 1996
to reflect change in PHH fiscal year (14.0) 0.2 (13.8)
Additions to MSRs 164.4 - 164.4
Amortization (51.8) - (51.8)
Write-down/provision - 0.6 0.6
Sales (1.9) - (1.9)
-------------- ------------ -------------
Balance, December 31, 1996 289.5 (0.6) 288.9
Additions to MSRs 251.8 - 251.8
Amortization (95.6) - (95.6)
Write-down/provision - (4.1) (4.1)
Sales (33.1) - (33.1)
Deferred hedge, net 18.6 - 18.6
Reclassification of mortgage-related securities (53.5) - (53.5)
-------------- ------------- --------------
Balance, December 31, 1997 377.7 (4.7) 373.0
Additions to MSRs 475.2 - 475.2
Additions to hedge 49.2 - 49.2
Amortization (82.5) - (82.5)
Write-down/provision - 4.7 4.7
Sales (99.1) - (99.1)
Deferred hedge, net (84.8) - (84.8)
-------------- ------------- --------------
Balance, December 31, 1998 $ 635.7 $ - $ 635.7
============= ============ =============
</TABLE>
The value of the Company's MSRs is sensitive to changes in interest
rates. The Company uses a hedge program to manage the associated
financial risks of loan prepayments. Commencing in 1997, the Company
used certain derivative financial instruments, primarily interest rate
floors, interest rate swaps, principal only swaps, futures and options
on futures to administer its hedge program. Premiums paid/received on
the acquired derivatives instruments are capitalized and amortized over
the life of the contracts. Gains and losses associated with the hedge
instruments are deferred and recorded as adjustments to the basis of the
MSRs. In the event the performance of the hedge instruments do not meet
the requirements of the hedge program, changes in the fair value of the
hedge instruments will be reflected in the income statement in the
current period. Deferrals under the hedge programs are allocated to each
applicable stratum of MSRs based upon its original designation and
included in the impairment measurement.
For purposes of performing its impairment evaluation, the Company
stratifies its portfolio on the basis of interest rates of the
underlying mortgage loans. The Company measures impairment for each
stratum by comparing estimated fair value to the recorded book value.
The Company records amortization expense in proportion to and over the
period of the projected net servicing income. Temporary impairment is
recorded through a valuation allowance in the period of occurrence.
<PAGE>
9. Liabilities Under Management and Mortgage Programs
The Company has supported purchases of assets under management programs
primarily by issuing commercial paper, medium term notes and by
maintaining securitized obligations. Such financing is included in
liabilities under management and mortgage programs.
Borrowings to fund assets under management and mortgage programs
consisted of:
<TABLE>
<CAPTION>
December 31,
-------------------------------
(In millions) 1998 1997
------------- -------------
<S> <C> <C>
Commercial paper $ 2,484.4 $ 2,577.5
Medium-term notes 2,337.9 2,747.8
Securitized obligations 1,901.5 -
Other 173.0 277.3
------------- -------------
6,896.8 5,602.6
Reclassification for discontinued operations
Parent Company loans 1,954.5 2,590.1
Securitized obligations 1,104.3 -
Other 146.4 245.7
------------- -------------
Total reclassification for discontinued operations 3,205.2 2,835.8
------------- -------------
Debt under management and mortgage programs applicable to continuing operations $ 3,691.6 $ 2,766.8
============= =============
</TABLE>
Commercial Paper
Commercial paper, which matures within 180 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 6.1% and 5.9% at December 31, 1998 and
1997, respectively.
Medium-Term Notes
Medium-term notes of $2.3 billion primarily represent unsecured loans
which mature through 2002. The weighted average interest rates on such
medium-term notes were 5.6% and 5.9% at December 31, 1998 and 1997,
respectively.
Securitized Obligations
The Company maintains three separate financing facilities for our
continuing operations, the outstanding borrowings of which are
securitized by corresponding assets under management and mortgage
programs. The collective weighted average interest rate on such
facilities was 5.9% at December 31, 1998. Such securitized obligations
are described below.
Mortgage Facility. In December 1998, the Company entered into a 364-day
financing agreement to sell mortgage loans under an agreement to
repurchase such mortgages (the "Mortgage Agreement"). The Mortgage
Agreement is collateralized by the underlying mortgage loans held in
safekeeping by the custodian to the Mortgage Agreement. The total
commitment under this Mortgage Agreement is $500.0 million and is
renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Mortgage loans financed
under this Mortgage Agreement at December 31, 1998 totaled $378.0
million and are included in mortgage loans held for sale on the
consolidated balance sheet.
Relocation Facilities. The Company entered into a 364-day asset
securitization agreement effective December 1998 under which an
unaffiliated buyer has committed to purchase an interest in the rights
to payment related to certain Company relocation receivables. The
revolving purchase commitment provides for funding up to a limit of
$325.0 million and is renewable on an annual basis at the discretion of
the lender in accordance with the securitization agreement. Under the
terms of this agreement, the Company retains the servicing rights
related to the relocation receivables. At December 31, 1998, the Company
was servicing $248.0 million of assets, which were funded under this
agreement.
<PAGE>
The Company also maintains an asset securitization agreement with a
separate unaffiliated buyer, which has a purchase commitment up to a limit
of $350.0 million. The terms of this agreement are similar to the
aforementioned facility with the Company retaining the servicing rights on
the right of payment of our relocation receivables. At December 31, 1998,
the Company was servicing $171.0 million of assets eligible for purchase
under this agreement.
Other. Other liabilities under management and mortgage programs are
principally comprised of unsecured borrowings under uncommitted short-term
lines of credit and other bank facilities, all of which mature in 1999.
The weighted average interest rate on such debt was 5.4% and 6.0% at
December 31, 1998 and 1997, respectively.
Interest expense is incurred on indebtedness, which is used to finance
relocation and mortgage servicing activities. Interest related to equity
advances on homes was $26.9 million, $32.0 million and $35.0 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Interest
related to origination and mortgage servicing activities was $138.9
million, $77.6 million and $63.4 million for the years ended December 31,
1998, 1997 and 1996, respectively. Interest expense incurred on borrowings
used to finance both equity advances on homes and mortgage servicing
activities are recorded net within service fee revenues in the
consolidated statements of operations. Total interest payments were $165.8
million, $132.8 million and $93.4 million for the years ended December 31,
1998, 1997 and 1996, respectively.
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 100 percent of
the average outstanding commercial paper. This policy will be maintained
subsequent to the divestiture of the fleet businesses. As of December 31,
1998, the Company maintained $2.65 billion in committed and unsecured
credit facilities, which were backed by a consortium of domestic and
foreign banks. The facilities were comprised of $1.25 billion in 364 day
credit lines which matured in March 1999, a $150.0 million revolving
credit facility maturing December 1999 and a five year $1.25 billion
credit line maturing in the year 2002. In March 1999, the Company extended
the $1.25 billion in 364 day credit lines to March 2000. Under such credit
facilities, the Company paid annual commitment fees of $1.9 million, $1.7
million and $2.4 million for the years ended December 31, 1998, 1997 and
1996, respectively. In addition, the Company has other uncommitted lines
of credit with various banks of which $5.1 million was unused at December
31, 1998. The full amount of the Company's committed facility was undrawn
and available at December 31, 1998 and 1997.
On July 10, 1998, the Company entered into a Supplemental Indenture No. 1
(the "Supplemental Indenture") with The First National Bank of Chicago, as
trustee, under the Senior Indenture dated as of June 5, 1997, which
formalizes the policy of the Company limiting the payment of dividends and
the outstanding principal balance of loans to the Parent Company to 40% of
consolidated net income (as defined in the Supplemental Indenture) for
each fiscal year provided however, that the Company can distribute to the
Parent Company 100% of any extraordinary gains from asset sales and
capital contributions previously made to the Company by the Parent
Company. Notwithstanding the foregoing, the Supplemental Indenture
prohibits the Company from paying dividends or making loans to the Parent
Company if upon giving effect to such dividends and/or loan, the Company's
debt to equity ratio exceeds 8 to 1, at the time of the dividend or loan,
as the case may be.
<PAGE>
Discontinued Operations
The purchases of leased vehicles have principally been supported by the
Company's issuance of commercial paper and medium-term notes (coincident
with the Company's financing of other assets under management and mortgage
programs) and by the fleet segment maintaining securitized obligations.
Proceeds from public debt issuances have historically been loaned to the
fleet segment, pursuant to Parent Company loan agreements, consistent with
the funding requirements necessary for the purchases of leased vehicles.
10. Derivative Financial Instruments
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with
fluctuations in interest rates, foreign currency exchange rates, prices of
mortgage loans held for sale and anticipated mortgage loan closings
arising from commitments issued. The Company performs analyses on an
on-going basis to determine that a high correlation exists between the
characteristics of derivative instruments and the assets or transactions
being hedged. As a matter of policy, the Company does not engage in
derivative activities for trading or speculative purposes. 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 position of
counterparties and spreading its positions among multiple counterparties.
The Company presently does not expect non-performance by any of the
counterparties.
<PAGE>
Interest rate swaps. The Company enters into interest rate swap agreements
to match the interest characteristics of the assets being funded and to
modify the contractual costs of debt financing. The swap agreements
correlate the terms of the assets to the maturity and rollover of the debt
by effectively matching a fixed or floating interest rate with the
stipulated revenue stream generated from the portfolio of assets being
funded. 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. For the years
ended December 31, 1998, 1997 and 1996, the Company's hedging activities
decreased interest expense $1.4 million, $1.3 million and $2.1 million,
respectively, and had no effect on its weighted average borrowing rate.
The fair value of the swap agreements is not recognized in the
consolidated financial statements since they are accounted for as matched
swaps.
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps at December 31, 1998:
(In millions) Total 1999 2000
----- ---- ----
Medium-Term Notes:
Pay floating/receive fixed:
Notional value $ 241.0 $ 155.0 $ 86.0
Weighted average receive rate 5.81% 6.71%
Weighted average pay rate 5.09% 4.92%
Pay floating/receive floating:
Notional value 690.0 690.0
Weighted average receive rate 4.97%
Weighted average pay rate 5.04%
-------- ------- ------
Total $ 931.0 $ 845.0 $ 86.0
======== ======= ======
Other financial instruments. With respect to both mortgage loans held for
sale and anticipated mortgage loan closings arising from commitments
issued, the Company is exposed to the risk of adverse price fluctuations
primarily due to changes in interest rates. The Company uses forward
delivery contracts, financial futures and option contracts to reduce such
risk. Market value gains and losses on such positions used as hedges are
deferred and considered in the valuation of cost or market value of
mortgage loans held for sale. With respect to the mortgage servicing
portfolio, the Company acquired certain derivative financial instruments,
primarily interest rate floors, interest rate swaps, principal only swaps,
futures and options on futures to manage the associated financial impact
of interest rate movements.
<PAGE>
11. Fair Value of Financial Instruments and Servicing Rights
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments.
The fair values of the financial instruments presented may not be
indicative of their future values.
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 net of mortgage-related positions.
The value of embedded MSRs has been considered in determining fair value.
Mortgage servicing rights. Fair value is estimated by discounting future
net servicing cash flows associated with the underlying securities using
discount rates that approximate current market rates and externally
published prepayment rates, adjusted, if appropriate, for individual
portfolio characteristics.
Debt. The fair value of the Company's medium-term notes is estimated based
on quoted market prices.
Interest rate swaps and other mortgage-related positions. The fair values
of these instruments are 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 carrying amounts and fair values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- -----------------------------------
Notional/ Estimated Notional/ Estimated
Contract Carrying Fair Contract Carrying Fair
(In millions) Amount Amount Value Amount Amount Value
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Other assets
Investment in mortgage
securities $ - $ 46.2 $ 46.2 $ - $ 48.0 $ 48.0
- -------------------------------------------------------------------------------------------------------------------------
Assets under management and
mortgage programs
Relocation receivables - 659.1 659.1 - 775.3 775.3
Mortgage loans held for sale - 2,416.0 2,462.7 - 1,636.3 1,668.1
Mortgage servicing rights - 635.7 787.7 - 373.0 394.6
- -------------------------------------------------------------------------------------------------------------------------
Liabilities under management
and mortgage programs
Debt - 3,691.6 3,689.8 - 2,766.8 2,768.4
- -------------------------------------------------------------------------------------------------------------------------
Off balance sheet derivatives
relating to liabilities under
management and mortgage
programs
Interest rate swaps 931.0 - - 1,551.0 - -
in a gain position - - 2.3 - - 2.2
in a loss position - - (0.5) - - (0.3)
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-related positions
Forward delivery commitments (a) 5,057.0 2.9 (3.5) 2,582.5 19.4 (16.2)
Option contracts to sell (a) 700.8 8.5 3.7 290.0 0.5 -
Option contracts to buy (a) 948.0 5.0 1.0 705.0 1.1 4.4
Commitments to fund mortgages 3,154.6 - 35.0 1,861.7 - 19.7
Constant maturity treasury floors (b) 3,670.0 43.8 84.0 825.0 12.5 17.1
Interest rate swaps (b) 775.0 175.0
in a gain position - - 34.6 - - 1.3
in a loss position - - (1.2) - - -
Treasury futures (b) 151.0 - (0.7) 331.5 - 4.8
Principal only swaps (b) 66.3 - 3.1 - - -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Carrying amounts and gains (losses) on these mortgage-related positions
are already included in the determination of respective carrying
amounts and fair values of mortgage loans held for sale. Forward
delivery commitments are used to manage price risk on sale of all
mortgage loans to end investors including loans held by an unaffiliated
buyer as described in Note 6.
(b) Carrying amounts on these mortgage-related positions are capitalized
and recorded as a component of MSRs. Gains (losses) on such positions
are included in the determination of the respective carrying amounts
and fair value of MSRs.
12. Commitments and Contingencies
Leases. The Company has noncancelable operating leases covering
various equipment and facilities. Rental expense for the years ended
December 31, 1998, 1997 and 1996 was $23.1 million, $18.2 million and
$20.8 million, respectively.
Future minimum lease payments required under noncancelable operating
leases as of December 31, 1998 are as follows:
(In millions)
1999 $ 19.4
2000 18.6
2001 17.9
2002 17.2
2003 12.7
Thereafter 32.2
------
Total minimum lease payments $118.0
======
<PAGE>
Litigation
Parent Company Accounting Irregularities. Since the April 15, 1998 announcement
by the Parent Company of the discovery of potential accounting irregularities in
the former business units of CUC more than 70 lawsuits claiming to be class
actions, two lawsuits claiming to be brought derivatively on the Parent
Company's behalf and several other lawsuits and arbitration proceedings have
commenced in various courts an d other forums against the Parent Company and
other defendants by or on behalf of persons claiming to have purchased or
otherwise acquired securities or options issued by CUC or Cendant between May
1995 and August 1998. The Court has ordered consolidation of many of the
actions.
The Securities and Exchange Commission ("SEC") and the United States Attorney
for the District of New Jersey are conducting investigations relating to the
matters referenced above. The SEC advised the Parent Company that its inquiry
should not be construed as an indication by the SEC or its staff that any
violations of law have occurred. As a result of the findings from the
investigations, the Parent Company made all adjustments considered necessary
which are reflected in its financial statements. The Parent Company does not
expect that additional adjustments will be necessary as a result of these
government investigations.
The Parent Company does not believe it is feasible to predict or determine the
final outcome or resolution of these proceedings or to estimate the amounts or
potential range of loss with respect to these proceedings and investigations. In
addition, the timing of the final resolution of these proceedings and
investigations is uncertain. The possible outcomes or resolutions of these
proceedings and investigations could include judgments against the Parent
Company or settlements and could require substantial payments by the Parent
Company. Management believes that material adverse outcomes with respect to such
Parent Company proceedings could have a material adverse impact on the financial
condition and cash flows of the Company.
Other pending litigation. The Company and its subsidiaries are involved in
pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
<PAGE>
13. Income Taxes
The income tax provision consists of:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
(In millions) 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current
Federal $ (35.7) $ 16.1 $ 27.0
State (4.6) 1.3 4.8
Foreign (1.3) - -
------------ ----------- ----------
(41.6) 17.4 31.8
------------ ----------- ----------
Deferred
Federal 142.7 (2.4) 4.2
State 20.9 (0.4) 0.7
Foreign 1.6 - -
----------- ----------- -----------
165.2 (2.8) 4.9
----------- ------------ -----------
Provision for income taxes $ 123.6 $ 14.6 $ 36.7
=========== ============ ===========
</TABLE>
Net deferred income tax assets and liabilities are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
(In millions) 1998 1997
----------- -----------
<S> <C> <C>
Merger-related costs $ 13.9 $ 12.8
Accrued liabilities and deferred income 22.6 31.1
Depreciation and amortization 4.1 -
Other 2.7 -
----------- -----------
Net deferred tax asset $ 43.3 $ 43.9
=========== ===========
Management and mortgage programs:
Depreciation $ 23.2 (3.4)
Mortgage servicing rights (247.9) (74.6)
Accrued liabilities and deferred income 26.4 9.8
----------- -----------
Net deferred tax liabilities under management
and mortgage programs $ (198.3) $ (68.2)
============ ============
</TABLE>
Income tax refunds, net of payments, were $10.6 million, $0.9 million
and $11.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company's effective income tax rate differs from the federal
statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory rate 35.0% (35.0%) 35.0%
Merger-related costs - 58.3% -
State income taxes net of federal benefit 3.4% 1.1% 3.9%
Amortization of non-deductible goodwill 0.1% 0.6% 0.5%
Other 1.5% 1.1% 0.7%
------------ ------------ ------------
40.0% 26.1% 40.1%
============ ============ ============
</TABLE>
14. Pension and Other Benefit Programs
Effective December 31, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits". The provisions of SFAS No. 132 standardizes the disclosure
requirements for pensions and other postretirement benefits.
<PAGE>
Employee benefit plans
On May 1, 1998, the Company's Employee Investment Plan (the "Plan") was
merged into the Parent Company's Employee Savings Plan (the "Cendant
Plan"). Coincident with the merger (the "Plan Merger"), Plan
participants became participants in the Cendant Plan. Accordingly, the
participants' Plan assets that existed at the transfer date under the
Plan were invested in comparable investment categories in proportionate
amounts in the Cendant Plan. Effective as of the date of the Plan
Merger, investment options for participants under the Plan were
terminated and all future contributions were invested in options
available under the Cendant Plan. After the Plan Merger, Plan
participants maintained the same vesting schedule for their Company
contribution Plan benefits as was in effect under the Plan. The
Company's contributions vest in accordance with an employee's years of
vesting service, with an employee being 100% vested after three years of
vesting service. Under the Plan, the Company matches employee
contributions of up to 3% of their compensation, with up to an
additional 3% discretionary match available as determined at the end of
each Plan year. Under the Cendant Plan, employees are entitled to a 100%
match of the first 3% of their compensation contributed, with an
additional 50% discretionary match of up to an additional 3% of their
compensation contributed, such discretionary match determined at the end
of each Cendant Plan year. The Company's discretionary matches were 50%
in 1998, 50% in 1997 and 75% in 1996. The Company's contributions are
allocated based upon the investment elections noted above at the same
percentage as the respective employees' base salary withholdings. The
Company's costs for contributions were $5.7 million, $3.0 million and
$2.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Under the provisions of the Company's postemployment plan, employees are
eligible to participate and may elect upon disability to receive
medical, dental, and long-term disability benefits. The Company's
compensation cost was approximately $2.0 million for the year ended
December 31, 1998. Costs for the years ended December 31, 1997 and 1996
were not material.
Pension and supplemental retirement plans
The Company maintains a non-contributory defined benefit pension plan
(the "Pension Plan") covering substantially all domestic employees of
the Company and its subsidiaries employed prior to July 1, 1997.
Coincident with the disposition of the fleet businesses, all
participating employees of the fleet businesses will become fully vested
in their accrued benefits under the Pension Plan. A distribution of
benefits under the Pension Plan to employees and former employees of the
fleet businesses will be made in accordance with the terms of the
Pension Plan. Additionally, certain assets and liabilities relating to
currently active Company employees located in the United Kingdom ("UK")
will be transferred from a contributory defined benefit plan sponsored
by a UK subsidiary of the fleet businesses to a defined benefit plan
sponsored by Cendant. Participation in such plan will be at the
employees' option. Under the Pension Plan, benefits are based on an
employee's years of credited service and a percentage of final average
compensation. The Company's funding policy is to contribute amounts
sufficient to meet the minimum requirements plus other amounts as the
Company deems appropriate. 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.
<PAGE>
A reconciliation of the projected benefit obligation, plan assets and
funded status of the funded pension plans and the amounts included in
the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
(In millions) December 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Change in projected benefit obligation
Benefit obligation at January 1 $ 94.1 $ 103.6
Service cost 5.2 4.8
Interest cost 7.2 7.7
Benefit payments (3.5) (2.2)
Net loss (gain) 16.0 (2.4)
Curtailment - (4.5)
Special termination benefits - 17.8
Settlement - (30.1)
Other 0.4 -
------------- -------------
Benefit obligation at December 31 $ 119.4 $ 94.7
============= =============
Change in plan assets
Fair value of plan assets at January 1 $ 87.2 $ 77.1
Actual return on plan assets 9.7 12.5
Benefit payments (3.3) (2.0)
Contributions 0.3 0.3
Other 0.1 (0.1)
------------- --------------
$ 94.0 $ 87.8
============= =============
Funded status $ (25.4) $ (6.9)
Unrecognized net loss (gain) 12.9 (1.6)
Unrecognized prior service cost 0.1 0.1
Unrecognized net transition obligation - -
------------- -------------
Accrued benefit cost $ (12.4) $ (8.4)
============== ==============
</TABLE>
The projected benefit obligation and accumulated benefit obligation for
the unfunded pension plans with accumulated benefit obligations in
excess of plan assets were $2.2 million and $1.9 million, respectively,
as of December 31, 1998 and $2.0 million and $1.7 million, respectively,
as of December 31, 1997.
Components of net periodic benefit costs:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
(In millions) 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Service cost $ 6.4 $ 5.8 $ 5.6
Interest cost 8.3 8.7 8.3
Expected return on assets (11.1) (13.7) (10.3)
Net amortization and deferral 1.8 5.4 3.9
------------- ------------- -------------
Net periodic pension cost 5.4 6.2 7.5
Reclassification for discontinued operations 2.2 2.3 2.4
------------- ------------- -------------
Net periodic pension cost related to continuing operations $ 3.2 $ 3.9 $ 5.1
============= ============= =============
Year Ended December 31,
-------------------------------------------------
Rate assumptions: 1998 1997 1996
------------- ------------- -------------
Discount rate 6.75% 7.75% 8.00%
Rate of increase in compensation 5.00% 5.00% 5.00%
Long-term rate of return on assets 10.00% 10.00% 10.00%
</TABLE>
<PAGE>
On December 31, 1998 (the "transfer date"), assets were transferred to
the Company's pension plan that related to certain Parent Company
employees and related plan obligations which were retained as a result
of a Parent Company transaction occurring in September 1997. The
estimated projected benefit obligation equaled the fair value of the
plan's assets (primarily cash) of $7.1 million at the transfer date.
In connection with the HFS Merger and the resulting change in control of
the Company's supplemental retirement plans, the Company recognized a
loss of $20.2 million, which reflects a curtailment of the plans and the
related contractual termination of benefits, and settlement of certain
plan obligations. The loss was recorded as a component of the HFS Merger
Charge for the year ended December 31, 1997.
Postretirement benefit plans
The Company provides certain health care and life insurance benefits for
retired employees up to the age of 65. A curtailment gain of
approximately $1.4 million attributable to the disposition of the fleet
businesses will be recognized in 1999 due to a reduction in the
accumulated benefit obligation offset by a change in prior actuarial
assumptions. A reconciliation of the accumulated benefit obligation and
funded status of the plans and the amounts included in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
-------------------------------
(In millions) 1998 1997
------------- -------------
<S> <C> <C>
Change in accumulated benefit obligation
Benefit obligation at January 1 $ 8.0 $ 7.5
Service cost 0.9 0.8
Interest cost 0.6 0.6
Benefits payments (0.2) (0.2)
Unrecognized net loss (gain) 3.5 (0.7)
------------- --------------
Benefit obligation at December 31 $ 12.8 $ 8.0
============= =============
Funded status - all unfunded $ (12.8) $ (8.0)
Unrecognized transition obligation 4.2 4.5
Unrecognized net gain 1.3 (2.5)
------------- --------------
Accrued benefit cost $ (7.3) $ (6.0)
============== ==============
</TABLE>
Components of net periodic postretirement benefit costs:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
(In millions) 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Service cost $ 0.9 $ 0.8 $ 0.8
Interest cost 0.6 0.6 0.5
Net amortization and deferral 0.1 0.2 0.2
------------- ------------- -------------
Net cost 1.6 1.6 1.5
Reclassification for discontinued operations 0.5 0.5 0.5
------------- ------------- -------------
Net cost related to continuing operations $ 1.1 $ 1.1 $ 1.0
============= ============= =============
Rate assumptions: Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Discount rate 6.75% 7.75% 8.00%
Health care costs trend rate for subsequent year 8.00% 8.00% 10.00%
</TABLE>
The health care cost trend rate is assumed to decrease gradually through
the year 2004 when the ultimate trend rate of 4.75% is reached. The
effects of a one percentage point increase in the assumed health care
cost trend rates on total service and interest cost components and on
accumulated postretirement benefit obligations are $0.1 million and $0.6
million, respectively. The effects of a one percentage point decrease in
the assumed health care cost trend rates on total service and interest
cost components and on accumulated postretirement benefit obligations
are ($0.1) million and ($0.5) million, respectively.
<PAGE>
15. Related Party Transactions
In the ordinary course of business the Company is allocated certain
expenses from Cendant for corporate-related functions including
executive management, finance, human resources, information technology,
legal and facility related expenses. Cendant allocates corporate
expenses to its subsidiaries based on a percentage of revenues generated
by its subsidiaries. Such expenses allocated to the continuing
operations of the Company amounted to $36.9 million and $34.0 million
for the years ended December 31, 1998 and 1997, respectively and are
included in general and administrative expenses in the consolidated
statements of operations. In addition, at December 31, 1998 and 1997,
the Company had outstanding balances of $272.8 million and $101.9
million, respectively, payable to Cendant, representing the accumulation
of corporate allocations and amounts paid by Cendant on behalf of the
Company. Amounts payable to Cendant are included in accounts payable and
accrued liabilities in the consolidated balance sheets.
16. Segment Information
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
The provisions of SFAS No. 131 established revised standards for public
companies relating to reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports. It also established
standards for related disclosures about products and services, and
geographic areas. The adoption of SFAS No. 131 did not have an effect on
the Company's primary financial statements, but did affect the
disclosure of segment information. The segment information for 1997 and
1996 has been restated from the prior years' presentation in order to
conform to the requirements of SFAS No. 131.
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is
defined as earnings before (i) non-operating interest, (ii) income
taxes, and (iii) depreciation and amortization (exclusive of
depreciation and amortization on assets under management and mortgage
programs), adjusted to exclude Unusual Charges. Such Unusual Charges are
of a non-recurring or unusual nature and are not measured in assessing
segment performance or are not segment specific. Interest expense
incurred on indebtedness which is used to finance relocation and
mortgage origination and servicing activities is recorded net within
revenues in the applicable reportable operating segment (see Note 8 -
Liabilities Under Management and Mortgage Programs). The Company
determined that it has two reportable operating segments comprising its
continuing operations based primarily on the types of services it
provides, the consumer base to which marketing efforts are directed and
the methods used to sell services. Inter-segment net revenues were not
significant to the net revenues of any one segment or the consolidated
net revenues of the Company. A description of the services provided
within each of the Company's reportable operating segments is as
follows:
Relocation
Relocation services are provided to client corporations for the transfer
of their employees. Such services include appraisal, inspection and
selling of transferees' homes, providing equity advances to transferees
(generally guaranteed by the corporate customer). Additional services
provided include certain home management services, assistance in
locating a new home at the transferee's destination, consulting services
and other related services.
Mortgage
Mortgage services primarily include the origination, sale and servicing
of residential mortgage loans. Revenues are earned from the sale of
mortgage loans to investors as well as from fees earned on the servicing
of loans for investors. The Company markets a variety of mortgage
products to consumers through relationships with corporations, affinity
groups, financial institutions, real estate brokerage firms and other
mortgage banks.
Mortgage services customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association,
while generally retaining mortgage servicing rights. Mortgage servicing
consists of collecting loan payments, remitting principal and interest
payments to investors, holding escrow funds for payment of
mortgage-related expenses such as taxes and insurance, and otherwise
administering the Company's mortgage loan servicing portfolio.
<PAGE>
Segment Information
(In millions)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Total Relocation Mortgage Other
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 807.5 $ 444.0 $ 353.4 $ 10.1
Adjusted EBITDA 315.5 124.5 185.7 5.3
Depreciation and amortization 25.6 16.8 8.8 -
Segment assets 4,855.7 1,130.3 3,504.0 221.4
Capital expenditures 106.2 69.6 36.4 0.2
Year ended December 31, 1997
Total Relocation Mortgage Other
------------- ------------ ---------- ----------
Net revenues $ 588.7 $ 409.4 $ 179.3 $ -
Adjusted EBITDA 147.1 89.7 74.8 (17.4)
Depreciation and amortization 13.2 8.1 5.1 -
Segment assets 3,447.3 1,061.4 2,246.0 139.9
Capital expenditures 42.1 23.0 16.2 2.9
Year ended December 31, 1996
Total Relocation Mortgage Other
------------- ------------ ---------- ----------
Net revenues $ 469.8 $ 342.1 $ 127.7 $ -
Adjusted EBITDA 107.0 69.7 45.7 (8.4)
Depreciation and amortization 15.4 11.0 4.4 -
Segment assets 2,828.8 1,086.4 1,742.4 -
Capital expenditures 15.4 5.5 9.9 -
</TABLE>
Provided below is a reconciliation of total Adjusted EBITDA and total
assets for reportable segments to the consolidated amounts.
<TABLE>
<CAPTION>
Adjusted EBITDA
(In millions)
Year Ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Adjusted EBITDA for reportable segments $ 315.5 $ 147.1 $ 107.0
Depreciation and amortization 25.6 13.2 15.4
Merger-related costs and other unusual charges (credits) (18.9) 189.9 -
------------ ----------- -----------
Consolidated income (loss) from continuing operations
before income taxes $ 308.8 $ (56.0) $ 91.6
=========== ============ ===========
Total Assets
(In millions)
December 31,
------------------------------------------
1998 1997 1996
----------- ------------ -----------
Total assets for reportable segments $ 4,855.7 $ 3,447.3 $ 2,828.8
Net assets of discontinued operations 967.5 703.5 654.2
----------- ------------ ---------
Consolidated assets $ 5,823.2 $ 4,150.8 $ 3,483.0
=========== ============ =========
</TABLE>
<PAGE>
Geographic Information
<TABLE>
<CAPTION>
(In millions) United United All Other
1998 Total States Kingdom Countries
---- ----------- ----------- -------- ----------
<S> <C> <C> <C>
Net revenues $ 807.5 $ 785.0 $ 12.6 $ 9.9
Assets 5,823.2 5,339.0 452.5 31.7
Long-lived assets 149.6 149.0 0.5 0.1
1997
----
Net revenues $ 588.7 $ 564.0 $ 13.0 $ 11.7
Assets 4,150.8 3,912.0 195.9 42.9
Long-lived assets 75.8 66.2 8.3 1.3
1996
----
Net revenues $ 469.8 $ 458.7 $ 14.1 $ (3.0)
Assets 3,483.0 3,248.9 217.6 16.5
Long-lived assets 59.1 49.2 8.4 1.5
</TABLE>
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property
and equipment.
EXHIBIT 12
PHH Corporation and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(Dollars in millions)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------------
December 31, January 31,
1998 (2) 1997 1996 1996 1995
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
before income taxes $ 308.8 $ (56.0) $ 91.6 $ 76.2 $ 64.1
Plus: Fixed charges 173.5 115.7 105.9 93.1 74.5
--------- --------- -------- --------- --------
Earnings available to cover fixed charges $ 482.3 $ 59.7 $ 197.5 $ 169.3 $ 138.6
========= ========= ======== ========= ========
Fixed charges (1):
Interest, including amortization
of deferred financing costs $ 165.8 $ 109.6 $ 99.0 $ 86.0 $ 67.9
Interest portion of rental payment 7.7 6.1 6.9 7.1 6.6
--------- --------- -------- --------- --------
Total fixed charges $ 173.5 $ 115.7 $ 105.9 $ 93.1 $ 74.5
======== ========= ======== ========= ========
Ratio of earnings to fixed charges 2.78x (*) 1.86x 1.82x 1.86x
======== ========= ========= ========== ========
</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 incurred on debt is used to
finance the Company's mortgage services and relocation services
activities.
(2) For the year ended December 31, 1998, income from continuing operations
before income taxes includes non-recurring merger-related costs and
other unusual credits of $18.9 million. Excluding credits, the ratio of
earnings to fixed charges is 2.67x.
(*) Earnings are inadequate to cover fixed charges (deficiency of $56.0
million) for the year ended December 31, 1997. Loss from continuing
operations before income taxes includes non-recurring merger-related
costs and other unusual charges of $189.9 million. Excluding such
charges, the ratio of earnings to fixed charges is 2.16x.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-63627, 333-27715, and 333-45373 for PHH Corporation on Form S-3 of our report
dated August 11, 1999 (which expresses an unqualified opinion and includes
explanatory paragraphs relating to the restatement related to the merger of
Cendant Corporation's relocation business and fuel card business with the
Company and the subsequent divestiture of its fleet business segment,
reclassifications to conform to the presentation used by Cendant Corporation
described in Notes 3 and 4 and presentation of the Company's fleet business as a
discontinued operation as described in Note 4), appearing in this Annual Report
on Form 10-K/A of PHH Corporation for the year ended December 31, 1998.
Deloitte & Touche LLP
Parsippany, New Jersey
August 11, 1999
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PHH Corporation:
We consent to the incorporation by reference in Registration Statement Nos.
33-63627, 333-27715 and 333-45373 on Forms S-3 of PHH Corporation of our report
dated April 30, 1997, with respect to the consolidated statements of income,
shareholder's equity and cash flows of PHH Corporation and subsidiaries for the
year ended December 31, 1996, before the restatements and reclassifications
described in Notes 3 and 4 to the consolidated financial statements, which
report is included in the Annual Report on Form 10-K/A of PHH Corporation for
the year ended December 31, 1998.
KPMG LLP
Baltimore, Maryland
August 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheet and statement of operations of the Company as of and
for the year ended December 31, 1998 and is qualified in its entirety to be
referenced to such financial statements. Amounts are in millions.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
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0 0 0
0 0 0
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