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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_______________
FORM 10-K
| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the eight-month period ended December 31, 1996
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)
11333 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
(410) 771-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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 or any amendment to this
Form 10-K [ X ] Aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 30, 1997: $0 Number of shares of PHH
Corporation outstanding on June 30, 1997: 100
PHH Corporation meets the conditions set forth in General Instructions I (1) (a)
and (b) to Form 10-K and is therefore filing this form with the reduced
disclosure format.
PHH CORPORATION
PART I
Item l. Business
MERGER WITH HFS INCORPORATED
Pursuant to a merger agreement (the "Merger Agreement") by and among PHH
Corporation (the "Company"), HFS Incorporated ("HFS") and Mercury Acquisition
Corp. ("Mercury"), a wholly owned subsidiary of HFS, effective April 30, 1997,
Mercury was merged into the Company, with the Company being the surviving
corporation, and the Company became a wholly owned subsidiary of HFS (the
"Merger"). In connection with the Merger, all outstanding shares of the
Company's common stock, including shares issued to holders of the Company's
employee stock options, were converted into approximately 30.3 million shares of
HFS common stock.
In connection with the Merger, on April 30, 1997, the Company's fiscal year was
changed from a year ending on April 30, to a year ending on December 31. As a
result, the accompanying Consolidated Financial Statements cover the transition
period from May 1, 1996 to December 31, 1996. The Company's next full year will
be for the period January 1, 1997 to December 31, 1997.
GENERAL
The Company provides a broad range of integrated management services, expense
management programs and mortgage banking services to more than 3,000 clients,
including many of the world's largest corporations, as well as government
agencies and affinity groups. Its primary business service segments consist of
vehicle management, real estate and mortgage banking. Information as to
revenues, operating income and identifiable assets by business segment is
included in the Business Segments note in the Notes to Consolidated Financial
Statements.
As of June 30, 1997, the Company and its subsidiaries had approximately 6,264
employees.
Certain statements in this Annual Report on Form 10-K, including without
limitation certain matters discussed in "Item 7. Management's Narrative Analysis
of Results of Operations," constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements.
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 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.
The Company's principal executive offices are located at 11333 McCormick Road,
Hunt Valley, Maryland 21031 (telephone 410-771-3600).
VEHICLE MANAGEMENT SERVICES
Vehicle management services consist primarily of the management, purchase,
leasing and resale of vehicles for corporate clients and government agencies,
including fuel and expense management programs and other fee-based services for
clients' vehicle fleets.
Fleet Management Services
The Company provides fully integrated vehicle management and leasing programs
through PHH Vehicle Management Services. These programs were developed to meet
the specific needs of companies using large and small numbers of cars and trucks
and consist of managerial, leasing and advisory services, aimed at reducing and
controlling the cost of operating corporate fleets.
The Company's advisory services for automobile fleet management programs include
recommendations on the makes and models of cars and accessories best suited to
the client's use, the determination of persons eligible for company cars, the
method of reimbursing field representatives for actual car expenses, the care
and maintenance of cars and the personal use of company cars.
Managerial services for automobile fleet programs include purchasing
automobiles, arranging for their delivery through new car dealers located
throughout North America, primarily the United States and Canada, the United
Kingdom and the Republic of Ireland, complying with various local registration,
title, tax and insurance requirements, pursuing warranty claims with automobile
manufacturers and selling used cars at replacement time.
The Company offers similar programs and services for vans and light and
heavy-duty truck fleets. Advisory services offered include the determination of
the vehicle specifications, makes, models and equipment best suited to perform
the functions required by the client. Managerial services include purchasing new
vans, light and heavy-duty trucks, trailers, truck bodies and equipment from
manufacturers and franchised dealers, the performance of title, registration,
tax and insurance functions, arranging for them to be titled, licensed and
delivered to locations designated by clients, verifying invoices and selling
used vehicles at replacement time.
The Company offers various leasing plans for its vehicle leasing programs. Under
these plans, the Company provides for the financing primarily through the
issuance of commercial paper and medium-term notes and through unsecured
borrowings under revolving credit agreements and bank lines of credit. See the
Liabilities Under Management Programs note in Notes to Consolidated Financial
Statements.
The Company leases vehicles for minimum lease terms of twelve months or more
under either direct financing or operating lease agreements. The Company's
experience indicates that the full term of the leases may vary considerably due
to extensions beyond the minimum lease term. Under the direct financing lease
agreements, resale of the vehicles upon termination of the lease is generally
for the account of the lessee. The Company has two distinct types of operating
leases. Under one type, the open-end operating lease, resale of the vehicles
upon termination of the lease is for the account of the lessee except for a
minimum residual value which the Company has guaranteed. The Company's
experience has been that vehicles under this type of lease agreement have
consistently been sold for amounts exceeding residual value guarantees. Under
the other type of operating lease, the closed-end operating lease, resale of the
vehicle on termination of the lease is for the account of the Company.
The Company's fleet management services may be the same whether the client owns
or leases the vehicles. In either case, the client generally operates the
vehicles on a net basis, paying all the actual costs incidental to their
operation, including gasoline, oil, repairs, tires, depreciation, vehicle
licenses, insurance and taxes. The fee charged by the Company for its services
is based upon either a percentage of the original cost of the vehicle or a
stated management fee and, in the case of a leasing client, includes the
interest cost incurred in financing the vehicle.
Fuel and Expense Management Programs
The Company offers fuel and expense management programs to corporations and
government agencies for the control of automotive business travel expenses in
each of the United States, Canada, United Kingdom, Republic of Ireland and
Germany. Through a service card and billing service, a client's traveling
representatives are able to purchase various products and services such as
gasoline, tires, batteries, glass and maintenance services at numerous outlets.
The Company also provides a series of safety and accident management related
programs, statistical control reports detailing expenses related to the general
operation of vehicles, and a program which monitors and controls the type and
cost of vehicle maintenance for individual automobiles.
In forming a joint venture, the Company sold 50 percent of its interest in its
US service card business to First USA Paymentech, Inc. The effect of the joint
venture is to reduce net revenues and operating expenses while reflecting 50
percent of joint venture operating income as net revenues. The Company believes
the joint venture will provide opportunities for continued growth in the service
card business in future years.
The Company also provides a fuel and expense management program and a
centralized billing service for companies operating truck fleets in each of the
United Kingdom, Republic of Ireland and Germany. Drivers of the clients' trucks
are furnished with courtesy cards together with a directory listing the names of
strategically located truck stops and service stations which participate in this
program. Service fees are earned for billing, collection and record keeping
services and for assuming credit risk. These fees are paid by the truck stop or
service stations and/or the fleet operator and are based upon the total dollar
amount of fuel purchased or the number of transactions processed.
Competitive Conditions
The principal methods of competition within vehicle management services are
service quality and price.
In the United States and Canada, an estimated 30% of the market for vehicle
management services is served by third-party providers. There are 5 major
providers of such services in North America, as well as an estimated several
hundred local and regional competitors. The Company is the second largest
provider of comprehensive vehicle management services in North America.
In the United Kingdom, the portion of the fuel card services and vehicle
management services markets served by third-party providers is an estimated 37%
and 45%, respectively. The Company is the market leader among the 4 major
nationwide providers of fuel card services, and the 6 major nationwide providers
of vehicle management services. Numerous local and regional competitors serve
each such market element.
The following sets forth certain statistics concerning automobiles, vans, light,
medium and heavy-duty trucks for which the Company provides managerial, leasing
and/or advisory services primarily in the United States, Canada, the United
Kingdom, the Republic of Ireland and Germany:
As of and for the
eight-month period
ended December 31 As of and for the year ended April 30,
1996 1996 1995 1994 1993
------- --------- --------- --------- ---------
Ending number of vehicles
under management: ............ 516,139 482,600 463,200 450,400 454,300
Number of vehicles purchased .... 64,847 117,700 112,400 108,000 115,800
Number of fuel and service card
transactions (in thousands) ... 37,800 56,000 51,400 47,300 45,600
Gallons of fuel processed
(in thousands) ................ 433,000 1,069,000 1,136,000 1,073,000 1,039,000
REAL ESTATE SERVICES
The Company provides employee real estate services principally to large
international corporations, government agencies, affinity groups and financial
institutions in the United States, Canada, the United Kingdom and the Republic
of Ireland through HFS Mobility Services, Inc. (formerly, PHH Real Estate
Services, Inc.). In June 1997, the employee real estate services of two of HFS's
subsidiaries, Worldwide Relocation Management, Inc. and Coldwell Banker
Relocation Services, Inc., were merged (the "Real Estate Services Merger") with
and into the Company's employee real estate services subsidiary, PHH Real Estate
Services, Inc., which was renamed HFS Mobility Services, Inc. in connection
therewith. As a result of the Real Estate Services Merger, HFS Mobility
Services, Inc. will be the largest provider of employee real estate services in
the United States. Principal services consist of counseling transferred
employees of clients and the purchase, management and resale of their homes. The
Company's real estate services offer clients the opportunity to reduce employee
relocation costs and facilitate employee relocation.
The 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 of title.
Transferring employees are provided equity on their home based on an appraised
value 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.
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. All such advances are generally guaranteed by the client corporation.
The client 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 billing.
Funds to finance the purchase of homes are provided primarily through the
issuance of commercial paper and medium-term notes and through unsecured
borrowings under revolving credit agreements and bank lines of credit, or may be
provided by the client. Interest costs are billed directly to the Company's
clients. See the Liabilities Under Management Programs note in Notes to
Consolidated Financial Statements.
The Company's real estate services subsidiaries also offer employee programs
which provide group move planning and implementation, home marketing assistance,
property management, household goods movement, destination services and asset
management for financial institutions and government agencies.
Competitive Conditions
The principal methods of competition within real estate services are service
quality and price. In the United States, Canada and the United Kingdom, an
estimated 22% of the market for real estate services is served by third-party
providers.
In each of the United States, Canada and the United Kingdom, there are 4 major
national providers of such services. There are an estimated several dozen local
and regional competitors in each such country. The Company is the market leader
in the United States and Canada, and third in the United Kingdom.
The following sets forth certain statistics concerning real estate services in
the United States, Canada and the United Kingdom:
For the
eight-month period
ended December 31 For the year ended April 30,
1996 1996 1995 1994 1993
------------------ --------- -------- -------- --------
Asset-based services:
Home purchase authorizations .......... 21,600 32,400 31,000 31,800 31,800
Transferee homes sold ................. 18,600 27,900 25,300 28,900 28,400
Average value of U.S. transferee
homes sold (1) ..................... $188,000 $177,000 $171,000 $165,000 $156,000
Fee-based services transactions:
Home finding .......................... 20,540 25,890 24,020 23,180 15,620
Household goods moves ................. 17,640 17,310 14,700 13,720 8,730
Property dispositions ................. 5,090 8,580 7,250 4,180 3,610
-------- -------- -------- -------- --------
43,270 51,780 45,970 41,080 27,960
(1) Revenues for real estate services in the United States are
significantly determined based on the value of homes sold, while revenues for
the United Kingdom and Canadian segments are not related to the value of homes
sold; therefore, this table only includes the average value of U.S. homes sold.
MORTGAGE BANKING SERVICES
The Company provides U.S. residential mortgage banking services through PHH
Mortgage Services Corporation. These services consist of the origination, sale
and servicing of residential first mortgage loans. A variety of first mortgage
products are marketed to consumers through relationships with corporations,
affinity groups, credit unions, real estate brokerage
firms and other mortgage banks.
PHH Mortgage Services Corporation is a centralized mortgage lender conducting
business in all 50 states. It utilizes its computer system and an extensive
telemarketing operation to allow the consumer to complete the entire mortgage
transaction over the telephone. Through its own network of appraisers, title
companies and closing attorneys, the Company can effectively administer its
products and services anywhere in the nation.
The mortgage unit customarily sells all mortgages it originates to investors
(which include a variety of institutional investors) either as individual loans,
as mortgage-backed securities or as participation certificates issued or
guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), or the Government National Mortgage
Association (GNMA) while generally retaining mortgage servicing rights. The
guarantees provided by FNMA and FHLMC are on a non-recourse basis to the
Company. Guarantees provided by GNMA are to the extent recoverable from certain
government insurance programs.
Mortgage servicing consists of collecting loan payments, remitting principal and
interest payments to investors, holding escrow funds for payment of
mortgage-related expenses such as taxes and insurance, and otherwise
administering the Company's mortgage loan servicing portfolio.
Competitive Conditions
The principal methods of competition in mortgage banking services are service
quality and price. There are an estimated 20,000 national, regional or local
providers of mortgage banking services across the United States. The Company
ranked in the top twenty among loan originators for 1996.
The following sets forth certain statistics concerning mortgage banking
services:
As of and for the
eight-month period ended
December 31, As of and for the year ended April 30,
1996 1996 1995 1994 1993
------------------------ ------- ------- ------- -------
Mortgage loan closings
(in millions) ......................... $ 5,341 $ 7,853 $ 3,432 $ 8,074 $ 5,618
Mortgage servicing portfolio at
period end (in millions) ................ $24,821 $21,676 $16,017 $16,645 $11,047
Delinquency rate ........................... 1.9% 1.4% 1.3% 1.2% 1.1%
Significant Customers
No customer purchased services totaling 10% or more of consolidated revenues
during the eight-month period ended December 31, 1996.
Item 2. Properties
The offices of PHH Vehicle Management Services North American operations are
located throughout the US and Canada. Primary office facilities are located in a
six-story, 200,000 square foot office building in Hunt Valley, Maryland, leased
until September 2003; and offices in Mississauga, Canada, having 59,400 square
feet, leased until February 2003.
The offices of HFS Mobility Services North American operations are located
throughout the US and Canada. Two primary office facilities are both located in
Danbury, Connecticut, one having 92,600 square feet, leased until January 2000
and the other having 30,000 square feet, leased until November 1998. The Company
is currently evaluating proposals to consolidate the operations of HFS Mobility
Services.
The offices of PHH Mortgage Services are located primarily in a 127,000 square
foot building in Mount Laurel, New Jersey, which is owned by the Company.
The offices of Vehicle Management Services and HFS Mobility Services operations
located in the United Kingdom and Europe are as follows: a 129,000 square foot
building which is owned by the Company located in Swindon, United Kingdom; and
field offices having 35,400 square feet located in Swindon and Manchester,
United Kingdom; Munich, Germany; and Dublin, Ireland, are leased for various
terms to February 2016.
The Company considers that its properties are generally in good condition and
well maintained and are generally suitable and adequate to carry on the
Company's business.
Item 3. Legal Proceedings
The Company is party to various litigation arising in the ordinary course of
business and is plaintiff in several collection matters which are not considered
material either individually or in the aggregate.
Item 4. Results of Votes of Security Holders
Not Applicable
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Prior to the Merger, the Company's common stock was publicly traded on the New
York Stock Exchange under the symbol "PHH." The common stock was entitled to
dividends when and as declared by the Board of Directors. The dividends and high
and low prices for each quarter during the eight-month period ended December 31,
1996 and during the fiscal years ended April 30, 1996 and 1995 were as follows:
Dividend Price
Paid High Low
-------- -----------------
Eight-month period ended
December 31, 1996
First quarter $.19 $28 7/8 $25 5/8
Second quarter $.19 $31 7/8 $26
Two-month period ended
December 31, 1996 - $47 7/8 $29 7/8
Fiscal Year 1996
First quarter $.17 $23 3/4 $19 5/8
Second quarter $.17 $23 3/8 $21
Third quarter $.17 $25 3/4 $21 7/8
Fourth quarter $.17 $28 3/8 $24 1/2
Fiscal Year 1995
First quarter $.16 $19 3/8 $17 1/2
Second quarter $.16 $19 $17 3/8
Third quarter $.16 $19 $16 3/4
Fourth quarter $.16 $20 1/4 $17 5/8
In June 1996 the Board of Directors authorized a two-for-one common stock split
which was effected in the form of a 100% stock dividend in July 1996. All share,
per share and stock price information in this report reflect the two-for-one
common stock split.
Item 6. Selected Financial Data
Not Applicable
Item 7. Management's Narrative Analysis of Results of Operations
MERGER WITH HFS INCORPORATED
Pursuant to a merger agreement (the "Merger Agreement") by and among PHH
Corporation (the"Company"), HFS Incorporated ("HFS") and Mercury Acquisition
Corp. ("Mercury"), a wholly owned subsidiary of HFS, effective April 30, 1997,
Mercury was merged into the Company, with the Company being the surviving
corporation, and the Company became a wholly owned subsidiary of HFS (the
"Merger"). In connection with the Merger, all outstanding shares of the
Company's common stock, including shares issued to holders of the Company's
employee stock options, were converted into approximately 30.3 million shares of
HFS common stock.
In connection with the Merger, the Company's fiscal year was changed from a year
ending on April 30, to a year ending December 31. As a result, the transition
period financial statements cover the period from May 1, 1996 to December 31,
1996. Accordingly, this discussion covers the transition period compared to the
same period in the previous year unless otherwise stated.
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information contained in
the Consolidated Financial Statements and accompanying Notes thereto of the
Company appearing elsewhere in this Form 10-K. Unaudited comparable period data
is included in the Notes to the Consolidated Financial Statements.
Eight-month Period Ended December 31, 1996 Compared to the Eight-month Period
Ended December 31, 1995:
Consolidated net income and net income per share for the eight-month period
ended December 31, 1996 increased 12 percent to $55.1 million and 9 percent to
$1.53, respectively. The increase for the period was due to an improvement in
the vehicle management services segment offset by declines in mortgage banking
services and real estate services segments.
Consolidated revenues increased 5 percent to $1.28 billion for the eight-month
period ended December 31, 1996. Vehicle management services revenues increased 2
percent to $918.1 million for the same period, primarily from increased leasing
revenues as a result of an increased number of and average carrying amount of
leased vehicles, partially offset by a decrease in other vehicle revenues
primarily due to a decrease in gains on the sale of used vehicles. Real estate
services revenues decreased 2 percent to $198.3 million primarily as a result of
a decrease in transferee homes sold, partially offset by an increase in revenue
due to an increase in the number of fee-based transactions. Mortgage banking
revenue increased 40 percent to $167.6 million. The increase was primarily due
to an increase in loans closed and to servicing revenues generated from a 23
percent growth in the servicing portfolio from $20.1 billion at December 31,
1995 to $24.8 billion at December 31, 1996.
Consolidated expenses increased 5 percent to $1.19 billion for the eight-month
period ended December 31, 1996. Increased depreciation on vehicles under
operating leases are primarily due to increases in leased vehicles as discussed
above. Costs, including interest, of carrying and reselling homes decreased 14
percent, primarily as a result of the effects of the decrease in homes sold as
discussed above. Direct costs of mortgage banking services increased 86 percent
to $76.1 million, primarily due to an increase in amortization of servicing
rights and fees and costs associated with the increase in the loan portfolio.
Interest expense increased 3 percent compared with the same period in the prior
year. The effects of increases in liabilities under management programs and
other debt were partially offset by the effect of lower interest rates.
Selling, general, and administrative costs increased 4 percent for the
eight-month period ended December 31, 1996 compared with the same period in the
prior year. Increases in personnel and other operating costs to support the
growth in real estate services fee-based transactions and mortgage production
and increased US relocation systems costs, were partially offset by decreases in
vehicle management services costs as a result of effective cost management,
reduction in system spending, reduction in vehicles acquired and by the decrease
in the North American truck fuel management subsidiary (NTS, Inc.) expenses as
this operation was sold in February 1996.
The Company's effective tax rate was 40.8 percent for the eight-month period
ended December 31, 1996 as compared to 41.6 percent for the same period a year
ago.
LIQUIDITY AND CAPITAL RESOURCES
The Company manages its funding sources to ensure adequate liquidity. The
sources of liquidity fall into three general areas: ongoing liquidation of
assets under management, global capital markets, and committed credit agreements
with various high-quality domestic and international banks. In the ordinary
course of business, the liquidation of assets under management programs, as well
as cash flows generated from operating activities, provide the cash flow
necessary for the repayment of existing liabilities. For the eight-month period
ended December 31, 1996 cash provided by operating activities totaled $300.5
million primarily due to depreciation on vehicles under operating leases, offset
by an increase in mortgage loans held for sale at December 31. 1996. Cash used
in investing activities totaled $1.0 billion primarily as a result of the growth
in investment in leases and leased vehicles under management.
Using historical information, the Company projects the time period that a
client's vehicle will be in service or the length of time that a home will be
held in inventory before being sold on behalf of a client. Once the relevant
asset characteristics are projected, the Company generally matches the projected
dollar amount, interest rate and maturity characteristics of the assets within
the overall funding program. This is accomplished through stated debt terms or
effectively modifying such terms through other instruments, primarily interest
rate swap agreements and revolving credit agreements. (See Liabilities Under
Management Programs in Notes to Consolidated Financial Statements.) Within
mortgage banking services, the Company funds the mortgage loans on a short-term
basis until sale to unrelated investors, which generally occurs within sixty
days. Interest rate risk on mortgages originated for sale is managed through the
use of forward delivery contracts, financial futures and options.
The Company has maintained broad access to global capital markets by maintaining
the quality of its assets under management. This is achieved by establishing
credit standards to minimize credit risk and the potential for losses. Depending
upon asset growth and financial market conditions, the Company utilizes the
United States, Euro and Canadian commercial paper markets, as well as other
cost-effective short-term instruments. In addition, the Company utilizes public
and private debt markets to issue unsecured senior corporate debt. Augmenting
these sources, the Company has reduced outstanding debt by the sale or transfer
of managed assets to third parties while retaining fee-related servicing
responsibility. The Company's aggregate commercial paper outstanding totaled
$3.1 billion at December 31, 1996. At December 31, 1996, $1.7 billion in
medium-term notes and $337 million in other debt securities were outstanding.
Cash provided by financing activities was $727.3 million for the eight-month
period ended December 31, 1996 largely due to an increase in borrowings with
terms of less than 90 days due to increase in mortgage loans held for sale as
discussed above. From a risk management standpoint, borrowings not in the local
currency of the business unit are converted to the local currency through the
use of foreign currency forward contracts. The Company maintains a leverage
ratio between 7 to 1 and 8 to 1.
To provide additional financial flexibility, the Company's current policy is to
ensure that minimum committed bank facilities aggregate 80 percent of the
average amount of outstanding commercial paper. The Company has a $2.5 billion
syndicated unsecured credit facility. The facility is backed by 22 domestic and
foreign banks and is comprised of $1.25 billion of lines maturing in 364 days
and $1.25 billion maturing in five years. In addition, the Company has
approximately $300 million of uncommitted lines of credit with various financial
institutions. Management closely evaluates not only the credit quality of the
banks but the terms of the various agreements to ensure ongoing availability.
The full amount of the Company's committed facilities at December 31, 1996, was
undrawn and available. Management believes that its current policy provides
adequate protection should volatility in the financial markets limit the
Company's access to commercial paper or medium-term note funding.
Management believes that these established means of effectively matching
floating and fixed interest rate and maturity characteristics of funding to
related assets, the variety of short- and long-term domestic and international
funding sources, and the committed banking facilities minimize the Company's
exposure to interest rate and liquidity risk.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The statement provides
accounting and reporting standards for transfers and servicing of financial
assets and, among other things, SFAS No. 125 also requires that previously
recognized servicing receivables that exceed contractually specified servicing
fees shall be reclassified as interest-only strips receivable, and subsequently
measured under the provisions of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." The Company will adopt the
provisions of SFAS No. 125 on January 1, 1997 and will reclassify a portion of
its excess servicing fees to interest-only strips. The effect of adopting SFAS
No. 125 is not expected to be material to the Company's operations or financial
condition.
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 on Accounting and
Financial Disclosure
(a) As reported in the Company's Report on Form 8-K filed on May 14, 1997,
the Board of Directors of the Company engaged the accounting firm of Deloitte
and Touche LLP, as independent accountants for the Company, effective as of May
12, 1997 and, accordingly, dismissed KPMG Peat Marwick LLP in such capacity
effective with the completion of their report on the financial statements of PHH
Corporation included in this transition report on Form 10-K for the period ended
December 31, 1996.
(b) During the eight-month transition period ended December 31, 1996 and
the two most recent fiscal years ended April 30, 1996 and 1995, and the
subsequent interim period through May 12, 1997, there have been no disagreements
with KPMG Peat Marwick LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure or any reportable
events.
(c) The reports of KPMG Peat Marwick LLP on the financial statements for
the transition period and past the two fiscal years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
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 Index to Financial Statements and Financial Statement Schedules
Item 14(a)(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement Schedules
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.
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 I 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(**).
3-2 By-Laws of PHH Corporation, as amended October 1990(*).
4-1 Indenture between the Company and Bank of New York, Trustee, dated
as of May 1, 1992, filed as Exhibit 4(a)(iii) to Registration
Statement 33-48125(*).
4-2 Indenture between the Company and First National Bank of Chicago,
Trustee, dated as of March 1, 1993, filed as Exhibit 4(a)(i) to
Registration Statement 33-59376(*).
4-3 Indenture between the Company and First National Bank of Chicago,
Trustee, Dated as of June 5, 1997(**).
4-4 Indenture between the Company and the Bank of New York, Trustee Dated
as of June 5, 1997,(**).
4-5 364-Day Credit Agreement Among the Company, 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, filed as Exhibit 10.1 to
Registration Statement 333-27715(*).
4-6 Five-year Credit Agreement among the Company, the Lenders, and
Chase Manhattan Bank, as Administrative Agent, dated March 4, 1997
filed as Exhibit 10.2 to Registration Statement 333-27715(*).
10-17 Distribution Agreement between the Company and Credit Suisse;
First Boston Corporation; Goldman Sachs & Co. and Merrill Lynch &
Co., dated June 5, 1997(**).
11 Schedule containing information used in the computation of net income
per share(**).
12 Schedule containing information used in the computation of the ratio
of earnings to fixed charges(**).
23 Consent of KPMG Peat Marwick 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.
(b) Reports on Form 8-K
There was one report on Form 8-K filed during the two-month period ended
December 31, 1996 as follows:
The Company filed a Current Report on Form 8-K on November 15, 1996, describing
that the Company entered into an Agreement and Plan of Merger (the "Merger
Agreement") with HFS Incorporated ("HFS"), and Mercury Acquisition
Corp., a wholly-owned subsidiary of HFS.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By /s/ Robert D. Kunich
Robert D. Kunisch
Chief Executive Officer
and President
July 29, 1997
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/ Robert D. Kunisch July 29, 1997
Robert D. Kunisch
Chief Executive Officer
and President
Principal Financial Officer:
/s/ Michael P. Monaco July 29, 1997
Michael P. Monaco
Executive Vice President,
Chief Financial Officer and Assistant Treasurer
Principal Accounting Officer:
/s/ Nan A. Kreamer July 29, 1997
Nan A. Kreamer
Corporate Controller
Board of Directors:
/s/ James E. Buckman July 29, 1997
James E. Buckman
Director
/s/ Stephen P. Holmes July 29, 1997
Stephen P. Holmes
Director
Index to Financial Statements
and
Financial Statement Schedules
Consolidated Financial Statements of the Company:
Independent Auditors' Report
Consolidated Statement of Income
for the eight-month period ended December 31, 1996.
Consolidated Balance Sheet at December 31, 1996.
Consolidated Statement of Cash Flows
for the eight-month period ended December 31, 1996.
Consolidated Statement of Stockholders' Equity
for the eight-month period ended December 31, 1996.
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PHH Corporation:
We have audited the consolidated financial statements of PHH Corporation and
subsidiaries as listed in the accompanying index on page F-1. In connection with
our audit of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
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 referred to above present
fairly, in all material respects, the financial position of PHH Corporation and
subsidiaries at December 31, 1996, and the results of their operations and their
cash flows for the eight-month period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
April 30, 1997
PHH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
For the eight-month period ended December 31, 1996
(In thousands except per share data)
- --------------------------------------------------------------------------------
Revenues:
Vehicle management services ................................... $ 918,088
Real estate services .......................................... 198,324
Mortgage banking services ..................................... 167,581
----------
1,283,993
----------
Expenses:
Depreciation on vehicles under operating leases ............... 645,143
Costs, including interest, of carrying and reselling homes .... 98,934
Direct costs of mortgage banking services ..................... 76,100
Interest ...................................................... 151,129
Selling, general and administrative .......................... 219,599
----------
1,190,905
----------
Income before income taxes ........................................ 93,088
Income taxes ...................................................... 37,981
----------
Net income ........................................................ $ 55,107
----------
Net income per share ............................................... $ 1.53
----------
See Notes to Consolidated Financial Statements
PHH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
Assets:
Cash ............................................................. $ 13,779
Restricted cash .................................................. 89,849
Accounts receivable,
less allowance for doubtful accounts of $6,319 ............. 540,569
Carrying costs on homes under management ......................... 49,000
Mortgage loans held for sale ..................................... 1,248,299
Mortgage servicing rights and fees ............................... 288,943
Property and equipment, net ...................................... 92,145
Goodwill, net .................................................... 47,279
Other assets .................................................... 138,453
-----------
2,508,316
-----------
Assets Under Management Programs:
Net investment in leases and leased vehicles ................. 3,418,666
Equity advances on homes ....................................... 647,664
-----------
4,066,330
-----------
$6,574,646
-----------
Liabilities:
Accounts payable and accrued expenses ...............................$ 460,294
Advances from clients and deferred revenue .......................... 116,649
Other debt .......................................................... 1,185,647
Deferred income taxes ............................................. 237,200
-----------
1,999,790
-----------
Liabilities Under Management Programs ............................. 3,904,296
-----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, authorized 3,000,000 shares ................. --
Common stock, no par value, authorized 75,000,000 shares;
issued and outstanding shares of 34,956,835 ............... 101,155
Cumulative foreign currency translation adjustment .......... (8,364)
Retained earnings ................................................ 577,769
-----------
670,560
-----------
$ 6,574,646
-----------
See Notes to Consolidated Financial Statements.
PHH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the eight-month period ended December 31, 1996
(In thousands)
- --------------------------------------------------------------------------------
Operating Activities:
Net income .................................................. $ 55,107
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation on vehicles under operating leases .......... 645,143
Other depreciation and amortization ...................... 22,650
Amortization and write-down of servicing rights and fees . 35,272
Additions to originated mortgage servicing rights ........ (56,583)
Additions to excess mortgage servicing fees .............. (38,277)
Gain on sales of mortgage servicing rights ............... (1,449)
Deferred income taxes .................................... 28,700
Gain on sale of subsidiary ............................... (2,944)
Changes in:
Accounts receivable .................................... (64,128)
Carrying costs on homes under management ............... (2,083)
Mortgage loans held for sale ........................... (373,505)
Accounts payable and accrued expenses .................. 23,911
Advances from clients and deferred revenue ............. 19,294
All other operating activity ........................... 9,417
-----------
Cash provided by operating activities ....................... 300,525
-----------
Investing Activities:
Investment in leases and leased vehicles .................... (1,207,150)
Repayment of investment in leases and leased vehicles ....... 392,758
Equity advances on homes under management ................... (2,220,660)
Repayment of advances on homes under management ............. 2,138,595
Proceeds from sales of mortgage servicing rights ............ 2,303
Additions to property and equipment ......................... (16,950)
Proceeds from sale of subsidiary ............................ 4,400
Funding of grantor trusts ................................... (89,849)
All other investing activities .............................. (2,678)
-----------
Cash used in investing activities ............................ (999,231)
-----------
Financing Activities:
Net change in borrowings with terms of less than 90 days ..... 875,775
Proceeds from issuance of other borrowings .................. 1,243,241
Principal payment on other borrowings ....................... (1,383,565)
Stock option plan transactions .............................. 5,074
Payment of dividends ........................................ (13,236)
-----------
Cash provided by financing activities ....................... 727,289
-----------
Effect of exchange rate changes on cash ......................... (24,092)
-----------
Increase in cash ................................................ 4,491
Cash at beginning of period ..................................... 9,288
-----------
Cash at end of period ........................................... $ 13,779
-----------
See Notes to Consolidated Financial Statements
PHH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the eight-month period ended December 31, 1996
Cumulative Foreign
Common Stock Currency Translation
(Dollars in thousands except per data) Shares Amount Adjustment Retained Earnings
- ---------------------------------------------------- ----------------------------------------------------------
Balance April 30, 1996 34,661,524 $ 96,081 $ (23,483) $ 535,898
Net income 55,107
Cash dividend declared ($.38 per share) (13,236)
Foreign currency translation adjustment 15,119
Stock option plan transactions,
net of related income tax benefits 295,311 5,074
- ---------------------------------------------------- -------------------------------------------------------
Balance December 31, 1996 34,956,835 $101,155 $ (8,364) $ 577,769
- ---------------------------------------------------- -------------------------------------------------------
See Notes to Consolidated Financial Statements.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands except per share data)
Merger with HFS Incorporated
Pursuant to a merger agreement (the "Merger Agreement") by and among PHH
Corporation (the "Company"), HFS Incorporated ("HFS") and Mercury Acquisition
Corp. ("Mercury"), a wholly owned subsidiary of HFS, effective April 30, 1997,
Mercury was merged into the Company, with the Company being the surviving
corporation, and the Company became a wholly owned subsidiary of HFS (the
"Merger"). In connection with the Merger, all outstanding shares of the
Company's common stock, including shares issued to holders of the Company's
employee stock options, were converted into approximately 30.3 million shares of
HFS common stock. Pursuant to the Merger Agreement, the number of HFS shares
issued to complete the Merger was determined by multiplying the outstanding
shares of the Company as of April 30, 1997 by the conversion number of 0.825,
calculated in accordance with the terms of the Merger Agreement plus 0.7 million
shares of HFS common stock issued in exchange for outstanding options to
purchase shares of the Company's common stock. The 30.3 million shares of HFS
common stock issued to shareholders and option holders of the company represent
19.2% of the total outstanding shares of HFS at April 30, 1997.
Under the change in control provisions of certain grantor trusts established in
connection with the Company's Senior Executive Severance Plan, Supplemental
Executive Retirement Plan and the PHH Excess Benefits Plan, the Company was
required to fund the trusts for the present value of amounts expected to be paid
under the Plans. At December 31, 1996, the funded amounts of the grantor trusts
are shown as restricted cash in the Consolidated Balance Sheets.
Change in Fiscal Year
On April 30, 1997, the Compan's fiscal year was changed from a year ending on
April 30, to a year ending on December 31. As a result, these consolidated
financial statements cover the transition period from May 1, 1996 to December
31, 1996. The Company's next full year will be for the period January 1, 1997 to
December 31, 1997.
Accounting Policies
The accounting policies of the Company conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of the
Company and its wholly owned domestic and foreign subsidiaries (the Company).
Policies outlined below include all policies considered significant. All
significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosures of
contingencies at the date of the financial statements, and revenues and expenses
recognized during the reporting period. Actual results could differ from those
estimates.
Vehicle Management Services
Vehicle management services primarily consist of the management, purchase,
leasing, and resale of vehicles for corporate clients and government agencies.
These services also include fuel, maintenance, safety and accident management
programs and other fee-based services for clients' vehicle fleets. Revenues from
these services other than leasing are taken into income over the periods in
which the services are provided and the related expenses are incurred.
The Company leases vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements. Open-end operating leases and direct
financing leases generally have a minimum lease term of 12 months with monthly
renewal options thereafter. Closed-end operating leases typically have a longer
term, usually 30 months or more, but are cancelable under certain conditions.
The Company records the cost of leased vehicles as an "investment in leases and
leased vehicles." Amounts charged to lessees for interest on the unrecovered
investment are credited to income on a level yield method which approximates the
contractual terms. Vehicles under operating leases are amortized using the
straight-line method over the expected lease term.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Real Estate Services
The 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 of title.
Transferring employees are provided equity on their home based on an appraised
value 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.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at the 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. All such advances are generally guaranteed by the client corporation.
The client 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 billing.
Revenues and the related "costs, including interest, of carrying and reselling
homes" are recognized at closing on the resale of a home. Real estate services
revenue is shown net of costs reimbursed by client corporations. Under the terms
of contracts with clients, the Company is generally protected against losses
from changes in real estate market conditions.
The Company also offers fee-based programs such as home marketing assistance,
household goods moves, destination services, and property dispositions for
financial institutions and government agencies. Revenues from these fee-based
services are taken into income over the periods in which the services are
provided and the related expenses are incurred.
Mortgage Banking Services
Mortgage banking services primarily include the origination, sale and servicing
of residential first mortgage loans. The Company markets a variety of first
mortgage products to consumers through relationships with corporations, affinity
groups, financial institutions, real estate brokerage firms and other mortgage
banks. Loan origination fees, commitment fees paid in connection with the sale
of loans, and direct loan origination costs associated with loans held for
resale, are deferred until the loan is sold. Fees received for servicing loans
owned by investors are based on the difference between the weighted average
yield received on the mortgages and the amount paid to the investor, or on a
stipulated percentage of the outstanding monthly principal balance on such
loans. Servicing fees are credited to income when received. Costs associated
with loan servicing are charged to expense as incurred.
Sales of mortgage loans are generally recorded on the date a loan is delivered
to an investor. Sales of mortgage securities are recorded on the settlement
date. Gains or losses on sales of mortgage loans are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans sold. The carrying value of the loans excludes the cost assigned
to originated servicing rights (see note for Mortgage Servicing Rights and
Fees). Such gains and losses are also increased or decreased by the amount of
deferred mortgage servicing fees recorded.
The Company acquires mortgage servicing rights and excess servicing fees by
originating or purchasing mortgage loans and selling those loans with servicing
retained, or it may purchase mortgage servicing rights separately. The carrying
value of mortgage servicing rights and excess servicing fees is amortized over
the estimated life of the related loan portfolio.
Gains or losses on the sale of mortgage servicing rights are recognized when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
The Company reviews the recoverability of excess servicing fees by discounting
anticipated future excess servicing cash flows at original discount rates
utilizing externally published prepayment rates.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
If the discounted value is less than the recorded balance, due to higher than
expected prepayments, the difference is recognized as a write-down in the
consolidated statement of income.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is provided by charges to
income over the estimated useful lives of such assets. Buildings are depreciated
using the straight-line method (25 to 50 years); building improvements, using
the straight-line method (10 to 20 years); equipment and leasehold improvements,
using either the double-declining balance or straight-line method (3 to 10
years); and externally developed software is capitalized and amortized using the
straight-line method (5 years). Expenditures for improvements that increase
value or that extend the life of the assets are capitalized; maintenance and
repairs are charged to operations. Gains or losses from retirements and
disposals of property and equipment are included in selling, general
and administrative expense.
Goodwill, Net
Goodwill, net represents the excess of cost over the net tangible and intangible
assets of businesses acquired net of accumulated amortization. It is being
amortized by the straight-line method over various periods up to 40 years and
such amortization is included in selling, general and administrative expense.
Assets Under Management Programs
Assets under management programs are held subject to leases or other client
contracts. The effective interest rates and maturity characteristics of the
leases and other contracts are generally matched with the characteristics of the
overall funding program.
Translation of Foreign Currencies
Assets and liabilities of the foreign subsidiaries are translated at the
exchange rates as of the balance sheet dates; equity accounts are translated at
historical exchange rates and revenues, expenses and cash flows are translated
at the average exchange rates for the period presented. Translation gains and
losses are included in stockholders' equity including, for years prior to 1991,
transaction gains and losses resulting from forward exchange contracts on
foreign equity amounts net of income tax effects. Gains and losses resulting
from the change in exchange rates realized upon settlement of foreign currency
transactions are substantially offset by gains and losses realized upon
settlement of forward exchange contracts. Therefore, the resulting net income
effect of transaction gains and losses for the eight-month period ended December
31, 1996 was not significant.
Interest
Interest expense consists of interest on debt incurred to fund working capital
requirements and to finance vehicle leasing activities, real estate services and
mortgage banking operations. Interest on borrowings used to finance equity
advances on homes is included in "costs, including interest, of carrying and
reselling homes" and was $23,127 for the eight-month period ended December 31,
1996. Total interest paid, including amounts within "costs, including interest,
of carrying and reselling homes," was $183,256 for the eight-month period ended
December 31, 1996.
Income Taxes
The provision for income taxes includes deferred income taxes resulting from
items reported in different periods for income tax and financial statement
purposes. Deferred tax assets and liabilities represent the expected future tax
consequences of the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The effects
of changes in tax rates on deferred tax assets and liabilities are recognized in
the period that includes the enactment date. No provision has been made for US
income taxes on cumulative undistributed earnings of foreign subsidiaries since
it is the present intention of management to reinvest the undistributed earnings
indefinitely in foreign operations. Undistributed earnings of the foreign
subsidiaries at December 31, 1996, were approximately $115,000. The
determination of unrecognized deferred US tax liability for unremitted earnings
is not practicable. However, it is estimated that foreign withholding taxes of
approximately $5,700 may be payable if such earnings were remitted.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net Income Per Share
Net income per share is based on the weighted average number of shares of common
stock outstanding during the period and common stock equivalents arising from
the assumed exercise of outstanding stock options under the treasury stock
method. The number of shares used in the calculations, adjusted to reflect the
two-for-one common stock split (See note for Capital Stock) were 36,082 for the
eight-month period ended December 31, 1996.
Derivative Financial Instruments
As a matter of policy, the Company does not engage in derivatives trading or
market-making activities. Rather, derivative financial instruments such as
interest rate swaps are used by the Company principally in the management of its
interest rate exposures and foreign currency exposures on intercompany
borrowings. Additionally, the Company enters into forward delivery contracts,
financial futures programs and options to reduce the risks of adverse price
fluctuation with respect to both mortgage loans held for sale and anticipated
mortgage loan closings arising from commitments issued.
Amounts to be paid or received under interest rate swap agreements are accrued
as interest rates change and are recognized over the life of the swap agreements
as an adjustment to interest expense. The fair value of the swap agreements is
not recognized in the consolidated financial statements since they are accounted
for as hedges. Market value gains and losses on the Company's foreign currency
transaction hedges are recognized in income and substantially offset the foreign
exchange gains and losses on the underlying transactions. Market value gains and
losses on positions used as hedges in the mortgage banking services operations
are deferred and considered in the valuation of lower of cost or market value of
mortgage loans held for sale.
New Accounting Pronouncements
The Company adopted the provisions of the Financial Accounting Standards Board's
(FASB) statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," effective in 1996. Application of this statement requires the Company to
review long-lived assets and certain intangibles for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Adoption of this statement had no impact on the consolidated
financial statements of the Company.
The Company uses the intrinsic value method to account for stock-based employee
compensation plans. Under this method, compensation cost is recognized for
awards of shares of common stock to employees under compensatory plans only if
the quoted market price of the stock at the grant date (or other measurement
date, if later) is greater than the amount the employee must pay to acquire the
stock. In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement permits companies to adopt a new fair
value-based method to account for stock-based employee compensation plans or to
continue using the intrinsic value method. If the intrinsic value method is
used, information concerning the pro forma effects on net income and net income
per share of adopting the fair value-based method is required to be presented in
the notes to the financial statements. Pursuant to the Merger Agreement, options
granted under employee compensation plans were converted to HFS stock on April
30, 1997. Accordingly, the Company has not provided disclosures about its
stock-based employee compensation plans.
In 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The statement provides
accounting and reporting standards for transfers and servicing of financial
assets and, among other things, SFAS No. 125 also requires that previously
recognized servicing receivables that exceed contractually specified servicing
fees shall be reclassified as interest-only strips receivable, and subsequently
measured under the provisions of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." The Company will adopt the
provisions of SFAS No. 125 on January 1, 1997 and will reclassify a portion of
its excess servicing fees to interest-only strips. The effect of adopting SFAS
No. 125 is not expected to be material to the Company's operations or
financial condition.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated by the Company
and held pending sale to permanent investors. Such mortgage loans are recorded
at the lower of cost or market value as determined by outstanding commitments
from investors or current investor yield requirements calculated on the
aggregate loan basis. The valuation reserve was $10,141 at December 31, 1996.
The Company issues mortgage-backed certificates insured or guaranteed by the
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Government National Mortgage Association (GNMA) and other
private insurance agencies. The insurance provided by FNMA and FHLMC and other
private insurance agencies are on a non-recourse basis to the Company. However,
the guarantee provided by GNMA is only to the extent recoverable from insurance
programs of the Federal Housing Administration and the Veterans Administration.
The outstanding principal balance of mortgages backing GNMA certificates issued
by the Company aggregated approximately $3.4 billion at December 31, 1996.
Additionally, the Company sells mortgage loans as part of various
mortgage-backed security programs sponsored by FNMA, FHLMC and GNMA. Certain of
these sales are subject to recourse or indemnification provisions in the event
of default by the borrower. As of December 31, 1996, mortgage loans sold with
recourse amounted to $83,034. The Company believes adequate reserves are
maintained to
cover all potential losses.
Mortgage Servicing Rights and Fees
Mortgage servicing rights and fees activity was as follows for the for the eight
- -month period ended December 31, 1996:
Excess Purchased Originated
Servicing Servicing Servicing Impairment
Fees Rights Rights Allowance Total
- --------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1996 $ 122,045 $ 25,977 $ 83,500 $ (1,313) $ 230,209
Additions 38,277 - 56,583 - 94,860
Amortization (20,953) (3,563) (11,488) - (36,004)
Write-down/Provision - - - 732 732
Sales (854) - - - (854)
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 $138,515 $ 22,414 $ 128,595 $ (581) $ 288,943
- --------------------------------------------------------------------------------------------------------------------------
Excess servicing fees represent the present value of the differential between
the actual servicing fees and normal servicing fees which are capitalized at the
time loans are sold with servicing rights retained. Purchased servicing rights
represent the cost of acquiring the rights to service mortgage loans for others.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights" (SFAS No. 122). This Statement
requires that mortgage servicing rights be recognized when a mortgage loan is
sold and servicing rights are retained. The Company adopted SFAS No. 122
effective May 1, 1995, and, accordingly, capitalized originated servicing
rights, net of amortization and valuation allowances, of $45,827 for the
eight-month period ended December 31, 1996.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SFAS No. 122 requires that a portion of the cost of originating a mortgage loan
be allocated to the mortgage servicing rights based on the servicing rights'
fair value relative to the loan as a whole. To determine the fair value of
mortgage servicing rights, the Company uses market prices for comparable
mortgage servicing, when available, or alternatively uses a valuation model that
calculates the present value of future net servicing income using assumptions
that market participants would use in estimating future net servicing income.
SFAS No. 122 also requires the impairment of originated and purchased servicing
rights to be measured based on the difference between the carrying amount and
current fair value of the servicing rights. In determining impairment, the
Company aggregates all mortgage servicing rights, excluding those capitalized
prior to the adoption of SFAS No. 122, and stratifies them based on the
predominant risk characteristic of interest rate band. For each risk
stratification, a valuation allowance is maintained for any excess of amortized
book value over the current fair value by a charge or credit to income.
Property and Equipment
Property and equipment at December 31, 1996 consisted of the following:
- --------------------------------------------------------------------------------
Land .............................................................. $ 9,122
Buildings and leasehold improvements .............................. 61,359
Equipment ......................................................... 109,198
accumulated depreciation and amortization ......................... (93,588)
---------
86,091
Capitalized software costs, net .................................... 6,054
---------
$ 92,145
---------
Other Assets
Other assets at December 31, 1996 consisted of the following:
- --------------------------------------------------------------------------------
Mortgage-related notes receivable ................................. $ 66,053
Residential properties held for resale ............................ 7,788
Income taxes receivable ........................................... 19,165
Other.............................................................. 45,447
---------
$ 138,453
---------
Mortgage-related notes receivable are loans secured by residential real estate.
Residential properties held for resale are located primarily in the US and are
carried at the lower of cost or net realizable value.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Assets Under Management Programs
Net Investment in Leases and Leased Vehicles
The net investment in leases and leased vehicles at December 31, 1996 consisted
of the following:
- --------------------------------------------------------------------------------
Vehicles under open-end operating leases .......................... $2,617,263
Vehicles under closed-end operating leases ........................ 443,853
Direct financing leases ........................................... 356,699
Accrued interest on leases ......................................... 851
----------
$3,418,666
----------
The Company leases vehicles for initial periods of twelve months or more under
either operating or direct financing lease agreements. The Company's experience
indicates that the full term of the leases may vary considerably due to
extensions beyond the minimum lease term. Lessee repayments of investments in
leases and leased vehicles for the eight-month period ended December 31, 1996
were $1,026,826 and the ratio of such repayments to the average net investment
in leases and leased vehicles was 47.74%.
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
vehicles under this type of lease agreement have consistently been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost and accumulated depreciation of vehicles under this type of
operating lease was $4,604,552 and $1,987,289 respectively, at December 31,
1996.
Under the other type of operating lease, closed-end operating leases, resale of
the vehicles on termination of the lease is for the account of the Company. The
lessee generally pays for or provides maintenance, vehicle licenses and
servicing. The original cost and accumulated depreciation of vehicles under
these agreements was $600,560 and $156,707 respectively, at December 31, 1996.
The Company believes adequate reserves are maintained in the event of loss on
vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee. Maintenance
and repairs of these vehicles are the responsibility of the lessee.
Leasing revenues are included in revenues from vehicle management services.
Following is a summary of leasing revenues for the eight-month period ended
December 31, 1996:
- --------------------------------------------------------------------------------
Operating leases $ 767,823
Direct financing leases, primary interest 25,172
- --------------------------------------------------------------------------------
$ 792,995
- --------------------------------------------------------------------------------
Other managed vehicles are subject to leases serviced by the Company for others,
and neither the vehicles nor the leases are included as assets of the Company.
The Company receives a fee under such agreements which covers or exceeds its
cost of servicing.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has transferred existing managed vehicles and related leases to
unrelated investors and has retained servicing responsibility. Credit risk for
such agreements is retained by the Company to a maximum extent in one of two
forms: excess assets transferred, which were $7,109 at December 31, 1996; or
guarantees which was $0 at December 31, 1996. All such credit risk has been
included in the Company's consideration of related reserves. The outstanding
balances under such agreements aggregated $158,481 at December 31, 1996.
Other managed vehicles with balances aggregating $93,901 at December 31, 1996
are included in a special purpose entity which is not owned by the Company. This
entity does not require consolidation as it is not controlled by the Company and
all risks and rewards rest with the owners. Additionally, managed vehicles
totaling $47,418 at December 31, 1996 are owned by special purpose entities
which are owned by the Company. However such assets and related liabilities have
been netted in the balance sheet since there is a two-party agreement with
determinable accounts, a legal right of offset exists and the Company expercises
its right of offset in settlement with client corporations.
Equity Advances on Homes
Equity advances on homes represent advances paid to transferring employees of
clients for their equity based on appraised values of their homes.
Other Debt
Other debt at December 31, 1996 consisted of the following:
- --------------------------------------------------------------------------------
Commercial paper $ 1,085,647
Medium-term note 100,000
- --------------------------------------------------------------------------------
$ 1,185,647
- --------------------------------------------------------------------------------
Commercial paper programs are more fully described in the note for Liabilities
Under Management Programs. The medium-term notes represented an unsecured
obligation having a fixed interest rate of 6.5% with interest payable
semi-annually and a term of seven years payable in full in fiscal 2000.
Income Taxes
Provisions for income taxes were comprised as follows for the eight-month period
ended December 31, 1996:
- --------------------------------------------------------------------------------
Current income taxes:
Federal $ 1,196
State and local 2,177
Foreign 5,908
- --------------------------------------------------------------------------------
9,281
- --------------------------------------------------------------------------------
Deferred income taxes:
Federal 25,400
State and local 3,200
Foreign 100
- --------------------------------------------------------------------------------
28,700
- --------------------------------------------------------------------------------
$ 37,981
- --------------------------------------------------------------------------------
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred income taxes are recorded based upon differences between the financial
statement and the tax bases of assets and liabilities and available tax credit
carryforwards. There was no valuation allowance relating to deferred tax assets.
Net deferred tax liabilities as of December 31, 1996 were comprised as follows:
- --------------------------------------------------------------------------------
Depreciation $ (245,146)
Accrued liabilities and deferred income 46,107
Unamortized mortgage servicing rights (51,239)
Alternative minimium tax and net operating loss carryforwards 13,078
- --------------------------------------------------------------------------------
$ (237,200)
- --------------------------------------------------------------------------------
The portions of the income tax liability and provision classified as current and
deferred are subject to final determination based on the actual income tax
returns to be filed for the twelve-month period ended April 30, 1997.
The Company paid income taxes of $8,126 for the eight-month period ended
December 31, 1996.
A summary of the differences between the statutory federal income tax rate and
the Company's effective income tax rate follows for the eight-month period ended
December 31, 1996:
- --------------------------------------------------------------------------------
Federal income tax statutory rate 35.0%
State income taxes, net of federal benefit 3.9%
Amortization of goodwill 0.5%
Foreign tax in excess of domestic rate 1.0%
Other 0.4%
- --------------------------------------------------------------------------------
Effective tax rate 40.8%
- --------------------------------------------------------------------------------
The Company's US federal income tax returns have been examined by the Internal
Revenue Service through April 30, 1993.
Liabilities Under Management Programs
Borrowings to fund assets under management programs are classified as
"liabilities under management programs" and, at December 31, 1996 consisted of
the following:
- --------------------------------------------------------------------------------
Commercial paper $ 2,005,196
Medium-term note 1,562,200
Limited recourse debt 9,653
Secured notes payable on vehicles under lease 16,147
Other unsecured debt 311,100
- --------------------------------------------------------------------------------
$ 3,904,296
- --------------------------------------------------------------------------------
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Commercial paper, all of which matures within 90 days, is supported by committed
revolving credit agreements described below and short-term lines of credit. The
weighted average interest rate on the Company's outstanding commercial paper was
5.4% at December 31, 1996.
Medium-term notes represent unsecured loans which mature in 1997. The weighted
average interest rate on medium-term notes was 5.7% at December 31, 1996.
Limited recourse debt and secured notes payable on vehicles under lease
primarily consist of secured loans arranged for certain clients for their
convenience. The lenders hold a security interest in the lease payments and the
clients' leased vehicles. The debt and notes payable mature concurrently with
the related lease payments. The aggregate lease payments due from the lessees
exceed the loan repayment requirements. The weighted average interest rate on
secured debt was 5.3% at December 31, 1996.
The Company has a $2.5 billion syndicated unsecured credit facility backed by 22
domestic and foreign banks. The facility is comprised of $1.25 billion of lines
maturing in 364 days and $1.25 billion maturing in five years. Under the credit
facilities, the Company is obligated to pay annual commitment fees of
approximately 7 basis points. The Company has other unused lines of credit of
$301,468 at December 31, 1996 with various banks.
Other unsecured debt, all of which matures in 1997, includes other borrowings
under short-term lines of credit and other bank facilities. The weighted average
interest rate on unsecured debt was 5.8% at December 31, 1996.
Although the period of service for a vehicle is at the lessee's option, and the
period a home is held for resale varies, management estimates, by using
historical information, the rate at which vehicles will be disposed and the rate
at which homes will be resold. These projections of estimated liquidations of
assets under management programs and the related estimated repayment of
liabilities under management programs as of December 31, 1996, as set forth in
the table below, indicate that the actual repayments of liabilities under
management programs will be different than required by contractual maturities.
Assets Under Liabilities Under
Management Programs Management Programs
------------------- -------------------
1997 $2,163,260 $2,070,029
1998 1,135,667 1,089,109
1999 513,964 496,119
2000 163,695 160,041
2001 53,843 51,617
2002-2006 35,901 37,381
---------- ----------
$4,066,330 $3,904,296
- --------------------------------------------------------------------------------
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Option Plans
Prior to the Merger, the Company had stock option plans for key employees and
outside Directors of the Company. On April 30, 1997 all unexercised options were
canceled and converted to shares of HFS as provided by the Merger Agreement. The
plans allowed for the purchase of common stock at prices not less than fair
market value on the date of grant. Either incentive stock options or
non-statutory stock options were granted under the plans. Options became
exercisable after one year from date of grant on a vesting schedule provided by
the plans, and expired ten years after the date of the grant. Option
transactions are summarized as follows for the eight-month period ended December
31, 1996:
Number of Option Price
Shares per Share
- --------------------------------------------------------------------------------
Outstanding April 30, 1996 2,615,970 $ 9.94 to $26.56
Granted 1,098,100 $27.00 to $30.75
Exercised (306,192) $12.25 to $19.94
Canceled (25,200) $19.94 to $28.44
Outstanding December 31, 1996 3,382,678 $ 9.94 to $30.75
- --------------------------------------------------------------------------------
Exercisable December 31, 1996 2,291,578 $ 9.94 to $21.00
- --------------------------------------------------------------------------------
Capital Stock
On June 24, 1996, the Board of Directors authorized a two-for-one common stock
split, effected in the form of a 100% stock dividend which was paid on July 31,
1996. All share amounts and per share amounts herein, have been adjusted for the
common stock split.
Pension and Other Employee Benefit Plans
Pension and Supplemental Retirement Plans The Company has a non-contributory
defined benefit pension plan covering substantially all US employees of the
Company and its subsidiaries. The Company's subsidiary located in the UK has a
contributory defined benefit pension plan, with participation at the employee's
option. Under both the US and UK plans, benefits are based on an employee's
years of credited service and a percentage of final average compensation. The
Company's policy for both plans is to contribute amounts sufficient to meet the
minimum requirements plus other amounts as the Company deems appropriate from
time to time. The Company also sponsors two unfunded supplemental retirement
plans to provide certain key executives with benefits in excess of limits under
the federal tax law and to include annual incentive payments in benefit
calculations.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net costs included the following components for the eight-month period ended
December 31, 1996:
- --------------------------------------------------------------------------------
Service cost $ 3,919
Interest cost 5,732
Actual return on assets (6,652)
Net amortization and deferral 2,067
- --------------------------------------------------------------------------------
Net cost $ 5,066
- --------------------------------------------------------------------------------
A summary of the plans' status and the Company's recorded liability recognized
in the Consolidated Balance Sheet at December 31, 1996 follows:
Funded Plans
- --------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ 69,743
Unvested 7,058
- -------------------------------------------------------------------------------
$ 76,801
- --------------------------------------------------------------------------------
Projected benefit obligation $ 97,145
Funded assets, at fair value
(primarily common stock and bond mutual funds) (88,416)
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions (4,544)
Unrecognized prior service cost (761)
Unrecognized net obligation (356)
- --------------------------------------------------------------------------------
Recorded liability $ 3,068
- --------------------------------------------------------------------------------
Unfunded Plans
- --------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ 13,031
Unvested 601
- -------------------------------------------------------------------------------
$ 13,632
- --------------------------------------------------------------------------------
Projected benefit obligation $ 17,977
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions (3,087)
Unrecognized prior service cost (2,641)
Unrecognized net obligation (1,237)
Minimum liability adjustment 2,620
- --------------------------------------------------------------------------------
Recorded liability $ 13,632
- --------------------------------------------------------------------------------
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant percentage assumptions used in determining the cost and related
obligations under the US pension and unfunded supplemental retirement plans are
as follows for the eight-month period ended December 31, 1996:
- --------------------------------------------------------------------------------
Discount rate 8.00%
Rate of increase in compensation 5.00%
Long-term rate of return on assets 10.00%
- --------------------------------------------------------------------------------
Postretirement Benefits Other Than Pensions
The Company provides healthcare and life insurance benefits for certain retired
employees up to the age of 65. A summary of the plan's status and the Company's
recorded liability recognized in the consolidated balance sheet at December 31,
1996 follows:
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Active employees $ 5,811
Current retirees 1,670
- --------------------------------------------------------------------------------
7,481
Unrecognized transition obligation (4,799)
Unrecognized net gain 1,832
- --------------------------------------------------------------------------------
Recorded liability $ 4,514
- --------------------------------------------------------------------------------
Net periodic postretirement benefit costs included the following components for
the eight-month period ended December 31, 1996.
- --------------------------------------------------------------------------------
Service costs $ 568
Interest cost 353
Net amortization and deferral 126
- --------------------------------------------------------------------------------
$ 1,047
- --------------------------------------------------------------------------------
Significant percentage assumptions used in determining the cost and obligations
under the postretirement benefit plan are as follows for the eight-month period
ended December 31, 1996:
- --------------------------------------------------------------------------------
Discount rate 8.00%
Health care costs trend rate for subsequent year 10.00%
- --------------------------------------------------------------------------------
The health care cost trend rate is assumed to decrease gradually through 2004
when the ultimate trend rate of 4.75% is reached. At December 31, 1996, a
one-percentage-point increase in the assumed health care cost trends rate for
each future year would increase the annual service and interest cost by
approximately $126 and the accumulated postretirement benefit obligation by
approximately $582.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investment Plan
Under provisions of the Company's employee investment plan, a qualified
retirement plan, eligible employees may generally have up to 10% of their base
salaries withheld and placed with an independent custodian and elect to invest
in common stock of the Company, an index equity fund, a growth equity fund, an
international equity fund, a fixed income fund, an asset allocation fund and/or
a money market fund. The Company's contributions vest proportionately in
accordance with an employee's years of vesting service, with an employee being
100% vested after three years of vesting service. The Company matches, in common
stock of the Company, employee contributions to 3% of their base salaries, with
up to an additional 3% match available at the end of the year based on the
Company's operating results for the twelve month period beginning May 1 and
ending April 30. The Company's additional matches of employee contributions
greater than 3% up to 6%, were 75% in 1996. The additional match, initially
invested in a money market fund, can be redirected by the employee into any of
the investment elections noted above. The Company recorded contribution expense
of $3,412 for the eight-month period ended December 31, 1996.
Lease Commitments
Total rental expenses relating to office facilities and equipment were $16,407,
for the eight-month period ended December 31, 1996. Minimum rental commitments
under non-cancelable leases with remaining terms in excess of one year are as
follows:
- --------------------------------------------------------------------------------
1997............... $16,797 2001...................... $5,567
1998............... 15,245 2002-2006............. 9,094
1999............... 10,222 2007 and thereafter.. 4,568
2000............... 7,555
- --------------------------------------------------------------------------------
These leases provide for additional rentals based on the lessors' increased
property taxes, maintenance and operating expenses.
Contingent Liabilities
The Company and its subsidiaries are involved in pending litigation of the usual
character incidental to the business transacted by them. In the opinion of
management, such litigation will not have a material effect on the Company's
consolidated financial statements.
The Company is contingently liable under the terms of an agreement involving its
discontinued aviation services segment for payment of Industrial Revenue Bonds
issued by local governmental authorities operating at two airports, one of which
comes due in the year 2013 and the other which comes due in the year 2014, each
of which is in the amount of $3,500. The Company believes its allowance for
disposition loss is sufficient to cover all potential liability.
Fair Value of Financial Instruments and Servicing Rights
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
- - Cash, accounts receivable, certain other assets and commercial paper
borrowings. Due to the short-term nature of these financial instruments, the
carrying value equals or approximates fair value.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - Mortgage loans held for sale. Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained. Gains (losses) on mortgage-related positions, used to reduce
the risk of adverse price fluctuations, for both mortgage loans held for sale
and anticipated mortgage loan closings arising from commitments issued, are
included in the carrying amount of mortgage loans held for sale.
- - Mortgage servicing rights and fees. Fair value is estimated by discounting
the expected net cash flow of servicing rights and deferred mortgage servicing
fees using discount rates that approximate market rates and externally published
prepayment rates, adjusted, if appropriate, for individual portfolio
characteristics.
- - Borrowings. Fair value of borrowings, other than commercial paper, is
estimated based on quoted market prices or market comparables.
- - Interest rate swaps, foreign exchange contracts, forward delivery
commitments, futures contracts and options. The fair value of interest rate
swaps, foreign exchange contracts, forward delivery commitments, futures
contracts and options is estimated, using dealer quotes, as the amount that the
Company would receive or pay to execute a new agreement with terms identical to
those remaining on the current agreement, considering interest rates at the
reporting date.
- - The following table sets forth information about financial instruments,
except for those noted above for which the carrying value approximates fair
value, at December 31, 1996:
Estimated
--------------------------
Notional Carrying Fair
Amount Amount Value
----------- ----------- -----------
Assets
Mortgage loans held for sale .................. $ - $ 1,248,299 $ 1,248,299
Excess mortgage servicing fees .................. - 138,515 155,033
Originated mortgage servicing
rights ...................................... - 128,014 139,776
Purchased mortgage servicing
rights ..................................... - 22,414 29,326
Liabilities
Medium-term notes ............................. - 1,662,200 1,662,220
Off balance sheet
Interest rate swaps ........................... 1,670,155
In a gain position ......................... - 2,457
In a loss position ......................... - (10,704)
Foreign exchange forwards .......................... 329,088 - 10,010
Mortgage-related positions:*
Forward delivery commitments ..... 1,703,495 11,425 7,448
Option contracts to sell ..................... 265,000 952 746
Option contracts to buy ...................... 350,000 1,346 (463)
Treasury options used to hedge servicing rights * . 313,900 1,327 278
- ------------------------------------------------------------------------------------------------
* Gains (losses) on mortgage-related positions are already included in the
determination of market value of mortgage loans held for sale.
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivative Financial Instruments
The Company employs interest rate swap agreements to match effectively the fixed
or floating rate nature of liabilities to the assets funded. A key assumption in
the following information is that rates remain constant at December 31, 1996
levels. To the extent that rates change, both the maturity and variable interest
rate information will change. However, the net rate the Company pays remains
matched with the assets funded.
The following table summarizes the maturity and weighted average rates of the
Company's interest rate swaps employed at December 31, 1996. These
characteristics are effectively offset within the portfolio of assets funded by
the Company.
Maturities
----------------------------------------------------------------------------
Total 1997 1998 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------
United States
Commercial Paper:
Pay fixed/receive floating:
Notional value $ 427,181 $ 199,528 $ 136,176 $ 59,346 $ 20,531 $ 4,625 $ 6,975
Weighted average receive rate 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Weighted average pay rate 6.21% 6.33% 6.47% 6.37% 6.51% 6.60%
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 336,000 250,000 86,000
Weighted average receive rate 6.59% 6.50%
Weighted average pay rate 5.95% 5.86%
Pay floating/receive floating:
Notional value 357,200 357,200
Weighted average receive rate 5.51%
Weighted average pay rate 5.90%
Canada
Commercial Paper:
Pay fixed/receive floating:
Notional value 68,255 32,631 22,849 10,585 2,190
Weighted average receive rate 3.11% 3.11% 3.11% 3.11%
Weighted average pay rate 6.25% 5.89% 5.63% 4.58%
Pay floating/receive floating:
Notional value 52,730 28,010 14,961 4,342 2,853 2,564
Weighted average receive rate 7.21% 7.09% 6.93% 7.61% 7.61%
Weighted average pay rate 3.38% 3.38% 3.38% 3.38% 3.38%
Pay floating/receive fixed
Notional value 36,481 36,481
Weighted average receive rate 4.92%
Weighted average pay rate 3.07%
UK
Commercial Paper:
Pay fixed/receive floating:
Notional value 379,308 37,708 93,070 138,834 109,696
Weighted average receive rate 6.56% 6.56% 6.56% 6.56%
Weighted average pay rate 6.17% 7.85% 6.96% 7.10%
Germany
Commercial Paper:
Pay fixed/receive fixed:
Notional value 13,000 1,950 2,925 (6,825) 3,575 11,375
Weighted average receive rate 3.25% 3.25% 3.25% 3.25% 3.25%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34%
- -----------------------------------------------------------------------------------------------------------------------------
$1,670,155 $ 943,508 $ 269,981 $ 292,282 $ 138,845 $ 18,564 $ 6,975
- -----------------------------------------------------------------------------------------------------------------------------
PHH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the eight-month period ended December 31, 1996, the Company's hedging
activities increased interest expense $3,653 and had no effect on its weighted
average borrowing rate.
The Company enters into foreign exchange contracts as hedges against currency
fluctuation on certain intercompany loans. Such contracts effectively offset the
currency risk applicable to approximately $329,088 of obligations at December
31, 1996.
The Company is exposed to credit-related losses in the event of non-performance
by counterparties to certain derivative financial instruments. The Company
manages such risk by periodically evaluating the financial condition of
counterparties and spreading its positions among multiple counterparties. The
Company presently does not expect non-performance by any of the counterparties.
Comparable Prior Year Income Statement (unaudited)
As described in the note on Change in Fiscal Year, the Company changed its
fiscal year. Comparable results of operations for the eight-month period ended
December 31, 1995 are as follows:
Revenues ............................................ $1,217,647
Operating expenses .................................. 1,133,631
----------
Operating income .................................... 84,016
Income Taxes ....................................... 34,934
----------
Net Income .......................................... $ 49,082
==========
Quarterly Financial Data (Unaudited)
(In thousands except per share data)
Eight-month period ended December 31, 1996
-------------------------------------------------
First Second Third Eight-Month
Quarter Quarter Quarter* Period
---------- ---------- ---------- -----------
Revenues ......................$ 475,761 $ 473,002 $ 335,230 $1,283,993
Income before income taxes .... 37,113 39,963 16,012 93,088
Net income .................... 21,772 23,966 9,369 55,107
---------- ---------- ---------- ----------
Net income per share...........$ 0.61 $ 0.68 $ 0.26 $ 1.53
---------- ---------- ---------- ----------
* Comprised of the two-month period ended December 31, 1996.
Business Segments
The Company's operations are classified into three business segments: vehicle
management services, real estate services and mortgage banking services. Vehicle
management services and real estate services are provided in North America and
Europe. Mortgage banking services are provided in the US. Selected information
by business segment and geographic area for the eight-month period ended
December 31, 1996 are as follows:
PHH CORPORATION AND SUBSIDIARIES
Business Segments (In thousands)
- -------------------------------------------------------------------------------
Revenues:
Vehicle management services .... $ 918,088
Real estate services ........... 198,324
Mortgage banking services .......... 167,581
----------
Consolidated ................... $1,283,993
----------
Income Before Income Taxes:
Vehicle management services .... $ 45,706
Real estate services ........... 23,529
Mortgage banking services ...... 23,853
----------
Consolidated ................... $ 93,088
----------
Identifiable Assets:
Vehicle management services .... $3,866,907
Real estate services ........... 965,330
Mortgage banking services ...... 1,742,409
----------
Consolidated ................... $6,574,646
----------
Capital Expenditures:
Vehicle management services .... $ 6,369
Real estate services ........... 1,982
Mortgage banking services ...... 8,599
----------
Consolidated ................... $ 16,950
----------
Depreciation and Amortization:
Vehicle management services .... $ 657,541
Real estate services ........... 7,016
Mortgage banking services ...... 38,508
----------
Consolidated .................. $ 703,065
----------
Geographic Areas (In thousands)
----------
Revenues:
North America (principally U.S.) $1,129,831
Europe ......................... 154,162
----------
Consolidated ................... $1,283,993
----------
Income Before Income Taxes:
North America (principally U.S.) $ 79,458
Europe ......................... 13,630
----------
Consolidated ................... $ 93,088
----------
Identifiable Assets:
North America (principally U.S.) $5,854,657
Europe ......................... 719,989
----------
Consolidated ................... $6,574,646
----------
PHH Corporation and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE
EIGHT-MONTH PERIOD ENDED DECEMBER 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
CHARGED
(CREDITED)
BALANCE AT TO OPERATING BALANCE AT
DESCRIPTION APRIL 30, 1996 EXPENSES OTHERS (a) DEDUCTIONS (b) DECEMBER 31, 1996
- --------------------------------- -------------- --------------------------- -------------- -----------------
VALUATION ACCOUNTS DEDUCTED
IN THE BALANCE SHEET FROM
ASSETS TO WHICH THEY APPLY
Accounts receivable $ 5,478,000 $1,960,000 $ - $ 1,119,000 $ 6,319,000
Net investment in leases and
leased vehicles 9,362,000 3,108,000 - 160,000 12,310,000
Carrying costs on homes under
management 1,650,000 - - 1,650,000
Mortgages held for sale and
mortgage-related notes receivable 18,547,000 (5,796,000) - - 12,751,000
Real estate management programs 340,000 - - - 340,000
-------------- ----------- ------- ------------ -----------
TOTAL $ 35,377,000 $ (728,000) $ - $ 1,279,000 $33,370,000
-------------- ----------- ------- ------------ -----------
Note: (a) Amounts relate to acquisitions, divestitures and reclassifications
of prior year amounts.
(b) Deductions from reserves represent accounts charged off, less
recoveries, and foreign translation gains and losses.