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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR APRIL 30, 1994 COMMISSION FILE NUMBER 1-7797
PHH CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11333 McCormick Road, Hunt Valley, Maryland 21031
(Address of principal executive offices) (Zip Code)
(410) 771-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X]
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF JUNE 30, 1994: $615,088,532.
NUMBER OF SHARES OF PHH CORPORATION OUTSTANDING ON JUNE 30, 1994: 17,265,643.
Documents Incorporated by Reference
Part III--Proxy Statement for 1994 Annual Meeting of Stockholders
PHH CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
The Company provides a broad range of integrated management services,
expense management programs and mortgage banking services to more than 2,000
clients, including many of the world's largest corporations, as well as
governmental agencies and affinity groups. Its primary business service
segments consist of vehicle management, relocation and 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, 1994, the Company and its subsidiaries had approximately
5,000 employees.
VEHICLE MANAGEMENT SERVICES
Vehicle management services consist primarily of the management, purchase,
leasing and resale of vehicles for corporate clients and governmental agencies,
including fuel and expense management programs and other fee-based services for
clients' vehicle fleets.
FLEET MANAGEMENT SERVICES
The Company provides fully integrated vehicle management and leasing
programs through PHH Vehicle Management Services. These programs were developed
to meet the specific needs of companies using large and small numbers of cars
and trucks and consist of managerial, leasing and advisory services, aimed at
reducing and controlling the cost of operating corporate fleets.
The Company's advisory services for automobile fleet management programs
include recommendations on the makes and models of cars and accessories best
suited to the client's use, the determination of persons eligible for company
cars, the method of reimbursing field representatives for actual car expenses,
the care and maintenance of cars and the personal use of company cars.
Managerial services for automobile fleet programs include purchasing
automobiles, arranging for their delivery through new car dealers located
throughout the United States, Canada, the United Kingdom and the Republic of
Ireland, 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.
1
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 governmental 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-related programs,
statistical control reports detailing expenses related to the general operation
of vehicles, and a program which monitors and controls the type and cost of
vehicle maintenance for individual automobiles.
The Company also provides a fuel and expense management program and a
centralized billing service for companies operating truck fleets in each of the
United States, Canada, 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 the
billing, collection and record keeping services and for assuming the 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 shares the market
leadership with one other provider.
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 35%, respectively. The Company is the market leader among the 4 major
nation-wide providers of fuel card services, and a market leader among the 7
major nation-wide 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 and heavy-duty trucks for which the Company provides managerial, leasing
and/or advisory services in the United States, Canada, the United Kingdom, the
Republic of Ireland and Germany at the end of the fiscal years shown:
1994 1993 1992 1991 1990
Ending number of vehicles under management:
United States................................................ 312,288 322,598 333,528 334,823 332,423
Canada....................................................... 46,317 45,336 46,466 44,082 33,774
United Kingdom (2)........................................... 91,776 86,341 86,983 83,781 57,721
Average cost of vehicles:
United States................................................ $ 17,603 $ 16,865 $ 15,601 $ 14,598 $ 14,395
Canada (1)................................................... $ 15,118 $ 14,874 $ 14,402 $ 14,061 $ 13,182
United Kingdom (1)(2)........................................ $ 20,346 $ 19,183 $ 18,229 $ 15,639 $ 14,249
Number of vehicles purchased................................... 107,999 115,768 117,877 128,435 133,665
Number of fuel and service card transactions
(in thousands)............................................... 47,349 45,636 44,124 43,126 41,081
Gallons of fuel processed (in thousands)....................... 1,073,119 1,038,723 1,076,026 1,064,983 882,534
(1) The cost of the Canadian and United Kingdom vehicles is stated in United
States dollars, translated at the average exchange rate in effect for the
year ended April 30, 1994 in order to eliminate the effect of exchange rate
fluctuations.
(2) Includes the Republic of Ireland.
2
RELOCATION AND REAL ESTATE SERVICES
EMPLOYEE RELOCATION
The Company provides employee relocation services principally to large
international corporations, governmental agencies and affinity groups in the
United States, Canada, the United Kingdom and the Republic of Ireland through
PHH Homequity Corporation and other relocation subsidiaries. Principal services
consist of counseling transferred employees of clients and the purchase,
management and resale of their homes. The Company's relocation services offer
clients the opportunity to reduce employee relocation costs and facilitate
employee relocation.
The relocation subsidiary pays a transferring employee his/her equity in a
home based upon a value determined by independent appraisals. In certain
circumstances the employee's mortgage may be retired concurrently with the
purchase of the equity; otherwise the relocation subsidiary normally accepts
the administrative responsibility for making payments on any mortgages.
Following payment to the employee, the corporate client normally pays the
relocation subsidiary an advance billing to cover costs to be incurred during
the period the home is held for resale, including debt service on any existing
mortgage. These costs are paid by the relocation subsidiary and, after ultimate
resale, a settlement is made with the corporate client reconciling the advance
billing and the expense payments. Under the terms of the client contracts, the
relocation subsidiaries are generally protected against losses from changes in
market conditions.
Funds to finance the purchase of homes are provided primarily through the
issuance of commercial paper and medium-term notes and occasionally 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 relocation subsidiaries also offer programs which provide
home marketing, moving services, rental management, spousal career counseling
and consulting services for transferred employees to help in selecting their
new communities and homes. The destination services operations focus on
developing and delivering home-finding and settling-in services for individual
customers through local centers.
Through its PHH Fantus Corporation subsidiary, the Company provides
strategic facilities planning services, site selection and location consulting
for corporate clients and governmental agencies. Additionally, the Company
provides consulting services in the areas of general business strategy,
marketing and management for transnational clients.
REAL ESTATE SERVICES
The Company provides real estate services through PHH Homequity
Corporation and other relocation subsidiaries. These services primarily include
the management and resale of homes for financial institutions and governmental
agencies in the United Kingdom, the United States and Canada.
COMPETITIVE CONDITIONS
The principal methods of competition within relocation and real estate
services are service quality and price. In the United States, Canada and the
United Kingdom, an estimated 25% of the market for relocation and 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.
3
The following sets forth certain statistics concerning relocation and real
estate services in the United States, Canada and the United Kingdom for the
fiscal years shown:
1994 1993 1992 1991 1990
Number of transactions:
Home purchase authorizations......................... 31,780 31,800 30,387 31,266 34,081
Transferee homes sold................................ 28,906 28,417 28,113 28,191 29,286
Fee-based services:
Home finding...................................... 22,519 15,625 10,541 7,716 N/A
Home marketing.................................... 14,970 8,047 6,171 4,158 N/A
Household-goods moves............................. 13,722 8,727 7,168 7,526 N/A
51,211 32,399 23,880 19,400
Average value of U.S. transferee homes sold (1)........ $ 165,000 $ 156,000 $ 156,600 $ 150,200 $ 140,200
(1) Revenues for the U.S. relocation services are significantly determined
based on the value of homes sold, while revenues for the United Kingdom and
Canadian segments are primarily based on fees which are not related to the
value of homes sold; therefore, this table only includes the average value
of U.S. homes sold.
N/A Information not available.
MORTGAGE BANKING SERVICES
The Company provides residential mortgage banking services through PHH US
Mortgage Corporation. These services consist of the origination, sale and
servicing of residential first mortgage loans. A variety of first mortgage
products as well as casualty insurance-related products are marketed to
consumers through relationships with corporations, affinity groups, real estate
brokerage firms and other mortgage banks.
PHH US Mortgage 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 non-recourse
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 22,000 national, regional or
local providers of mortgage banking services across the United States. The
Company ranked twenty-third among loan originators for calendar year 1993 and
twenty-fourth for the three months ended March 31,1994.
The following sets forth certain statistics concerning mortgage banking
services for the fiscal years shown:
1994 1993 1992 1991 1990
Mortgage loan closings
(in millions)...................................... $ 8,074 $ 5,618 $ 3,797 $ 2,331 $ 1,962
Mortgage servicing portfolio at April 30
(in millions)...................................... $ 16,645 $ 11,047 $ 7,517 $ 5,007 $ 3,411
Delinquency rate..................................... 1.2% 1.1% 1.8% 2.3% 2.4%
4
SIGNIFICANT CUSTOMERS
No customer purchased services totaling 10% or more of consolidated
revenues in 1994, 1993, or 1992.
ITEM 2. PROPERTIES
The corporate offices of the Company are located at 11333 McCormick Road,
Hunt Valley, Maryland in an eight-story building which is owned by the Company
and contains approximately 163,000 square feet of office space.
The offices of PHH Vehicle Management Services North American operations
are located throughout the US and Canada as follows:
(Bullet) A six-story, 200,000 square foot office building in Hunt Valley,
Maryland leased until September 2003
(Bullet) Office space totaling 17,500 square feet in five cities leased as
full service branch offices for fleet management activities for
various terms to April 2003
(Bullet) A dealership in Williamsburg, Virginia, having 101,000 square
feet, leased until March 1998
(Bullet) A dealership in Edenton, North Carolina, having 337,100 square
feet, leased until December 1998
(Bullet) Offices in Fort Worth, Texas, having 75,500 square feet, leased
until March 2002
(Bullet) Administrative offices in Mississauga, Canada, having 59,400
square feet, leased until February 1998
(Bullet) Regional offices located in Montreal, Calgary, Vancouver,
Mississauga & Quebec, Canada, having a total of 43,100 square
feet, leased for various terms to December 2002
The offices of PHH Relocation and Real Estate Services North American
operations are located throughout the US and Canada as follows:
(Bullet) Offices located in Wilton, Connecticut, having 40,000 square
feet, leased until January 1996
(Bullet) Offices in Danbury, Connecticut, having 92,500 square feet,
leased until January 2000
(Bullet) Field office space leased in fourteen cities as follows: 56,500
square feet in Irving, Texas until November 1998; 54,000 square
feet in Oak Brook, Illinois until April 2003; 52,800 square feet
in Concord, California until October 1998; and 55,500 square feet
in eleven other cities for various terms to June 2002
(Bullet) Offices located in Florham Park, New Jersey, where 14,200 square
feet are leased until May 1996
(Bullet) Offices in Chicago, Illinois, having 8,800 square feet, leased
until September 2004
(Bullet) Office space totaling 35,300 square feet in Toronto, Montreal,
Vancouver, Ottawa and Nova Scotia, leased for various terms to
May 2004
The offices of Mortgage Banking Services are located as follows:
(Bullet) A 127,000 square foot building in Mount Laurel, New Jersey which
is owned by the Company
(Bullet) In Englewood, Colorado in a building having 27,900 square feet
leased until June 1997
(Bullet) In two other locations totaling 16,300 square feet for various
terms to June 1995.
The offices of Vehicle Management Services and Relocation and Real Estate
Management Services operations located in the United Kingdom and Europe are as
follows:
(Bullet) A 129,000 square foot building which is owned by the Company
located in Swindon, United Kingdom
(Bullet) Field offices having 47,800 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.
5
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various litigation arising in the ordinary course
of business and is plaintiff in several collection matters which are not
considered material either individually or in the aggregate.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended April 30, 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is publicly traded on the New York Stock
Exchange under the symbol "PHH". The common stock is entitled to dividends when
and as declared by the Board of Directors. The payment of future dividends will
depend upon earnings, the financial condition of the Company and other relevant
factors. At June 30, 1994 there were 1,975 holders of common stock. The
dividends and high and low prices for each quarter during the Company's 1994
and 1993 fiscal years were as follows:
DIVIDEND PRICE
1994 PAID HIGH LOW
First quarter................... $.30 $ 42 1/2 $ 39 1/2
Second quarter.................. $.30 $ 46 3/4 $ 41 3/8
Third quarter................... $.30 $ 46 3/4 $ 40 5/8
Fourth quarter.................. $.30 $ 43 1/4 $ 33 1/4
1993
First quarter................... $.30 $ 36 7/8 $ 32 3/4
Second quarter.................. $.30 $ 38 7/8 $ 34 5/8
Third quarter................... $.30 $ 41 1/2 $ 37 1/4
Fourth quarter.................. $.30 $ 43 $ 39
6
ITEM 6. SELECTED FINANCIAL DATA
(In thousands except per share data)
Years ended April 30, 1994 1993 1992 1991 1990
Revenues:
Vehicle management services $ 1,162,483 $ 1,069,484 $ 992,514 $ 1,023,857 $ 1,022,233
Relocation and real estate services 816,261 829,336 849,871 923,536 822,662
Mortgage banking services 155,935 122,111 89,099 70,232 57,096
$ 2,134,679 $ 2,020,931 $ 1,931,484 $ 2,017,625 $ 1,901,991
Income from continuing operations $ 64,558 $ 56,417 $ 49,979 $ 47,079 $ 57,308
Discontinued operations, net of income taxes - - - - (18,500)
Net income $ 64,558 $ 56,417 $ 49,979 $ 47,079 $ 38,808
Income per share:
From continuing operations $ 3.64 $ 3.25 $ 2.92 $ 2.78 $ 3.38
From discontinued operations - - - - (1.09)
Net income per share $ 3.64 $ 3.25 $ 2.92 $ 2.78 $ 2.29
Cash dividends per share $ 1.20 $ 1.20 $ 1.20 $ 1.20 $ 1.16
Selected Balance Sheet Data
As of April 30, 1994 1993 1992 1991 1990
Total assets $ 4,766,783 $ 4,613,028 $ 4,365,031 $ 4,198,689 $ 4,464,094
Assets under management programs $ 3,243,014 $ 3,393,425 $ 3,115,680 $ 3,133,332 $ 3,419,324
Liabilities under management programs $ 2,841,905 $ 2,900,934 $ 2,771,250 $ 2,804,688 $ 3,027,594
Other debt $ 719,822 $ 511,128 $ 405,017 $ 184,497 $ 259,136
Stockholders' equity $ 498,313 $ 457,483 $ 423,287 $ 392,866 $ 362,706
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
RESULTS OF OPERATIONS
All comparisons within the following discussion are to the previous year,
unless otherwise stated.
Consolidated results: Net income increased 14% to $64.6 million in fiscal
1994. Net income per share increased 12% to $3.64. The increase in net income
was due to increases in the mortgage banking services and vehicle management
services business segments, partially offset by a decrease in the relocation and
real estate services business segment. In fiscal 1993, net income increased 13%
to $56.4 million and net income per share increased 11% to $3.25, reflecting
increases in all three of the Company's business segments, though primarily in
mortgage banking services.
Consolidated revenues increased 6% to $2.1 billion in fiscal 1994 and 5% to
$2.0 billion in fiscal 1993.
The provision for income taxes reflects effective tax rates of 41.2%, 40.1%
and 39.9% in fiscal 1994, 1993 and 1992, respectively. The fiscal 1994 rate
reflects the increase in the US federal corporate income tax rate from 34% to
35%. The additional tax accrued to adjust the Company's deferred tax assets and
liabilities for the effect of the increased income tax rate was offset by an
adjustment of tax accruals based upon the completion of certain tax
examinations.
Vehicle Management Services
Vehicle management services primarily consist of the management, purchase,
leasing and resale of vehicles for corporate clients and governmental agencies,
including fuel and expense management programs and other fee-based services for
clients' vehicle fleets.
Operating Income (in thousands) 1994 1993 1992
Revenues:
Leasing revenues $ 968,149 $ 894,576 $ 827,696
Other 194,334 174,908 164,818
1,162,483 1,069,484 992,514
Expenses:
Depreciation 808,894 707,542 600,109
Interest 109,859 124,038 157,522
Selling, general and
administrative 197,500 195,632 194,148
1,116,253 1,027,212 951,779
Operating Income $ 46,230 $ 42,272 $ 40,735
Leasing revenues increased 8% to $968 million in fiscal 1994 and 8% to $895
million in fiscal 1993. The increases were primarily due to a reduced amount, in
comparison to prior years, of leases and leased vehicles sold or transferred to
third parties for which management and servicing responsibility is retained. Had
these assets not been sold or transferred, the related rental payments would
have been included in revenues and the related depreciation on vehicles under
operating leases and interest would have been included in expenses. On a pro
forma basis, the result would have been a decrease in leasing revenues of 6% for
fiscal 1994 and 3% for fiscal 1993. The decreases in pro forma leasing revenues
were primarily due to a lower rental interest component charged on certain
leases and leased vehicles due to reduced interest rates and a decrease in the
number of leased vehicles under management.
Other revenues increased 11% to $194 million in fiscal 1994 and 6% to $175
million in fiscal 1993. The increases were primarily due to growth in domestic
fee-based services such as vehicle maintenance management programs and a
favorable resale market for disposition of vehicles under closed-end leases.
Key Operating Factors 1994 1993 1992
Ending number of vehicles
under management 450,381 454,275 466,977
Percent change (1%) (3%) 1%
Number of vehicles
purchased 107,999 115,768 117,877
Percent change (7%) (2%) (8%)
Number of fuel and
service card transactions
(in thousands) 47,349 45,636 44,124
Percent change 4% 3% 5%
Gallons of fuel processed
(in thousands) 1,073,119 1,038,723 1,076,026
Percent change 3% (3%) 1%
Vehicle management services operating income increased 9% to $46.2 million
in fiscal 1994. The increase was primarily due to increases from the continuing
positive effects of a favorable resale market for disposition of vehicles under
closed-end leases, higher management fees resulting from increases in the
average cost of vehicles managed, growth in domestic fee-based vehicle services
as reflected in the number of fuel and service card transactions and gallons
processed (see key operating factors) as well as the favorable effect of
productivity efforts. Partially offsetting the increase were decreased revenues
resulting from a slight decrease in the number of vehicles under management as
well as increased selling, general and administrative costs including costs
related to certain information technology improvements.
In fiscal 1993, operating income increased 4% to $42.3 million. The increase
was primarily due to growth in fee-based vehicle management services as well as
improvements in fuel and expense management programs in the UK. These
improvements were partially offset by a decrease in domestic fuel and expense
management programs, a decrease in the number of vehicles under management,
continued investment toward expansion into Continental Europe, and a reduction
due to the effect of foreign currency translation.
8
The Company's profitability from vehicle management services is affected by
the number of vehicles managed and related services provided for clients.
Profitability can also be affected as corporate clients exercise a higher degree
of caution by decreasing the size of their vehicle fleets or by extending the
service period of existing fleet vehicles. Operating results should be
positively affected as clients choose to outsource their vehicle management
services and as the Company expands into new markets, further enhances its
product diversity, broadens its client base and continues its productivity and
quality improvement efforts.
Relocation and Real Estate Services
Relocation and real estate services primarily consist of the purchase,
management and resale of homes for transferred employees of corporate clients,
governmental agencies and affinity groups. Other programs include fee-based
services which provide assistance to the transferring employee and real estate
services to financial institutions as well as other consulting services.
Operating Income (in thousands) 1994 1993 1992
Revenues $ 816,261 $ 829,336 $ 849,871
Expenses:
Costs of carrying and
reselling homes
and interest 718,078 738,979 760,831
Selling, general and
administrative 76,683 63,742 62,683
794,761 802,721 823,514
Operating Income $ 21,500 $ 26,615 $ 26,357
Relocation and real estate services revenues decreased 2% to $816 million in
fiscal 1994. Revenue decreases were primarily due to a reduction in the number
of transferee homes sold in the US and UK and a reduction in interest rates and
other direct costs of carrying and reselling homes, which are charged to the
Company's clients. These decreases were partially offset by revenue increases
due to an increase in the number of homes sold in Canada resulting from an
acquisition in fiscal 1994; an increase in domestic fee-based relocation
services such as home marketing programs, group move planning and household
goods moving; and an increase in the average value of transferee homes sold in
the US.
In fiscal 1993, revenues decreased 2% to $829 million. The decrease was
primarily due to a reduction in interest rates and other direct costs of
carrying and reselling homes, which are passed through to the Company's clients,
partially offset by an increase in the number of transferee homes sold in the US
and favorable results in the US from other fee-based relocation services.
Costs of carrying and reselling homes and interest decreased 3% to $718
million in fiscal 1994 and 3% to $739 million in fiscal 1993. The decreases were
primarily due to a decrease in interest expense caused by a reduction in
interest rates as noted above, as well as a reduction in other direct costs of
carrying and reselling homes due to a reduction in the number of days homes were
held for resale. In fiscal 1994, increased costs were incurred due to an
increase in the number of homes sold resulting from the Company's acquisition in
Canada and to enhance the Company's global information technology.
Key Operating Factors 1994 1993 1992
Number of transactions:
Home purchase
authorizations 31,780 31,800 30,387
Percent change - 5% (3%)
Transferee homes sold 28,906 28,417 28,113
Percent change 2% 1% -
Fee-based services:
Home finding 22,519 15,625 10,541
Home marketing 14,970 8,047 6,171
Household-goods
moves 13,722 8,727 7,168
51,211 32,399 23,880
Percent change 58% 36% 19%
Average value of US
transferee home sold $ 165,000 $ 156,000 $ 156,600
Percent change 6% - 4%
Relocation and real estate services operating income decreased 19% to $21.5
million in fiscal 1994. The decrease was primarily due to costs incurred by the
Company to broaden its worldwide consulting business, enhance its global
information technology and consolidate office space in North America, as well as
integration costs from its acquisition in Canada. The decrease was partially
offset by improvement in the results of other fee-based relocation and real
estate services and an increase in the value of transferee homes sold in the US.
In fiscal 1993, operating income increased 1% to $26.6 million. The increase
was primarily due to increases in the number of transferee homes sold in the US
as well as improvement in other fee-based services in the US. Partially
offsetting the increase were decreases in the number of homes sold and a
reduction of real estate services provided in the UK and Canada, as well as the
minor effect of a change in the application of revenue recognition accounting
policies in the UK to more closely align policies for similar product lines on a
worldwide basis.
The Company is generally not at risk on its carrying value of homes should
there be a downturn in the housing market. Management anticipates that, as
businesses continue to reassess their relocation plans as part of cost control
measures, the results of the relocation services segment may be impacted.
However, operating results should be positively affected as the Company expands
into new markets, enhances its product diversity, broadens its client base and
continues its productivity and quality improvement efforts.
9
Mortgage Banking Services
Mortgage banking services primarily 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, real estate brokerage firms and other mortgage banks.
Operating Income (in thousands) 1994 1993 1992
Revenues $ 155,935 $ 122,111 $ 89,099
Expenses:
Direct costs
and interest 85,564 69,805 55,669
Selling, general and
administrative 28,305 26,955 17,405
113,869 96,760 73,074
Operating Income $ 42,066 $ 25,351 $ 16,025
Mortgage banking services revenues increased 28% to $156 million in fiscal
1994. The increase was primarily due to a large percentage increase in loan
closing volume as well as a 51% increase in the servicing portfolio. The value
of loan closings increased 44% due to growth in volume from established customer
relationships, increased market penetration, as well as volume generated from
residential mortgage refinancings. Similarly, in fiscal 1993, revenues increased
37% to $122 million.
Direct costs and interest increased 23% to $86 million in fiscal 1994 and
25% to $70 million in fiscal 1993. The increases were primarily due to increased
costs to support increased loan closings and a larger servicing portfolio
partially offset by reduced interest rates. Additionally, direct costs include
unscheduled amortization of excess mortgage servicing fees of $11.3 million and
$11.9 million in fiscal 1994 and 1993, respectively.
Key Operating Factors 1994 1993 1992
Mortgage loan closings
(in millions) $ 8,074 $ 5,618 $ 3,797
Percent change 44% 48% 63%
Ending mortgage
servicing portfolio
(in millions) $ 16,645 $ 11,047 $ 7,517
Percent change 51% 47% 50%
Delinquency rate 1.2% 1.1% 1.8%
Mortgage banking services operating income increased 66% to $42.1 million in
fiscal 1994 and 58% to $25.4 million in fiscal 1993. The increase reflects
increases in revenues as discussed above, partially offset by higher costs
incurred due to increased loan closings as well as higher costs of managing the
larger servicing portfolio.
The Company's profitability from mortgage banking services will be affected
by such external factors as the level of interest rates, the strength of the
various segments of the economy, and the condition of residential real estate
markets. The Company is experiencing a slowdown in refinancing activity due to a
rise in interest rates. Management believes the Company's broad-based marketing
strategies and continuous quality improvement efforts, as well as its focus on
building and maintaining a high quality servicing portfolio, should continue to
positively affect operating results.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". Additionally, in November 1992, the Financial Accounting
Standards Board (FASB) issued SFAS No. 112, effective in fiscal 1995,
"Employers' Accounting for Postemployment Benefits". Application of this
statement will require the Company to change from the cash basis to the accrual
basis of recording the costs of benefits provided to former or inactive
employees after employment but before retirement. The effect of this statement
has been estimated and will not significantly affect the consolidated financial
statements of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company manages its funding sources to ensure adequate liquidity for
servicing of existing liabilities and by obtaining longer-term funds required to
meet the Company's strategic growth objectives. The mix of funding sources
depends on market conditions at the time, the characteristics of the assets of
the Company, and the management of diverse international funding sources for the
greatest long-term financial flexibility.
The sources of liquidity fall into three general areas: ongoing liquidation
of assets under management, international money and capital markets, and
committed credit agreements with various high-quality domestic and international
banks. In the ordinary course of business, the liquidation of assets under
management programs, as well as cash flows generated from operating activities,
provide the cash flow necessary for the repayment of existing liabilities. (See
Operating Activities and Investing Activities in the Company's Consolidated
Statements of Cash Flows.)
Based upon 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. Within mortgage
banking services, the asset characteristics reflect the length of time from
commitment to the sale of mortgages to unrelated investors. Once the 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. Interest rate risk on
mortgages originated for sale is managed through the use of forward delivery
contracts, financial futures and options.
To maintain the integrity of its assets under management, the Company
maintains rigorous client credit standards to minimize credit risk and the
potential for losses.
Domestic and international financial markets provide a variety of sources of
funding. The Company has consciously managed these sources to ensure broad
access to major money and capital markets. Depending upon asset growth and
financial market conditions, the Company utilizes the United States, Euro,
Canadian and Sterling commercial paper markets, as well as other cost effective
short-term instruments. In addition, the Company utilizes the public and private
debt markets to issue unsecured senior corporate debt. Augmenting these sources,
the Company has reduced outstanding debt by the sale or
10
transfer of managed assets to third parties while retaining fee-related
servicing responsibility. The Company's aggregate commercial paper outstanding
totaled $2.1 and $1.9 billion at April 30, 1994 and April 30, 1993,
respectively. At April 30, 1994, $1.2 billion in medium-term notes and $185
million in other debt securities were outstanding compared to $1.1 billion and
$390 million, respectively, in fiscal 1993. (See Financing Activities in the
Company's Consolidated Statements of Cash Flows.) From a risk management
standpoint, borrowings not in the local currency of the business unit are
converted to the local currency through the use of foreign currency forward
contracts.
To provide additional financial flexibility, the Company's current policy is
to ensure that minimum committed bank facilities aggregate 80% of the average
amount of outstanding commercial paper. Committed revolving credit agreements
totaling $2.4 billion and uncommitted lines of credit aggregating $330 million
are currently in place with 31 domestic and international banks. Management
closely evaluates not only the credit quality of the banks but the maturity of
the various agreements to ensure ongoing availability. Of the Company's $2.4
billion in committed facilities at April 30, 1994, the full amount was undrawn
and available. Management believes that its current policy provides adequate
protection should financial stress occur in the commercial paper or medium-term
note markets.
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 enable the Company to service its debt and offer a
broad spectrum of service products to its clients.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
PHH Corporation:
We have audited the consolidated financial statements of PHH Corporation
and subsidiaries as listed in the accompanying index on page 27. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PHH
Corporation and subsidiaries at April 30, 1994 and 1993, and the results of
their operations and their cash flows for each of the years in the three-year
period ended April 30, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK
Baltimore, Maryland
May 23, 1994
To the Stockholders and Board of Directors
PHH Corporation:
We consent to incorporation by reference in the Registration Statements on
Form S-3 (No. 33-48125, No. 33-52669 and No. 33-59376) and Form S-8 (No.
33-38309 and No. 33-53282) of PHH Corporation of our report dated May 23, 1994,
relating to the consolidated balance sheets of PHH Corporation and subsidiaries
as of April 30, 1994 and 1993, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended April 30, 1994, and all related schedules, which report
appears in the April 30, 1994 annual report on Form 10-K of PHH Corporation.
KPMG PEAT MARWICK
Baltimore, Maryland
July 29, 1994
12
Consolidated Statements of Income
(In thousands except per share data)
Years ended April 30, 1994 1993 1992
Revenues:
Vehicle management services $ 1,162,483 $ 1,069,484 $ 992,514
Relocation and real estate services 816,261 829,336 849,871
Mortgage banking services 155,935 122,111 89,099
2,134,679 2,020,931 1,931,484
Expenses:
Depreciation on vehicles under operating leases 808,894 707,542 600,109
Costs, including interest, of carrying and
reselling homes 717,793 734,640 757,534
Direct costs of mortgage banking services 57,091 47,288 30,738
Interest 138,617 150,894 185,750
Selling, general and administrative 302,488 286,329 274,236
2,024,883 1,926,693 1,848,367
Income before income taxes 109,796 94,238 83,117
Income taxes 45,238 37,821 33,138
Net income $ 64,558 $ 56,417 $ 49,979
Net income per share $ 3.64 $ 3.25 $ 2.92
See Notes to Consolidated Financial Statements.
13
Consolidated Balance Sheets
(In thousands)
As of April 30, 1994 1993
Assets
Cash $ 25 $ 522
Accounts receivable, less allowance for doubtful
accounts of $6,525 in 1994 and $8,453 in 1993 470,756 402,581
Carrying costs on homes under management 36,085 52,042
Mortgages held for resale 705,888 478,658
Property and equipment, net 108,158 98,886
Unamortized goodwill 54,797 55,209
Other assets 148,060 131,705
1,523,769 1,219,603
Assets Under Management Programs
Net investment in leases and leased vehicles 2,766,983 2,716,956
Equity advances on homes 474,525 674,799
Other assets under management programs 1,506 1,670
3,243,014 3,393,425
$ 4,766,783 $ 4,613,028
Liabilities
Accounts payable and accrued expenses $ 533,943 $ 545,598
Advances from clients 49,765 73,190
Deferred revenue 29,435 33,449
Other debt 719,822 511,128
Deferred income taxes 93,600 91,246
1,426,565 1,254,611
Liabilities Under Management Programs 2,841,905 2,900,934
Stockholders' Equity
Preferred stock, authorized 3,000,000 shares - -
Common stock, no par value, authorized
50,000,000 shares; issued and outstanding
17,245,673 shares in 1994 and 17,197,785
shares in 1993 92,139 91,306
Cumulative foreign currency translation adjustment (21,627) (17,916)
Retained earnings 427,801 384,093
498,313 457,483
$ 4,766,783 $ 4,613,028
See Notes to Consolidated Financial Statements.
14
Consolidated Statements of Cash Flows
(In thousands)
Years ended April 30, 1994 1993 1992
Operating Activities:
Net income $ 64,558 $ 56,417 $ 49,979
Adjustments to reconcile income to cash
provided by operating activities:
Depreciation and amortization 843,678 738,062 620,298
Deferred income taxes 3,036 (14,075) (8,686)
Changes in:
Accounts receivable (72,536) 29,452 104,437
Carrying costs on homes under management 15,544 10,510 14,779
Mortgages held for resale (227,230) (28,505) (258,563)
Accounts payable and accrued expenses (6,177) 12,387 5,058
Advances from clients (23,249) (9,329) (59,986)
Deferred revenue (3,897) 3,592 4,666
All other operating activity (34,539) (21,969) (7,179)
Cash provided by operating activities 559,188 776,542 464,803
Investing Activities:
Investment in leases and leased vehicles (1,578,721) (1,699,971) (1,744,771)
Repayment of investment in leases and leased
vehicles 549,262 553,822 578,687
Proceeds from sales and transfers of
vehicle management-related assets 105,087 90,697 450,163
Value of homes acquired (4,101,894) (4,102,013) (3,992,271)
Value of homes sold 4,301,529 4,068,422 4,061,685
Proceeds from sales of relocation and real estate-
related assets 0 39,318 59,399
Additions to property and equipment, net of
dispositions (32,719) (20,825) (23,992)
Acquisitions accounted for as a purchase (2,594) - (35,381)
All other investing activities 602 3,006 5,501
Cash used in investing activities (759,448) (1,067,544) (640,980)
Financing Activities:
Net change in borrowings with terms of less than
90 days 172,255 81,453 (227,412)
Proceeds from issuance of other borrowings 1,040,092 1,123,795 927,824
Principal payment on other borrowings (1,011,673) (947,905) (515,775)
Stock option plan transactions 833 9,833 (362)
Payment of dividends (20,850) (20,436) (20,272)
Cash provided by financing activities 180,657 246,740 164,003
Effect of exchange rate changes on cash 19,106 43,601 13,088
Increase (decrease) in cash (497) (661) 914
Cash at beginning of period 522 1,183 269
Cash at end of period $ 25 $ 522 $ 1,183
See Notes to Consolidated Financial Statements.
15
Consolidated Statements of Stockholders' Equity
Cumulative
Foreign
Currency
(In thousands) Common Stock Translation Retained
Years Ended April 30, 1994, 1993 and 1992 Shares Amount Adjustment Earnings
Balance April 30, 1991 16,881,057 $ 81,835 $ (7,374) $ 318,405
Net income 49,979
Cash dividends declared ($1.20 per share) (20,272)
Foreign currency translation adjustment 1,076
Stock option plan transactions,
net of treasury share activity
and related income tax benefits - (362)
Balance April 30, 1992 16,881,057 81,473 (6,298) 348,112
Net income 56,417
Cash dividends declared ($1.20 per share) (20,436)
Foreign currency translation adjustment (11,618)
Stock option plan transactions,
net of treasury share activity
and related income tax benefits 316,728 9,833
Balance April 30, 1993 17,197,785 91,306 (17,916) 384,093
Net income 64,558
Cash dividends declared ($1.20 per share) (20,850)
Foreign currency translation adjustment (3,711)
Stock option plan transactions,
net of treasury share activity
and related income tax benefits 47,888 833
Balance April 30, 1994 17,245,673 $ 92,139 $ (21,627) $ 427,801
See Notes to Consolidated Financial Statements.
16
Notes to the Consolidated Financial Statements
(In thousands except per share data)
ACCOUNTING POLICIES
The accounting policies of PHH Corporation conform to generally accepted
accounting principles. The consolidated financial statements include the
accounts of PHH Corporation and its wholly-owned domestic and foreign
subsidiaries (the Company). Policies outlined below include all policies
considered significant. All significant intercompany balances and transactions
have been eliminated.
Vehicle Management Services
Vehicle management services primarily consist of the management, purchase,
leasing, and resale of vehicles for corporate clients and governmental agencies,
including fuel and expense 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 to corporate fleet users under operating and
direct financing lease arrangements. The initial lease term typically covers a
period of twelve months or more and thereafter may be extended at the option of
the lessee. The Company records the cost of leased vehicles as an "investment in
leases and leased vehicles." Amounts charged to lessees for interest on the
unrecovered investment are credited to income on a level yield method which
approximates the contractual terms.
Relocation and Real Estate Services
Relocation services primarily consist of the purchase, management and resale
of homes for transferred employees of corporate clients, governmental agencies
and affinity groups. The Company pays transferring employees their equity based
on an appraised value of their homes, determined by independent appraisers,
after deducting any outstanding mortgages. In certain circumstances the
mortgages may be retired concurrently with the purchase of the equity;
otherwise, the relocation management subsidiaries normally accept administrative
responsibility for making payments on any mortgages. These mortgages are either
retired at settlement or assumed by the purchaser when the homes are resold,
which generally is within six months.
The client normally pays an advance billing for a portion of the costs to be
incurred during the period the home is held for resale. These advances are
included in "advances from clients." These costs are paid by the relocation
management subsidiaries and are identified as "carrying costs on homes under
management" until resale. After resale, a settlement of actual costs and the
advance billing is made with the client.
Revenues and the related "costs, including interest, of carrying and
reselling homes" of the relocation management subsidiaries are recognized at
closing for the resale of the home. Under the terms of their contracts with
clients, the Company is generally protected against losses from changes in
market conditions.
The Company also offers fee-based programs such as home marketing programs,
moving services, rental management, and other programs designed to assist
transferred employees. The destination services operations focus on developing
and delivering home-finding and settling-in services for individual customers
through local centers. 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.
Real estate services include fee-based services for the management and
resale of homes primarily for financial institutions and governmental agencies.
The Company also offers strategic management consulting services to corporate
clients and governmental 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 as well as related insurance
products. The Company markets a variety of first mortgage products to consumers
through relationships with corporations, affinity groups, 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 stated 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. Such gains and losses are increased or decreased by
the amount of deferred mortgage servicing fees recorded.
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
on the straight-line method (25 to 45 years); building improvements, on the
straight-line method (10 to 20 years); equipment and leasehold improvements, on
either the double-declining balance or straight-line method (3 to 10 years); and
externally developed software is capitalized and amortized on 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.
Unamortized Goodwill
Unamortized goodwill represents the excess of cost over the net tangible and
intangible assets of businesses acquired. It is being amortized by the straight-
line method over various periods up to 40 years and is included in selling,
general and administrative expense.
17
Assets Under Management Programs
Assets under management programs are held subject to leases or other client
contracts. The effective interest rates and maturity characteristics of the
leases and other contracts are generally matched with the characteristics of the
overall funding program.
Translation of Foreign Currencies
Assets and liabilities of the foreign subsidiaries are translated at the
exchange rates as of the balance sheet dates; equity accounts are translated at
historical exchange rates. Revenues, expenses and cash flows are translated at
the average exchange rates for the periods presented. Translation gains and
losses are included in stockholders' equity including, for years prior to 1991,
transaction gains and losses resulting from forward exchange contracts on
foreign equity amounts net of income tax effects. Gains and losses resulting
from the change in exchange rates realized upon settlement of foreign currency
transactions are substantially offset by gains and losses realized upon
settlement of forward exchange contracts. Therefore, the resulting net income
effect of transaction gains and losses in all three years was not significant.
Interest
Interest expense consists of interest on debt incurred to fund working
capital requirements and to finance vehicle leasing activities, relocation
services and mortgage banking operations. Interest used to finance equity
advances on homes is included in "costs, including interest, of carrying and
reselling homes" and was $23,491 in 1994, $43,041 in 1993, and $51,308 in 1992.
Total interest paid, including amounts within "costs, including interest, of
carrying and reselling homes," was $165,406 in 1994, $170,628 in 1993, and
$229,332 in 1992.
Income Taxes
The provision for income taxes includes deferred taxes resulting from items
reported in different periods for income tax and financial statement purposes.
The Company computes deferred taxes using the liability method. No provision has
been made for US income taxes on cumulative undistributed earnings of foreign
subsidiaries since it is the present intention of management to reinvest the
undistributed earnings indefinitely in foreign operations. Undistributed
earnings of the foreign subsidiaries at April 30, 1994, were $84,078. The
determination of unrecognized deferred US tax liability for unremitted earnings
is not practicable. However, it is estimated that foreign withholding taxes of
$5,462 may be payable if such earnings were remitted.
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock outstanding during the year and common stock equivalents arising
from the assumed exercise of outstanding stock options under the treasury stock
method. The number of shares used in the calculations were approximately
17,741,000 for 1994, 17,357,000 for 1993, and 17,100,000 for 1992.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Instruments", requires disclosure of the fair
value of certain on- and off-balance sheet financial instruments for which it is
practicable to estimate fair value. The fair values presented for certain
financial instruments are estimates, which in many cases may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments with comparable terms and credit
quality. Fair value estimates are based on existing on- and off-balance sheet
financial instruments, without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. Financial instruments that
are subject to fair value disclosure requirements are carried in the financial
statements at amounts that approximate fair value, unless otherwise noted in the
Notes to Consolidated Financial Statements.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements for comparative purposes.
NEW ACCOUNTING PRONOUNCEMENT
In November 1992, the Financial Accounting Standards Board (FASB) issued
SFAS No. 112, effective in fiscal 1995, "Employers' Accounting for
Postemployment Benefits." Application of this statement will require the Company
to change from the cash basis to the accrual basis of recording the costs
associated with benefits provided to former or inactive employees after
employment but before retirement. The effect of this statement has been
estimated and will not significantly affect the consolidated financial
statements of the Company.
MORTGAGES HELD FOR RESALE
Mortgages held for resale represent mortgage loans originated by the Company
and held pending sale to permanent investors. Such mortgages are recorded at the
lower of cost or market value.
The Company is party to a variety of forward delivery contracts, financial
futures programs and options in order to minimize the risk of price fluctuations
with respect to both mortgage loans held for resale and anticipated mortgage
production arising from loan commitments issued. At April 30, 1994, the Company
had mandatory commitments to sell loans amounting to $997,300 and optional
commitments to sell loans amounting to $141,000 and commitments to fund loans
amounting to $561,000. These contractual commitments are taken into account
together with the stated interest on mortgages held for resale in recording
mortgages at the lower of cost or market value. The fair value of the mortgages
and related contractual commitments, estimated using quoted market prices of
similar instruments, approximates the carrying amount of mortgages held for
resale at April 30, 1994 and 1993.
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 $1,139,199 and $611,234 at April 30,
1994 and 1993, respectively. Additionally, the Company sells mortgage loans as
part of various mortgage-backed security programs sponsored by FNMA, FHLMC, and
GNMA. Certain of these sales are subject to recourse or indemnification
provisions in the event of default by the borrower. As of April 30, 1994 and
1993,
18
mortgage loans sold with recourse amounted to $14,400 and $23,800,
respectively. The Company believes adequate reserves are maintained to cover all
potential losses.
PROPERTY AND EQUIPMENT
Property and equipment at April 30 consisted of the following:
1994 1993
Land $ 10,748 $ 10,194
Buildings and leasehold improvements 55,421 49,442
Equipment 108,848 102,022
Accumulated depreciation
and amortization (78,371) (77,742)
96,646 83,916
Capitalized software costs, net 11,512 14,970
$ 108,158 $ 98,886
OTHER ASSETS
Other assets at April 30 consisted of the following:
1994 1993
Unamortized mortgage servicing fees $ 88,337 $ 64,187
Residential properties held for resale 13,488 21,679
Intangible assets recognized
from acquisitions 8,359 11,593
Mortgage-related notes receivable 5,039 6,387
Other 32,837 27,859
$ 148,060 $ 131,705
The unamortized mortgage servicing fees represent the value of purchased
servicing rights and excess servicing fees which are deferred. Such servicing
rights and fees are charged to income over the estimated effective life of the
related mortgages, estimated to average 6 years. The fair value of excess
servicing fees, estimated using discounted cash flows, approximates the carrying
amount which was $74,200 and $58,500 at April 30, 1994 and 1993, respectively.
Mortgage loans serviced were $16,644,730 and $11,047,284 at April 30, 1994 and
1993, respectively. Intangible assets recognized from acquisitions of relocation
services companies are being amortized by the straight-line method over periods
ranging from 5 to 10 years. Residential properties held for resale are located
primarily in the US and are carried at the lower of cost or resale value.
Mortgage-related notes receivable are loans secured by real estate.
ASSETS UNDER MANAGEMENT PROGRAMS
Net Investment in Leases and Leased Vehicles
The net investment in leases and leased vehicles at April 30 consisted of
the following:
1994 1993
Vehicles under open-end
operating leases $2,156,768 $2,033,222
Vehicles under closed-end
operating leases 254,614 306,926
Direct financing leases 354,485 375,621
Accrued interest on leases 1,116 1,187
$2,766,983 $2,716,956
The Company leases vehicles for initial periods 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. Lessee repayments of investments
in leases and leased vehicles for 1994 and 1993 were $1,358,156 and
$1,173,994, respectively; and the ratios of such repayments to the average net
investment in leases and leased vehicles were 49% in 1994 and 46% in 1993.
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
vehicles under this type of lease agreement have consistently been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost of vehicles under this type of operating lease at April 30, 1994
and 1993, was $3,538,000 and $3,184,000, respectively.
Under the other type of operating lease, closed-end operating leases, resale
of the vehicles on termination of the lease is for the account of the Company.
The lessee generally pays for or provides maintenance, vehicle licenses and
servicing. The original cost of vehicles under these agreements at April 30,
1994 and 1993, was $367,000 and $484,000, respectively. The Company believes
adequate reserves are maintained in the event of loss on vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee. Maintenance
and repairs of these vehicles are the responsibility of the lessee.
Leasing revenues are included in revenues from vehicle management services.
Following is a summary of leasing revenues for years ended April 30:
1994 1993 1992
Operating leases $ 939,297 $ 855,510 $ 772,292
Direct financing leases,
primarily interest 28,852 39,066 55,404
$ 968,149 $ 894,576 $ 827,696
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 financial spread under such agreements which
covers or exceeds its cost of servicing. The agreements are made in various
ways, some of which entail some risks of accounting loss to the Company, and all
of which has been included in its consideration of related reserves.
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 $12,836 and $42,120 at April 30,
1994 and 1993, respectively; or guarantees to a maximum extent of $2,749 and
$3,475 at April 30, 1994 and 1993, respectively. All such credit risk has been
included in the Company's consideration of related reserves. The outstanding
balances under such agreements aggregated $189,480 and $392,642 at April 30,
1994 and 1993, respectively.
Other managed vehicles with balances aggregating $206,740 and $181,296 at
April 30, 1994 and 1993, respectively, are included in special-purpose entities
whose ownership is deemed unrelated to the Company and whose credit and residual
value risk characteristics are ultimately not the Company's responsibility.
19
Equity Advances on Homes
Equity advances on homes represent advances paid to transferring employees
of clients for their equity based on an appraised value of their homes.
The Company manages the resale of homes for unrelated investors under its
real estate management program in the UK. The Company receives a financial
spread under this agreement which covers or exceeds its cost of servicing. The
outstanding balance under such agreements aggregated $1,848 and $10,237 at April
30, 1994 and 1993, respectively. The Company retains credit risk to the extent
of excess assets sold totaling $1,419 and $3,041 in 1994 and 1993, respectively,
which has been included in the Company's consideration of related reserves.
Other Assets Under Management Programs
Other assets under management programs represent mortgage-related loans
receivable originated by the Company on behalf of corporate clients and secured
by real estate. Based on contracts with corporate clients, the Company is
generally protected against loss after taking into account all related costs.
OTHER DEBT
Other debt at April 30 consisted of the following:
1994 1993
Commercial paper $ 619,822 $ 411,128
Medium-term note 100,000 100,000
$ 719,822 $ 511,128
As more fully described in the Note for Liabilities Under Management
Programs, commercial paper is primarily supported by committed one-year and
three-year revolving credit agreements. The weighted average interest rate on
commercial paper, all of which matures within ninety days, was 4.0% and 3.3% at
April 30, 1994 and 1993, respectively. The medium-term note represents an
unsecured obligation having a fixed interest rate of 6.5% with interest payable
semi-annually and a term of 7 years payable in full in fiscal 2000. At April 30,
1994 and 1993, respectively, the fair value of the medium-term note, estimated
from quotes from brokers, was $95,930 and $101,180, respectively.
INCOME TAXES
Provisions (credits) for income taxes for the years ended April 30, were
comprised as follows:
1994 1993 1992
Current income taxes:
Federal $ 24,316 $ 34,300 $ 24,298
State and local 11,905 9,643 6,233
Foreign 6,663 9,612 11,387
42,884 53,555 41,918
Deferred income taxes:
Federal 7,686 (8,000) (1,280)
State and local (3,000) (2,873) (653)
Foreign (2,332) (4,861) (6,847)
2,354 (15,734) (8,780)
$ 45,238 $ 37,821 $ 33,138
Deferred income taxes are recorded based upon differences between the
financial statements and the tax bases of assets and liabilities and available
tax credit carryforwards. There was no valuation allowance relating to deferred
tax assets.
Deferred tax assets (liabilities) as of April 30 were comprised as follows:
1994 1993
Alternative minimum tax credit
carryforwards $ 8,310 $ 43,268
Depreciation (137,602) (167,217)
Unamortized mortgage servicing fees (3,033) (6,013)
Accrued liabilities and deferred income 38,725 38,716
$ (93,600) $ (91,246)
The portions of the 1994 income tax liability and provision classified as
current and deferred are subject to final determination based on the actual 1994
income tax returns. The liability and provision amounts for 1993 have been
reclassified to reflect the final determination made in filing the 1993 income
tax returns.
The Company paid income taxes of $35,739 in 1994, $50,092 in 1993, and
$42,011 in 1992.
The US federal statutory tax rate for the Company was 35% in 1994, and 34%
in 1993 and 1992. The effective tax rates on income were 41.2% in 1994, 40.1% in
1993 and 39.9% in 1992. A summary of the reasons for differences between the
statutory rate and the Company's effective rate follows:
1994 1993 1992
Federal income tax
statutory rate 35.0% 34.0% 34.0%
Increase (decrease)
resulting from:
State income taxes,
net of federal
tax effect 5.3 4.7 4.4
Amortization of goodwill 0.7 0.8 0.8
Rate increase -
deferred taxes 3.0 - -
Adjustment of tax
accruals due to
completed tax
examinations (3.0) - -
Foreign tax rates higher
than US federal income
tax statutory rate - 0.4 0.8
Other 0.2 0.2 (0.1)
Effective tax rate 41.2% 40.1% 39.9%
The Company's US federal income tax returns have been examined by the
Internal Revenue Service through April 30, 1991.
LIABILITIES UNDER MANAGEMENT PROGRAMS
Borrowings to fund assets under management programs are classified as
"liabilities under management programs" and, at April 30, consisted of the
following:
1994 1993
Commercial paper $1,513,897 $1,479,671
Medium-term notes 1,143,235 1,031,085
Eurobond - 76,000
Limited recourse debt 9,819 54,693
Secured notes payable on
vehicles under lease 34,621 35,893
Other unsecured debt 140,333 223,592
$2,841,905 $2,900,934
20
Commercial paper, all of which matures within ninety days, is supported by
committed revolving credit agreements described below and short-term lines of
credit. The weighted average interest rates on commercial paper were 4.0% and
3.3% at April 30, 1994 and 1993, respectively.
Medium-term notes represent unsecured loans which mature as follows:
$1,043,235 in 1995 and $100,000 in 1997. The weighted average interest rates on
medium-term notes were 4.1% and 4.0% at April 30, 1994 and 1993, respectively.
At April 30, 1994 and 1993, respectively the fair value of medium-term notes,
estimated by obtaining quotes from brokers, was $1,145,800 and $1,041,047.
Limited recourse debt and secured notes payable on vehicles under lease
primarily consist of secured loans arranged for certain clients for their
convenience. The lenders hold a security interest in the lease payments and the
clients' leased vehicles. The debt and notes payable mature concurrently with
the related lease payments. The aggregate lease payments due from the lessees
exceed the loan repayment requirements. The weighted average interest rates on
secured debt were 4.2% and 3.7% at April 30, 1994 and 1993, respectively.
The Company has unsecured committed credit agreements with various banks
totaling $2,400,000. These agreements have both fixed and evergreen maturities
ranging from June 15, 1994 to April 28, 1997. The evergreen revolving credit
agreements require a notice of termination of one to three years. Interest rates
under all revolvers are either at fixed rates or vary with prime or the London
Interbank Offered Rate. Under these agreements, the Company is obligated to pay
annual commitment fees which were $3,975 and $3,954 in 1994 and 1993,
respectively. The Company has other unused lines of credit with various banks of
$223,000 and $121,000 at April 30, 1994 and 1993, respectively.
Other unsecured debt, all of which matures in 1995, includes other
borrowings under short-term lines of credit and other bank facilities. The
weighted average interest rates on unsecured debt were 5.2% and 5.3% at April
30, 1994 and 1993, respectively.
The Company employs interest rate swap agreements to match effectively the
fixed or floating rate nature of liabilities to the assets funded. The notional
amount of outstanding swap agreements is not indicative of the degree of risk of
accounting loss. At April 30, 1994 and 1993, the notional amount of swap
agreements with commercial and investment banks which effectively converts
outstanding short-term, floating rate debt to medium-term, fixed rate debt was
$708,368 and $938,624, respectively. The notional amount of swap agreements with
commercial and investment banks which effectively converts outstanding medium-
term fixed rate debt to short-term floating rate debt was $100,000 and $385,000,
at April 30, 1994 and 1993, respectively. The notional amount of swap agreements
with commercial and investment banks which effectively converts floating rate
debt to floating rate debt based on a different index was $1,040,000 and
$713,000 at April 30, 1994 and 1993, respectively. Additionally, the Company has
entered into interest rate swap agreements with unrelated investors to whom it
has transferred certain managed leases and leased vehicles to effectively
convert fixed rate leases into floating rate leases. The notional amount of such
swaps is $64,131 and $108,238 at April 30, 1994 and 1993, respectively, against
which the Company has in place interest rate swap agreements with commercial and
investment banks as discussed above. The fair value of interest rate swaps
(used for hedging purposes) is the estimated amount the Company would receive or
pay to terminate the swap agreements at April 30,1994 and 1993, respectively,
taking into account current interest rates and the current creditworthiness of
the swap counterparties. The estimated fair values of the Company's interest
rate swaps at April 30, 1994 and 1993, respectively, in a gain position
aggregated $5,929 and $15,693, respectively, and in a loss position aggregated
$6,064 and $29,854, respectively. The Company is exposed to credit loss in the
event of nonperformance by the other parties to the interest rate swap
agreements. However, the Company does not anticipate nonperformance by the
counterparties. The Company manages such risk by periodically evaluating the
financial condition of counterparties and spreading its positions among multiple
counterparties.
The Company has entered into foreign exchange contracts as hedges against
currency fluctuation on certain intercompany loans. Such contracts effectively
offset the currency risk applicable to approximately $85,852 and $231,944 of
obligations at April 30, 1994 and 1993, respectively. Market value gains and
losses are recognized, and the resulting gains and losses offset foreign
exchange gains or losses on such loans. At April 30, 1994 and 1993,
respectively, the fair value of the Company's foreign exchange contracts,
estimated by obtaining quotes from financial institutions, is a loss position
aggregating $260 and $8,587, respectively.
Although the period of service for a vehicle is at the lessee's option, and
the period a home is held for resale varies, management estimates, by using
historical information, the rate at which vehicles will be disposed and the rate
at which homes will be resold. These projections of estimated liquidations of
assets under management programs and the related estimated repayment of
liabilities under management programs as of April 30, 1994, 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
1995 $ 1,705,609 $ 1,613,423
1996 916,369 743,275
1997 414,997 323,567
1998 132,702 107,523
1999 43,976 34,501
2000-2004 29,361 19,616
$ 3,243,014 $ 2,841,905
STOCK OPTION, INVESTMENT AND INCENTIVE PLANS
The Company's employee stock option plans allow for options to be granted to
key employees for the purchase of common stock at prices not less than fair
market value on the date of grant. Either incentive stock options or non-
statutory stock options may be granted under the plans. The Company's Directors'
stock option plan allows for options to be granted to outside Directors of the
Company for the purchase of common stock at prices not less than fair market
value on the date of grant. Options become exercisable after one year from date
of grant on a vesting schedule provided by the plan and expire either eight or
ten years after the date of the grant. Option transactions during 1994, 1993,
and 1992 were as follows:
21
Number of Option Price
Shares per Share
Outstanding April 30, 1991 1,826,925 $18.13 to $39.00
Granted 362,460 $26.25 to $35.88
Exercised (77,148) $18.13 to $34.25
Canceled (159,399) $23.38 to $39.00
Outstanding April 30, 1992 1,952,838 $18.13 to $37.75
Granted 440,500 $33.63 to $39.63
Exercised (372,203) $19.88 to $37.75
Canceled (49,565) $23.38 to $37.75
Outstanding April 30, 1993 1,971,570 $18.13 to $39.63
Granted 199,450 $39.00 to $42.00
Exercised (305,062) $18.13 to $37.75
Canceled (97,785) $27.00 to $39.63
Outstanding April 30, 1994 1,768,173 $19.88 to $42.00
Exercisable April 30, 1994 1,575,723 $19.88 to $41.88
At April 30, 1994, there were 1,218,241 shares of common stock reserved,
including 889,827 shares for issuance under the employee stock option plans,
265,914 shares for issuance under the employee investment plan and 62,500 shares
for issuance under the Directors' stock option 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. For 1991 and prior years, the
Company matched, in common stock of the Company, employees' contributions to 6%
of their base salaries. Beginning in 1992 and thereafter, the Company matches,
in common stock of the Company, employee contributions to 3%, with an additional
3% match available at the end of the year based on the Company's operating
results. In 1994 and 1993, the Company made an additional match of 50% of
employee contributions greater than 3% up to 6%. The additional match, initially
invested in a money market fund, can be redirected by the employee into any of
the investment elections noted above. No additional match was made in 1992. The
Company's expenses for contributions included in selling, general and
administrative expenses were $4,020, $3,662, and $2,450 for the years ended
April 30, 1994 and the two preceding years, respectively.
The Company has incentive compensation plans for certain key employees. The
plans provide for the payment of cash bonuses or, in some instances, stock
incentives, based upon the achievement of predetermined performance objectives.
The related expense included in selling, general and administrative expenses for
1994, 1993 and 1992 was $6,086, $5,659 and $1,861, respectively.
STOCK RIGHTS
On March 17, 1986, the Company declared a dividend of one preferred share
purchase right for each share of common stock outstanding on April 11, 1986. The
Company adopted an amendment to its rights agreement January 16, 1989. Each
right entitles the holder to purchase 1/100th of a share of series A Junior
Participating Preferred Stock at an exercise price of $120. The rights become
exercisable in the event any party acquires or announces an offer to acquire 20%
or more of the Company's common stock. The rights expire April 10, 1996, and are
redeemable at $.05 per right prior to the time any party owns 20% or more of
the Company's outstanding common stock. In the event the Company enters into a
consolidation or merger after the time rights are exercisable, the rights
provide that the holder will receive, upon exercise of the right, shares of
common stock of the surviving company having a market value of twice the
exercise price of the right. Until the earlier of the time the rights become
exercisable, are redeemed or expire, the Company will issue one right with each
new share of common stock issued. The Company has designated 200,000 shares of
the authorized preferred shares as series A Junior Participating Preferred Stock
for issuance upon exercise of the rights.
PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Pension 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.
Pension cost for both plans for 1994, 1993, and 1992 included the following
components:
1994 1993 1992
Service cost--benefits
earned $ 4,514 $ 3,760 $ 3,477
Interest cost on projected
benefit obligation 5,259 4,559 4,126
Actual return on assets (2,049) (3,959) (4,250)
Net amortization and
deferral (2,620) (377) 207
Net pension cost $ 5,104 $ 3,983 $ 3,560
The following table provides a reconciliation of the actuarial present value
of projected benefit obligation for the plans in 1994 and 1993 and the Company's
recorded pension liability recognized in the Consolidated Balance Sheets at
April 30, 1994 and 1993:
1994 1993
Accumulated benefit obligation:
Vested $ 40,681 $ 36,035
Unvested 7,072 6,073
$ 47,753 $ 42,108
Projected benefit obligation $ 71,571 $ 63,199
Funded assets, at fair value (53,177) (48,212)
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions (11,528) (7,082)
Unrecognized prior service cost 129 (882)
Unrecognized net (obligation) asset (29) 19
Recorded liability $ 6,966 $ 7,042
Plan assets are primarily invested in marketable securities.
Supplemental Retirement Plans
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.
22
The cost of these plans in 1994, 1993 and 1992 included the following
components:
1994 1993 1992
Service cost--benefits
earned $ 90 $ 44 $ 7
Interest cost on projected
benefit obligation 922 824 781
Net amortization and deferral 570 445 409
$ 1,582 $ 1,313 $ 1,197
The following table provides a reconciliation of the actuarial present value
of projected benefit obligation for the plans and the Company's recorded
liability as reported in the Consolidated Balance Sheets at April 30, 1994 and
1993:
1994 1993
Accumulated benefit obligation
Vested $ 8,202 $ 7,407
Unvested 1,445 1,077
$ 9,647 $ 8,484
Projected benefit obligation $ 13,466 $ 10,656
Unrecognized net obligation (1,856) (2,088)
Unrecognized prior service cost (2,941) (1,034)
Minimum liability adjustment 2,562 2,464
Unrecognized net loss (1,584) (1,514)
Recorded liability $ 9,647 $ 8,484
In accordance with SFAS No. 87, $2,562 and $2,464 of additional minimum
liability is included in the recorded liability in 1994 and 1993, respectively,
to provide a total liability that is at least equal to the unfunded accumulated
benefit obligation. The Company recorded an intangible asset of the same amount
which is included in the Consolidated Balance Sheets.
Assumptions
Certain assumptions were used in determining the cost and related
obligations under the US pension and unfunded supplemental retirement plans as
follows:
1994 1993 1992
Percent
Pension Cost:
Discount rate 8.25 8.75 9.00
Rate of increase in
compensation 5.00 5.00 5.50
Long-term rate of
return on assets 10.00 10.00 10.00
Pension Obligation:
Discount rate 8.25 8.25 8.75
Rate of increase in
compensation 5.00 5.00 5.00
Postretirement Benefits Other Than Pensions
Effective May 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
accrual accounting for postretirement benefits other than pensions. The Company
provides healthcare and life insurance benefits for certain retired employees up
to the age of 65. Prior to adoption of SFAS No. 106, the Company recognized the
costs of these benefits by expensing the benefits as paid. The aggregate costs
of such benefits did not exceed $500 in 1993 or 1992.
The Company has elected to recognize the cost of its transition obligation
(the accumulated postretirement benefit obligation as of May 1, 1993) by
amortizing it on a straight-line basis over 20 years. The Company's SFAS No. 106
obligation and cost are based on a discount rate of 8.25%. The assumed rate of
increase in healthcare costs (healthcare cost trend rate) was 12% in 1994,
decreasing to 10% in 1995 and gradually decreasing to 4.75% by 2004. Increasing
the healthcare cost trend rates of future years by one percentage point would
increase the accumulated postretirement benefit obligation by $560 and would
increase annual aggregate service and interest costs by $161.
Net periodic postretirement benefits costs for 1994 included the following
components:
1994
Service cost - benefits earned during period $ 788
Interest cost on accumulated postretirement
benefit obligation 469
Amortization of the unrecognized transition obligation 294
Net periodic postretirement benefit cost $ 1,551
Status of Plan
Accumulated postretirement benefit obligation:
Active employees fully eligible for benefits $ 5,361
Current retirees 1,599
6,960
Unrecognized transition obligation (5,583)
Recorded liability $ 1,377
LEASE COMMITMENTS
Total rental expenses relating to office facilities and equipment were
$27,264, $25,368, and $25,994 for 1994, 1993 and 1992, respectively. Minimum
rental commitments under non-cancelable leases with remaining terms in excess of
one year are as follows:
1995 $ 15,037 1998 $ 7,970
1996 $ 13,004 1999 $ 4,703
1997 $ 9,303 2000-2004 $ 13,942
2005 & thereafter $ 1,863
These leases provide for additional rentals based on the lessors' increased
property taxes, maintenance and operating expenses.
ACQUISITION
In 1994 the Company purchased all of the outstanding stock of a Canadian
relocation company. The acquisition was accounted for as a purchase and is not
material to the consolidated financial statements.
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 three airports, as
well as guarantor on a note associated with the buyer of one office closed as
part of its disposition of its facilities management services segment. The
Company believes its allowance for disposition loss is sufficient to cover all
potential liability.
23
BUSINESS SEGMENTS
The Company operations are classified into three business segments: vehicle
management services, relocation and real estate services and mortgage banking
services. In the selected information by business segment and geographic area
which follows, previously reported operating income has been replaced by income
before income taxes to reflect the retroactive reclassification of "Other
expense, net" to "Selling, general and administrative" expenses. Further,
Canadian information has been combined with that of the United States to reflect
the Company's North American management structure. Additionally, minor
adjustments have been made to the methodology applied in allocating certain
income and expense items. None of these changes had a significant effect on the
information presented.
Business Segments
(In thousands)
Years Ended April 30, 1994 1993 1992
Revenues:
Vehicle Management Services $ 1,162,483 $ 1,069,484 $ 992,514
Relocation and Real Estate Services 816,261 829,336 849,871
Mortgage Banking Services 155,935 122,111 89,099
Consolidated $ 2,134,679 $ 2,020,931 $ 1,931,484
Income Before Income Taxes:
Vehicle Management Services $ 46,230 $ 42,272 $ 40,735
Relocation and Real Estate Services 21,500 26,615 26,357
Mortgage Banking Services 42,066 25,351 16,025
Consolidated $ 109,796 $ 94,238 $ 83,117
Identifiable Assets:
Vehicle Management Services $ 3,120,154 $ 3,053,652 $ 2,803,952
Relocation and Real Estate Services 807,119 970,810 1,011,723
Mortgage Banking Services 839,510 588,566 549,356
Consolidated $ 4,766,783 $ 4,613,028 $ 4,365,031
Capital Expenditures:
Vehicle Management Services $ 10,250 $ 11,205 $ 18,534
Relocation and Real Estate Services 8,839 4,343 8,458
Mortgage Banking Services 17,023 8,085 2,606
Consolidated $ 36,112 $ 23,633 $ 29,598
Depreciation and Amortization:
Vehicle Management Services $ 825,609 $ 722,913 $ 613,443
Relocation and Real Estate Services 8,921 8,349 5,139
Mortgage Banking Services 9,148 6,800 1,716
Consolidated $ 843,678 $ 738,062 $ 620,298
Geographic Areas
(In thousands)
Years Ended April 30, 1994 1993 1992
Revenues:
North America $ 1,954,106 $ 1,802,201 $ 1,711,132
Europe 180,573 218,730 220,352
Consolidated $ 2,134,679 $ 2,020,931 $ 1,931,484
Income Before Income Taxes:
North America $ 106,895 $ 89,664 $ 76,586
Europe 2,901 4,574 6,531
Consolidated $ 109,796 $ 94,238 $ 83,117
Identifiable Assets:
North America $ 4,211,169 $ 4,042,912 $ 3,739,525
Europe 555,614 570,116 625,506
Consolidated $ 4,766,783 $ 4,613,028 $ 4,365,031
24
QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands except per share data) Year ended April 30, 1994
Quarter First Second Third Fourth Year
Revenues $ 538,570 $ 545,374 $ 516,809 $ 533,926 $ 2,134,679
Income before income taxes $ 24,944 $ 27,929 $ 26,328 $ 30,595 $ 109,796
Net income $ 14,789 $ 16,203 $ 15,411 $ 18,155 $ 64,558
Net income per share $ .84 $ .90 $ .87 $ 1.03 $ 3.64
Cash dividends per share $ .30 $ .30 $ .30 $ .30 $ 1.20
Price range of stock:
High $ 42 1/2 $ 46 3/4 $ 46 3/4 $ 43 1/4 $ 46 3/4
Low $ 39 1/2 $ 41 3/8 $ 40 5/8 $ 33 1/4 $ 33 1/4
Year ended April 30, 1993
Quarter First Second Third Fourth Year
Revenues $ 513,266 $ 504,057 $ 488,518 $ 515,090 $ 2,020,931
Income before income taxes $ 21,392 $ 21,194 $ 23,910 $ 27,742 $ 94,238
Net income $ 12,639 $ 12,757 $ 14,398 $ 16,623 $ 56,417
Net income per share $ .74 $ .73 $ .83 $ .95 $ 3.25
Cash dividends per share $ .30 $ .30 $ .30 $ .30 $ 1.20
Price range of stock:
High $ 36 7/8 $ 38 7/8 $ 41 1/2 $ 43 $ 43
Low $ 32 3/4 $ 34 5/8 $ 37 1/4 $ 39 $ 32 3/4
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Directors is contained on pages 2 through
6 of the Registrant's Proxy Statement for its 1994 Annual Meeting of
Stockholders, which information is hereby incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
An Executive Officer
Office Held Name--Age Since Fiscal Year
Chairman of the Board, President
and Chief Executive Officer Robert D. Kunisch--53 1982
Senior Vice President William F. Adler--50 1986
Senior Vice President and Secretary Eugene A. Arbaugh--56 1987
Senior Vice President Stephen A. Fragapane--44 1988
Senior Vice President and Chief
Financial Officer Roy A. Meierhenry--55 1987
Senior Vice President H. Robert Nagel--50 1992
Vice President Terry E. Kridler--47 1986
Vice President Edwin F. Miller--51 1990
Vice President and Treasurer Robert W. Mitchell--47 1992
Vice President Donna C. Startzel--46 1988
Vice President Samuel H. Wright--48 1983
Controller Nan A. Grant--42 1991
Officers are elected by the Board of Directors to serve at the pleasure of the
Board. There is no family relationship between any of such persons. Each of the
persons named above has been employed by the Company or one of its subsidiaries
for more than the past five years except Mr. Mitchell, who was Vice President,
Finance for Household International Corporation and Vice President and
Treasurer for Household Finance Corporation.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is contained on pages 9
through 17 of the Registrant's Proxy Statement for its 1994 Annual Meeting of
Stockholders, which information is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is contained on pages 7, 8 and 9 of the Registrant's Proxy Statement
for its 1994 Annual Meeting of Stockholders, which information is hereby
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
NUMBER
(a) 1. Index to Financial Statements
Report and Consent of Independent Auditors 12
Consolidated Financial Statements of PHH Corporation
and Subsidiaries and related notes:
Consolidated Statements of Income for the years ended April 30, 1994, 1993 and 1992 13
Consolidated Balance Sheets at April 30, 1994 and 1993 14
Consolidated Statements of Cash Flows for the years ended April 30, 1994, 1993 and
1992 15
Consolidated Statements of Stockholders' Equity for the years ended April 30, 1994,
1993 and 1992 16
Notes to Consolidated Financial Statements 17
2. Index to Financial Statement Schedules
Consolidated Schedules of PHH Corporation and Subsidiaries for the years ended April 30,
1994, 1993 and 1992:
Schedule VIII--Valuation and Qualifying Accounts 30
Schedule IX--Short-Term Borrowings 31
All schedules not listed have been omitted because of the absence of the conditions under which they are
required or the required information is included elsewhere in the financial statements or notes thereto.
3. Exhibits
The exhibits identified by an asterisk (*) are on file with the Commission and such exhibits are
incorporated by reference from the respective previous filings. The exhibits identified by a double
asterisk (**) are being filed with this report.
Exhibit No.
3-1 Charter of PHH Corporation, as amended(*).
3-2 By-Laws of PHH Corporation, as amended October 1990(*).
4-1 Master Credit Agreements of various dates among the Company and various commercial banks filed as
Exhibit 4-4 to Form 10-K for fiscal year ended April 30, 1990(*).
4-2 Credit Agreements of various dates among the Company and various commercial banks filed as Exhibit 4-5
to Form 10-K for fiscal year ended April 30, 1990(*).
4-3 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(*).
4-4 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 (*).
4-5 Policy on confidential proxy voting and Independent Tabulation and Inspection of Elections adopted by
resolution of the Board of Directors on June 17, 1991 filed as an exhibit to Form 10-K for fiscal year
ended April 30, 1991 (*).
10-1 Amended and Restated Stock Compensation Plan of 1990 filed as Exhibit 4(a) to Registration No.
33-53282 (*)
10-2 Outside Directors Stock Option Plan filed as Exhibit 4(b) to Registration No. 33-38309 (*).
10-3 Amended and Restated Directors Deferred Compensation Plan for Corporate Directors filed as Exhibit
10-3 to Form 10-K for fiscal year ended April 30, 1993 (*).
10-4 Directors Deferred Stock Retirement Plan (**).
10-5 Executive Deferred Compensation Plan and Form of Executive Deferred Compensation Plan Trust Agreement
(**).
10-6 Long-Term Incentive Plan (FY93-94-95) filed as Exhibit 10-7 to Form 10-K for fiscal year ended April
30, 1992 (*).
10-7 Long-Term Incentive Plan (FY 95-96-97) (**).
27
10-8 Corporate Incentive Plan (FY 95) and CEO & President Incentive Plan (FY95) (**).
10-9 Amended and Restated Supplemental Executive Retirement Plan, filed as Exhibit 10-10 to Form 10-K for
fiscal year ended April 30, 1989, as amended on June 18, 1990, filed as Exhibit 10-12 to Form 10-K for
fiscal year ended April 30, 1990, and amended on November 11, 1991 filed as Exhibit 10-8 to Form 10-K
for fiscal year ended April 30, 1993 (*).
10-10 Third Amendment to Supplemental Executive Retirement Plan (**).
10-11 Form of Amended and Restated Supplemental Executive Retirement Agreement (**).
10-12 Amended and Restated Excess Benefit Plan (**).
10-13 Form of Amended and Restated Deferred Compensation Trust Agreement for Supplemental Executive
Retirement Plan and Excess Benefit Plan (**).
10-14 Amended and Restated Senior Executive Severance Plan filed as Exhibit 10-14 to Form 10-K for fiscal
year ended April 30, 1990 (*).
10-15 Form of Distribution Agreement between the Company and The First Boston Corporation, Goldman, Sachs &
Co., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and J.P. Morgan
Securities Inc. dated July 8, 1992 filed as Exhibit 1 to Registration Statement 33-48125 (*).
10-16 Form of Distribution Agreement between the Company and The First Boston Corporation, Goldman, Sachs &
Co., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and J.P. Morgan
Securities Inc. dated March 26, 1993 filed as Exhibit 1 to Registration Statement 33-59376 (*).
10-17 Form of Distribution Agreement between the Company, Goldman, Sachs & Co., Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith, Incorporated and J.P. Morgan Securities Inc. dated July 5, 1994 filed
as Exhibit 1 to Registration Statement 33-52669 (*).
10-18 Form of Rights Agreement between the Company and Maryland National Bank dated as of March 17, 1986
filed as an exhibit to the Form 8-K for the month of March 1986 and amended January 16, 1989 filed as
an exhibit to Form 8-K for the month of January 1989 and amended April 6, 1992, filed as Exhibit 10-15
to Form 10-K for the fiscal year ended April 30, 1992 (*).
11 Schedule containing information used in the computation of net income per share(**).
12 Schedule containing information used in the computation of the ratio of earnings to fixed charges(**).
21 Subsidiaries of the registrant(**).
24 Power of Attorney(**).
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 were no filings on Form 8-K during the
fourth quarter of fiscal 1994.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By ROBERT D. KUNISCH
Robert D. Kunisch
Chairman of the Board,
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Principal Executive Officer:
ROBERT D. KUNISCH July 29, 1994
Robert D. Kunisch
Chairman of the Board,
Chief Executive Officer
and President
Principal Financial Officer:
ROY A. MEIERHENRY July 29, 1994
Roy A. Meierhenry
Senior Vice President and
Chief Financial Officer
Principal Accounting Officer:
NAN A. GRANT July 29, 1994
Nan A. Grant
Controller
Majority of the Board of Directors:
Robert D. Kunisch, James S. Beard,
Andrew F. Brimmer, George L. Bunting, Jr.,
Barbara S. Feigin, Paul X. Kelley, Thomas V. King,
L. Patton Kline, Francis P. Lucier, Kent C. Nelson,
Alexander B. Trowbridge
ROBERT D. KUNISCH July 29, 1994
Robert D. Kunisch
As Attorney-in-fact
29
PHH CORPORATION AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED APRIL 30, 1994, 1993 AND 1992
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
CHARGED
BALANCE AT (CREDITED) BALANCE
BEGINNING OF TO OPERATING AT END
DESCRIPTION YEAR EXPENSES OTHERS (a) DEDUCTIONS (b) OF YEAR
VALUATION ACCOUNTS DEDUCTED IN THE
BALANCE SHEET FROM ASSETS TO
WHICH THEY APPLY
Accounts receivable $ 8,453,000 $ 3,299,000 $ 22,000 $ 5,249,000 $ 6,525,000
Net investment in leases and
leased vehicles 8,282,000 (1,669,000) -- 751,000 5,862,000
Carrying costs on homes under
management 1,301,000 349,000 -- -- 1,650,000
Mortgages held for resale and
mortgage-related notes
receivable 11,823,000 1,079,000 -- 2,225,000 10,677,000
Real estate management programs 2,001,000 (269,000) -- -- 1,732,000
YEAR ENDED APRIL 30, 1994 $ 31,860,000 $ 2,789,000 $ 22,000 $ 8,225,000 $ 26,446,000
Accounts receivable $ 7,343,000 $ 6,156,000 $ -- $ 5,046,000 $ 8,453,000
Net investment in leases and
leased vehicles 6,754,000 4,781,000 -- 3,253,000 8,282,000
Carrying costs on homes under
management 381,000 50,000 870,000 -- 1,301,000
Mortgages held for resale and
mortgage-related notes
receivable 10,680,000 5,424,000 -- 4,281,000 11,823,000
Real estate management programs 2,107,000 -- -- 106,000 2,001,000
YEAR ENDED APRIL 30, 1993 $ 27,265,000 $ 16,411,000 $ 870,000 $ 12,686,000 $ 31,860,000
Accounts receivable $ 5,744,000 $ 8,303,000 $ -- $ 6,704,000 $ 7,343,000
Net investment in leases and
leased vehicles 4,333,000 4,541,000 -- 2,120,000 6,754,000
Carrying costs on homes under
management 381,000 353,000 -- 353,000 381,000
Mortgages held for resale and
mortgage-related notes
receivable 3,644,000 7,764,000 -- 728,000 10,680,000
Real estate management programs 3,229,000 -- -- 1,122,000 2,107,000
YEAR ENDED APRIL 30, 1992 $ 17,331,000 $ 20,961,000 $ -- $ 11,027,000 $ 27,265,000
NOTES:(a) Amounts relate to acquisitions, divestitures and reclassifications of
prior year amounts.
(b) Deductions from reserves represent accounts charged off, less
recoveries, and foreign translation gains and losses.
30
PHH CORPORATION AND SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS
FOR THE YEARS ENDED APRIL 30, 1994, 1993, AND 1992
(THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Weighted Weighted
Category of Average Max. Amount Avg. Amount Average
Aggregate Balance Interest Outstanding Outstanding Int. Rate
Short-term at End of Rate At During During During
Borrowings Period Period End Period Period(a) Period (a)
YEAR ENDED APRIL 30, 1994:
Commercial Paper (b) $ 2,133,719 4.00% $ 3,215,324 $ 2,525,201 3.43%
Other Borrowings $ 127,467 4.86% $ 262,165 $ 168,518 5.20%
YEAR ENDED APRIL 30, 1993:
Commercial Paper (b) $ 1,890,799 3.26% $ 2,826,466 $ 2,233,779 3.85%
Other Borrowings $ 221,869 5.30% $ 284,242 $ 136,682 7.49%
YEAR ENDED APRIL 30, 1992:
Commercial Paper (b) $ 1,924,843 4.75% $ 2,731,293 $ 2,451,018 5.66%
Master Notes $ 0 -- $ 149,895 $ 17,347 6.12%
Other Borrowings $ 124,853 10.51% $ 247,092 $ 89,255 9.45%
(a) The average amount outstanding during the period is the average of the
daily balances. The weighted average interest rate during the period is
determined by dividing interest expense related to short-term borrowings by
the average of the daily balances.
(b) Commercial paper is supported by long-term revolving credit agreements and
short-term lines of credit.
31