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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
COMMISSION FILE NO. 1-7797
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PHH CORPORATION
(Exact name of Registrant as specified in its charter)
MARYLAND 52-0551284
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6 SYLVAN WAY,
PARSIPPANY, NEW JERSEY 07054
(Address of Principal executive offices) (Zip Code)
(973) 428-9700
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [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 common stock issued and outstanding and held
by nonaffiliates of the Registrant as of December 31, 1999: $0
Number of shares of common stock of PHH Corporation outstanding on
December 31, 1999: 1000
PHH Corporation meets the conditions set forth in General Instructions I (1)
(a) and (b) to Form 10-K and is therefore filing this form with the reduced
disclosure format.
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TABLE OF CONTENTS
ITEM PAGE
- ------ ----
PART I
1 Business .............................................................................. 1
2 Properties ............................................................................ 7
3 Legal Proceedings ..................................................................... 7
4 Submission of Matters to a Vote of Security Holders ................................... 8
PART II
5 Market for the Registrant's Common Equity and Related Security Holder Matters ......... 8
6 Selected Financial Data ............................................................... 8
7 Management's Narrative Analysis of the Results of Operations and Liquidity and
Capital Resources ..................................................................... 8
7a Quantitative and Qualitative Disclosures about Market Risk ............................ 14
8 Financial Statements and Supplementary Data ........................................... 15
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................................ 15
PART III
10 Directors and Executive Officers of the Registrant .................................... 15
11 Executive Compensation ................................................................ 15
12 Security Ownership of Certain Beneficial Owners and Management ........................ 15
13 Certain Relationships and Related Transactions ........................................ 15
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................... 16
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PHH CORPORATION
PART I
ITEM 1. BUSINESS
Except as expressly indicated or unless the context otherwise requires,
the "Company", "PHH", "we", "our", or "us" means PHH Corporation, a Maryland
Corporation, and its subsidiaries.
Pursuant to a merger with HFS Incorporated ("HFS") (the "HFS Merger"),
effective April 30, 1997, we became a wholly-owned subsidiary of HFS. On
December 17, 1997, pursuant to a merger between CUC International Inc. ("CUC")
and HFS (the "Cendant Merger"), HFS was merged into CUC with CUC surviving and
changing its name to Cendant Corporation ("Cendant" or the "Parent Company").
As a result of the Cendant Merger, we became a wholly-owned subsidiary of
Cendant.
GENERAL
We are a provider of relocation and mortgage services. In the relocation
segment, our Cendant Mobility Services Corporation subsidiary is the largest
provider of corporate relocation services in the world, offering relocation
clients a variety of services in connection with the transfer of a client's
employees. In the mortgage segment, our Cendant Mortgage Corporation subsidiary
originates, sells and services residential mortgage loans in the United States,
marketing such services to consumers through relationships with corporations,
affinity groups, financial institutions, real estate brokerage firms and
mortgage banks.
Additional information related to our business segments, including
financial data, is included in Note 15 -- Segment Information to our
Consolidated Financial Statements presented in Item 8 of this Annual Report on
Form 10-K and included herein.
FORWARD-LOOKING STATEMENTS
We make statements about our future results in this Annual Report on Form
10-K that may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
our current expectations and the current economic environment. We caution you
that these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed or implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities at our Parent Company;
o our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our
existing businesses and growth in such businesses and our ability to
operate within the limitations imposed by financing arrangements; and
o the effect of changes in the level and volatility of current interest
rates.
We derived the forward-looking statements in this Annual Report on Form
10-K (including the documents incorporated by reference in this Annual Report
on Form 10-K) from the foregoing factors and from other factors and
assumptions, and the failure of such assumptions to be realized as well as
other factors may also cause actual results to differ materially from those
projected. We assume no obligation to publicly correct or update these
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements or if we
later become aware that they are not likely to be achieved.
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PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 6 Sylvan Way, Parsippany,
NJ 07054 (telephone number (973) 428-9700).
RECENT DEVELOPMENTS
On June 30, 1999, we completed the disposition of our fleet segment, which
included PHH Vehicle Management Services Corporation, The Harpur Group, Ltd.
("Harpur"), Wright Express Corporation, ("WEX") and other subsidiaries pursuant
to an agreement between Avis Rent A Car, Inc. ("ARAC") and us. Prior to the
disposition of our fleet businesses, WEX and Harpur (formerly Cendant's fuel
card subsidiaries) were contributed to our fleet businesses by Cendant in April
1999. Pursuant to the agreement, ARAC acquired the net assets of our fleet
businesses through the assumption and subsequent repayment of $1.44 billion of
intercompany debt and the issuance of $360 million of convertible preferred
stock of Avis Fleet Leasing and Management Corporation, a wholly-owned
subsidiary of ARAC. We account for the convertible preferred stock using the
cost method of accounting.
RELOCATION SEGMENT
General. Our Relocation Segment represented approximately 50%, 55% and 70%
of our net revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. Our Cendant Mobility Services Corporation ("Cendant Mobility")
subsidiary is the largest provider of employee relocation services in the
world. Cendant Mobility assists more than 100,000 transferring employees
annually, including over 17,000 employees internationally each year in 106
countries and 2,000 destination locations. At December 31, 1999, we employed
approximately 2,400 people in our relocation business.
Services. The employee relocation business offers a variety of services in
connection with the transfer of our clients' employees. The relocation services
provided to our customers primarily include evaluation, inspection and selling
of transferees' homes or purchasing a transferee's home, issuing equity
advances (generally guaranteed by the corporate client), certain home,
management services, assistance in locating a new home at the transferee's
destination, consulting services and other related services.
Corporate clients pay a fee for the services performed. Another source of
revenue is interest on the equity advances and broker referral fees.
Substantially all costs associated with such services are reimbursed by the
corporate client, including, if necessary, repayment of equity advances and
reimbursement of losses on the sale of homes purchased in most cases (other
than government clients). As a result of the obligations of most corporate
clients to reimburse Cendant Mobility for losses on resale and guarantee
repayment of equity advances, our exposure on such items is limited to the
credit risk of the corporate clients of our relocation businesses and not on
the potential changes in value of residential real estate. We believe such risk
is minimal, due to the credit quality of the corporate clients of our
relocation subsidiaries. In transactions where we assume the risk of loss on
the sale of homes, which comprise approximately 5% of net revenue, we control
all facets of the resale process, thereby, limiting our exposure.
The homesale program service is the core service for many domestic and
international programs. This program provides employees guaranteed offers for
their homes and assists clients in the management of employees' productivity
during their relocation. Cendant Mobility allows clients to outsource their
relocation programs by providing clients with professional support for planning
and administration of all elements of their relocation programs. The majority
of new proposals involve outsourcing due to corporate downsizing, cost
containment, and increased need for expense tracking.
Our relocation accounting services support auditing, reporting, and
disbursement of all relocation-related expense activity.
Our group move management department provides coordination for moves
involving a large number of employees over a short period of time. Services
include planning, communications, analysis and
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assessment of the move. Policy consulting provides customized consultation and
policy review, as well as industry data, comparisons and recommendations.
Cendant Mobility also has developed and/or customized numerous non-traditional
services including outsourcing of all elements of relocation programs, moving
services, and spouse counseling.
Our moving service, with over 63,000 shipments annually, provides support
for all aspects of moving an employee's household goods. We also handle
insurance and claim assistance, invoice auditing, and control the quality of
van line, driver, and overall service.
Our marketing assistance service provides assistance to transferees in the
marketing and sale of their own home. A Cendant Mobility professional assists
in developing a custom marketing plan and monitors its implementation through
the broker. The Cendant Mobility contact also acts as an advocate, with the
local broker, for employees in negotiating offers which helps clients'
employees benefit from the highest possible price for their homes.
Our affinity services provide value-added real estate and relocation
services to organizations with established members and/or customers.
Organizations, such as insurance and airline companies, that have established
members offer our affinity services' to their members at no cost. This service
helps the organizations attract new members and to retain current members.
Affinity services provide home buying and selling assistance, as well as
mortgage assistance and moving services to members of applicable organizations.
Personal assistance is provided to over 53,000 individuals with approximately
22,000 real estate transactions annually.
Our international assignment service provides a full spectrum of services
for international assignees. This group coordinates the services previously
discussed; however, they also assist with immigration support, candidate
assessment, intercultural training, language training, and repatriation
coaching.
Vendor Networks. Cendant Mobility provides relocation services through
various vendor networks that meet the superior service standards and quality
deemed necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 350
principal brokers and 700 associate brokers. Our van line, insurance, appraisal
and closing networks allow us to receive discounts while maintaining control
over the quality of service provided to clients' transferees.
Competitive Conditions. The principal methods of competition within
relocation services are service, quality and price. In the United States, there
are two major national providers of such services. We are the market leader in
the United States and second in the United Kingdom ("UK").
Seasonality. Our principal sources of relocation service revenue are based
upon the timing of transferee moves, which are lower in the first and last
quarter each year, and at the highest levels in the second and third quarters.
MORTGAGE SEGMENT
General. Our Mortgage Segment represented approximately 48%, 44% and 30%
of our net revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. Through our Cendant Mortgage Corporation ("Cendant Mortgage")
subsidiary, we are the ninth largest originator of residential first mortgage
loans in the United States, and, on a retail basis, we are the sixth largest
originator in 1999. We offer services consisting of the origination, sale and
servicing of residential first mortgage loans. A full line of first mortgage
products are marketed to consumers through relationships with corporations,
affinity groups, financial institutions, real estate brokerage firms, including
CENTURY 21 (Registered Trademark) , Coldwell Banker (Registered Trademark) and
ERA (Registered Trademark) franchisees of the Parent Company, and other
mortgage banks. Cendant Mortgage is a centralized mortgage lender conducting
its business in all 50 states. At December 31, 1999, Cendant Mortgage had
approximately 4,200 employees.
Cendant Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae Corp., the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association. Cendant
Mortgage also services mortgage loans. We
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earn revenue from the sale of the mortgage loans to investors, as well as from
fees earned on the servicing of the loans for investors. Mortgage servicing
consists of collecting loan payments, remitting principal and interest payments
to investors, holding escrow funds for payment of mortgage-related expenses
such as taxes and insurance, and otherwise administering our mortgage loan
servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Internet. Mortgage information is offered to consumers through a Web
interface (Log In-Move In) that is owned by Cendant Mortgage. The Web
interface was completed in 1999 and contains educational materials, rate
quotes and a full mortgage application. This content is made available
to the customers of partner organizations. Partners include Century 21,
Coldwell Banker, ERA, Cendant Mobility, Mellon Bank, U.S. Bank, Black
Entertainment Television, the Gay Financial Network and the Move.com
network of Web sites. In addition, we developed and launched our own
online brand, InstaMortgage.com in 1999. Applications from online
customers are processed via our teleservices platform.
o Teleservices. Mortgages are offered to consumers through an 800 number
teleservices operation based in New Jersey under programs for real
estate organizations (Phone In-Move In (Registered Trademark) ), private
label programs for financial institutions and for relocation clients in
conjunction with the operations of Cendant Mobility. The teleservices
operation provides us with retail mortgage volume that contributes to
Cendant Mortgage ranking as the sixth largest retail originator in 1999
according to "Inside Mortgage Finance".
o Point of Sale. Mortgages are offered to consumers through field sales
professionals with all processing, underwriting and other origination
activities based in New Jersey. These field sales professionals
generally are located in real estate offices around the United States
and are equipped with software to obtain product information, quote
interest rates and prepare a mortgage application with the consumer.
o Wholesale/Correspondent. We purchase closed loans from financial
institutions and mortgage banks after underwriting the loans. Financial
institutions include banks, thrifts and credit unions. Such institutions
are able to sell their closed loans to a large number of mortgage
lenders and generally base their decision to sell to Cendant Mortgage on
price, product menu and/or underwriting. We also have
wholesale/correspondent originations with mortgage banks affiliated with
real estate brokerage organizations.
Strategy. Our strategy is to increase market share by expanding all of our
sources of business with emphasis on purchase mortgage volume through our
teleservices (Phone In-Move In (Registered Trademark) ) and Internet (Log
In-Move In (Registered Trademark) ) programs. Phone In-Move In (Registered
Trademark) was developed for real estate firms in 1997 and has been
established in over 5,600 real estate offices at December 31, 1999. We are well
positioned to expand our financial institutions business channel by working
with financial institutions which desire to outsource their mortgage
originations operations to Cendant Mortgage. We also expect to expand our
relocation mortgage volume through increased linkage with Cendant Mobility.
Each of these market share growth opportunities is driven by our low cost
teleservices platform, which is centralized in Mt. Laurel, New Jersey. The
competitive advantages of using a centralized, efficient and high quality
teleservices platform allows us to capture a higher percentage of the highly
fragmented mortgage market more cost effectively.
Competitive Conditions. The principal methods of competition in mortgage
banking services are service, quality, products and price. There are an
estimated 20,000 national, regional or local providers of mortgage banking
services across the United States. Cendant Mortgage has increased its mortgage
origination market share in the United States to 1.8% in 1999 from 0.9% in
1998. The market share leader reported a 7.3% market share in the United States
according to "Inside Mortgage Finance" for 1999. Competitive conditions can
also be impacted by shifts in consumer preference for variable rate mortgages
from fixed rate mortgages. Consumer demand for variable rate mortgages
increased in the second half of 1999.
Seasonality. The principal sources of mortgage services segment revenue
are based principally on the timing of mortgage origination activity, which is
based upon the timing of residential real estate sales.
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Real estate sales are lower in the first calendar quarter each year and
relatively level the other three quarters of the year. As a result, our revenue
from the mortgage services business is less in the first calendar quarter of
each year.
DISCONTINUED OPERATIONS
On June 30, 1999, pursuant to Cendant's program to divest non-strategic
businesses and assets, we completed the disposition of our fleet segment for
aggregate consideration of $1.8 billion (see "Recent Developments"). The
following is a description of the fleet businesses through June 30, 1999.
General. Through our former PHH Vehicle Management Services Corporation,
PHH Management Services PLC, Cendant Business Answers PLC, The Harpur Group
Ltd. and Wright Express subsidiaries, we offered a full range of fully
integrated fleet management services to corporate clients and government
agencies. These services included vehicle leasing, advisory services and fleet
management services for a broad range of vehicle fleets. Advisory services
included fleet policy analysis and recommendations, benchmarking, and vehicle
recommendations and specifications. In addition, we provided managerial
services which included ordering and purchasing vehicles, arranging for their
delivery through dealerships located throughout the United States, Canada, UK,
Germany and the Republic of Ireland, as well as capabilities throughout Europe,
administration of the title and registration process, as well as tax and
insurance requirements, pursuing warranty claims with vehicle manufacturers and
re-marketing used vehicles. We also offered various leasing plans for our
vehicle leasing programs, financed primarily through the issuance of commercial
paper and medium-term notes and through unsecured borrowings under revolving
credit agreements, securitizion financing arrangements and bank lines of
credit.
Through our former PHH Vehicle Management Services and Wright Express
subsidiaries in the United States and our former Harpur Group Ltd. subsidiary
in the UK, we also offered fuel and expense management programs to corporations
and government agencies for the effective management and control of automotive
business travel expenses. By utilizing our service cards issued under the fuel
and expense management programs, a client's representatives were able to
purchase various products and services such as gasoline, tires, batteries,
glass and maintenance services at numerous outlets.
We also provided fuel and expense management programs and a centralized
billing service for companies operating truck fleets in the UK, Republic of
Ireland and Germany. Drivers of the clients' trucks were furnished with
courtesy cards together with a directory listing the names of strategically
located truck stops and service stations, which participated in this program.
Service fees were earned for billing, collection and record keeping services
and for assuming credit risk. These fees were paid by the truck stop or service
stations and/or the fleet operator and were based upon the total dollar amount
of fuel purchased or the number of transactions processed.
Products. Our fleet management services were divided into two principal
products: (1) Asset Based Products, and (2) Fee Based Products.
Asset Based Products represented the services our clients required to
lease a vehicle which included vehicle acquisition, vehicle remarketing,
financing, and fleet management consulting. Open-end leases were the prevalent
structure in North America representing 96% of the total vehicles financed in
North America and 86% of the total vehicles financed worldwide. The open-end
leases were structured on either a fixed rate or floating rate basis (where the
interest component of the lease payment changed month to month based upon an
index) depending upon client preference. The open-end leases were typically
structured with a 12 month minimum lease term, with month to month renewals
thereafter. The typical unit remained under lease for approximately 34 months.
A client received a full range of services in exchange for a monthly rental
payment which included a management fee. The residual risk on the value of the
vehicle at the end of the lease term remained with the lessee under an open-end
lease, except for a small amount which was retained by the lessor.
Closed-end leases were structured with a fixed term with the lessor
retaining the vehicle residual risk. The most prevalent lease terms were 24
months, 36 months, and 48 months. The closed-end lease structure was preferred
in Europe due to certain accounting regulations. The closed-end lease structure
was utilized by approximately 71% of the vehicles leased in Europe, but only
14% of the vehicles leased on a worldwide basis. We utilized independent third
party valuations and internal projections to set the residuals utilized for
these leases.
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The Fee Based Products were designed to effectively manage costs and
enhance driver productivity. The three main Fee Based Products were Fuel
Services, Maintenance Services and Accident Management. Fuel Services
represented the utilization of our proprietary cards to access fuel through a
network of franchised and independent fuel stations. The cards operated as a
universal card with centralized billing designed to measure and manage costs.
In the United States, Wright Express was the leading fleet fuel cards supplier
with over 125,000 fuel facilities in its network and in excess of 1.6 million
cards issued. Wright Express distributed its fuel cards and related offerings
through three primary channels: (1) the WEX-branded Universal Card, which was
issued directly to fleets by Wright Express, (2) the Private Label Card, under
which Wright Express provided private label fuel cards and related services to
commercial fleet customers of major petroleum companies, and (3) Co-Branded
Marketing, under which Wright Express fuel cards were co-branded and issued in
conjunction with products and services of partners such as commercial vehicle
leasing companies. In the UK, our Harpur Group Limited and Cendant Business
Answers PLC subsidiaries, utilizing the All Star and Dial brands, maintained
the largest independent fueling network with more than 12,000 fueling sites and
more than 1.2 million cards in circulation.
We offered customer vehicle maintenance charge cards that were used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provided customers with benefits such as (1) negotiated discounts off full
retail prices through our convenient supplier network, (2) access to our
in-house team of certified maintenance experts that monitored each card
transaction for policy compliance, reasonability, and cost effectiveness, and
(3) inclusion of vehicle maintenance card transactions in a consolidated
information and billing database that helped to evaluate overall fleet
performance and costs. We maintained an extensive network of service providers
in the United States, Canada, and the United Kingdom to ensure ease of use by
the client's drivers.
We also provided our clients with comprehensive accident management
services such as (1) providing immediate assistance after receiving the initial
accident report from the driver (i.e. facilitating emergency towing services
and car rental assistance, etc.) (2) organizing the entire vehicle appraisal
and repair process through a network of preferred repair and body shops, and
(3) coordinating and negotiating potential accident claims. Customers received
significant benefits from our accident management services such as (1)
convenient coordinated 24-hour assistance from our call center, (2) access to
our leverage with the repair and body shops included in our preferred supplier
network (the largest in the industry), which typically provided customers with
extremely favorable repair terms and (3) expertise of our damage specialists,
who ensured that vehicle appraisals and repairs were appropriate,
cost-efficient, and in accordance with each customer's specific repair policy.
Competitive Conditions. The principal factors for competition in vehicle
management services were quality, service and price. We were competitively
positioned as a fully integrated provider of fleet management services with a
broad range of product offerings. We ranked second in the United States in the
number of vehicles under management and first in the number of proprietary fuel
and maintenance cards for fleet use in circulation. There were four other major
providers of fleet management service in the United States, hundreds of local
and regional competitors, and numerous niche competitors who focused on only
one or two products and did not offer the fully integrated range of products
provided by us. In the United States, it was estimated that only 45% of fleets
are leased by third party providers.
REGULATION
The federal Real Estate Settlement Procedures Act ("RESPA") and state real
estate brokerage laws restrict payments which real estate brokers and mortgage
brokers and other parties may receive or pay in connection with the sales of
residences and referral of settlement services (e.g., mortgages, homeowners
insurance, title insurance). Such laws may, to some extent, restrict preferred
alliance arrangements involving our parent's real estate brokerage franchisees
and our mortgage and relocation businesses. Our mortgage banking services
business is also subject to numerous federal, state and local laws and
regulations, including those relating to real estate settlement procedures,
fair lending, fair credit reporting, truth in lending, federal and state
disclosure, and licensing. Currently, there are local efforts in certain states
which could limit referral fees to our relocation business.
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It is a common practice for online mortgage and real estate-related
companies to enter into advertising, marketing and distribution arrangements
with other Internet companies and websites whereby the mortgage and real
estate-related companies pay fees for advertising, marketing and distribution
services and other goods and facilities. The applicability of RESPA's referral
fee prohibitions to the compensation provisions of these arrangements is
unclear and the Department of Housing and Urban Development has provided no
guidance to date on the subject. Although we believe that we have structured
our relationships with Internet advertisers to ensure compliance with RESPA,
some level of risk is inherent absent amendments to the law or regulations, or
clarification from regulators.
EMPLOYEES
As of December 31, 1999, we had approximately 6,600 employees. Management
believes our employee relations to be satisfactory.
On June 30, 1999, Robert D. Kunisch retired as Chief Executive Officer,
President and Director of the Company.
ITEM 2. PROPERTIES
Our principal executive offices are located at a building owned by Cendant
at 6 Sylvan Way, Parsippany, New Jersey.
The relocation segment has their main corporate operations located in
three leased buildings in Danbury, Connecticut with lease terms expiring in
2008, 2005 and 2004. There are also six regional offices located in Walnut
Creek, California; Oak Brook, Chicago, and Schaumburg, Illinois; Las Colinas,
Texas and Mission Viejo, California which provide operation support services
for the region pursuant to leases that expire in 2004, 2003, 2004, 2001 and
2003, respectively. We own the office in Mission Viejo. International offices
are located in Swindon, UK and Hong Kong, China, pursuant to leases that expire
in 2013 and 2001, respectively.
The mortgage segment has centralized its operations to one main area
occupying various leased offices in Mt. Laurel, New Jersey consisting of
approximately 885,000 square feet. The lease terms expire over the next five
years. Regional sales offices are located in Englewood, Colorado and Santa
Monica, California, pursuant to leases that expire in 2002 and 2005,
respectively.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various litigation matters arising in the ordinary
course of business and a plaintiff in several collection matters which are not
considered material either individually or in the aggregate.
Since the April 15, 1998 announcement by Cendant of the discovery of
accounting irregularities in the former CUC business units of our Parent
Company, approximately 70 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on Cendant's behalf and several other
lawsuits and arbitration proceedings have commenced in various courts and other
forums against Cendant and other defendants. In addition, the Securities and
Exchange Commission ("SEC") and the United States Attorney for the District of
New Jersey are conducting investigations relating to Cendant's accounting
irregularities. The SEC staff has advised Cendant that its inquiry should not
be construed as an indication by the SEC or its staff that any violations of
law have occurred. As a result of the findings from Cendant's internal
investigations, Cendant made all financial statement adjustments considered
necessary. Although Cendant can provide no assurances that additional
adjustments will not be necessary as a result of these government
investigations, Cendant does not expect that additional adjustments will be
necessary.
On December 7, 1999, Cendant announced that it reached a preliminary
agreement to settle the principal securities class action pending against
Cendant in the U.S. District Court in Newark, New Jersey relating to the
aforementioned class action lawsuits. Under the agreement, Cendant would pay
the class members approximately $2.85 billion in cash. The settlement remains
subject to execution of a definitive settlement agreement and approval by the
U.S. District Court. If the preliminary settlement is not
7
approved by the U.S. District Court, Cendant can make no assurances that the
final outcome or settlement of such proceedings will not be for an amount
greater than that set forth in the preliminary agreement.
The proposed settlements do not encompass all litigation asserting claims
associated with Cendant's accounting irregularities. Cendant does not believe
that it is feasible to predict or determine the final outcome or resolution of
these unresolved proceedings. We do not believe that the impact of such
unresolved proceedings would be material to our consolidated financial position
or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Not Applicable
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We are a provider of mortgage and relocation services and a wholly-owned
subsidiary of Cendant Corporation ("Cendant" or the "Parent Company"). Pursuant
to certain covenant requirements in the indentures under which we issue debt,
we continue to operate and maintain our status as a separate public reporting
entity.
This discussion should be read in conjunction with the information
contained in our Consolidated Financial Statements and accompanying Notes
thereto appearing elsewhere in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1999
VS.
YEAR ENDED DECEMBER 31, 1998
The underlying discussion of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization (exclusive of depreciation and
amortization on assets under management and mortgage programs), adjusted to
exclude merger-related costs and other unusual charges (credits) ("Unusual
Items") which were incurred in connection with our mergers with HFS
Incorporated ("HFS") (the "HFS Merger") and CUC International ("CUC") (the
"Cendant Merger"). Such Unusual Items are of a non-recurring or unusual nature
and are not included in assessing segment performance or are not segment
specific. Our management believes such discussion is the most informative
representation of how our management evaluates performance. However, our
presentation of Adjusted EBITDA may not be comparable with similar measures
used by other companies. We determined that we have two reportable operating
segments comprising our continuing operations based primarily on the types of
services we provide, the consumer base to which marketing efforts are directed
and the methods we use to sell services. For additional information, including
a description of the services provided in each of our reportable operating
segments, see Note 15 to the Consolidated Financial Statements.
Revenues increased $22 million (3%) to $830 million in 1999 from $808
million in 1998. In addition, Adjusted EBITDA which excluded Unusual Items of
$19 million in 1998, increased $14 million (4%) to $330 million in 1999 from
$316 million in 1998. The Adjusted EBITDA margin increased to 40% in 1999 from
39% in 1998.
8
RELOCATION SEGMENT
Revenues and Adjusted EBITDA decreased $29 million (7%) and $3 million
(2%), respectively, in 1999 compared with 1998 and the Adjusted EBITDA margin
increased to 29% in 1999 from 28% in 1998. Operating results in 1999 benefited
from a $13 million increase in referral fees and international relocation
service revenue, offset by a comparable decline in home sales revenue. Total
expenses decreased $26 million (8%), which included $15 million in cost savings
from regional operations, technology and telecommunications, and $11 million in
reduced expenses resulting from reduced government home sales and the sale of
an asset management company in the third quarter of 1998. The asset management
company contributed 1998 revenues and Adjusted EBITDA of $21 million and $16
million, respectively. In 1999, revenues and Adjusted EBITDA benefited from the
sale of a minority interest in an insurance subsidiary, which resulted in $7
million of additional revenue and Adjusted EBITDA. In 1998, revenues and
Adjusted EBITDA also benefited from an improvement in receivable collections,
which permitted an $8 million reduction in billing reserve requirements.
MORTGAGE SEGMENT
Revenues increased $44 million (12%) and Adjusted EBITDA decreased $4
million (2%), respectively, in 1999 compared with 1998. The increase in
revenues resulted from a $32 million increase in loan servicing revenues and a
$12 million increase in loan closing revenues. The average servicing portfolio
increased $10 billion (29%), with the average servicing fee increasing
approximately seven basis points because of a reduction in the rate of
amortization on servicing assets. The reduced rate of amortization was caused
by higher mortgage interest rates in 1999. Total mortgage closing volume in
1999 was $25.6 billion, a decline of $400 million from 1998. However, purchase
mortgage volume (mortgages for home buyers) increased $3.7 billion (24%) to
$19.1 billion, offset by a $4.2 billion decline in mortgage refinancing volume.
Moreover, purchase mortgage volume from the teleservices business (Phone In-
Move In) and Internet business (Log In-Move In) increased $4.7 billion (63%),
primarily because of increased purchase volume from Parent Company's real
estate franchisees. Industry origination volume is expected to be lower in 2000
compared to 1999 as a result of recent increases in interest rates and reduced
refinancing volume. We expect to offset lower refinancing volume with increased
purchase mortgage volume in 2000. The Adjusted EBITDA margin decreased to 46%
in 1999 from 53% in 1998. Adjusted EBITDA decreased in 1999 because of a $17
million increase in expenses incurred within servicing operations for the
larger of the increase in the average servicing portfolio and other expense
increases for technology, infrastructure and teleservices to support capacity
for volume anticipated in future periods. We anticipate that increased costs to
support future volume will negatively impact Adjusted EBITDA through the first
six months of 2000.
DISCONTINUED OPERATIONS
Our fleet businesses, inclusive of the fuel card subsidiaries contributed
by Cendant, generated revenues and net income of $166 million and $34 million,
respectively, for the six months ended June 30, 1999, the disposition date of
the fleet segment. See Liquidity and Capital Resources -- Discontinued
Operations for a further discussion.
LIQUIDITY AND CAPITAL RESOURCES -- CONTINUING OPERATIONS
To ensure adequate funding, we maintain three sources of liquidity:
ongoing liquidation of assets under management, global capital markets, and
committed credit agreements with various high-quality domestic and
international banks. In the ordinary course of business, the liquidation of
assets under management and mortgage programs, as well as cash flows generated
from operating activities, provide the cash flow necessary for the repayment of
existing liabilities. Financial covenants are designed to ensure our
self-sufficient liquidity status. Financial covenants include restrictions on
dividends payable to the Parent Company and Parent Company loans, limitations
on the ratio of debt to equity, and other separate financial restrictions.
Our exposure to interest rate and liquidity risk is minimized by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
9
domestic and international funding sources, and securing available credit under
committed banking facilities. Using historical information, we will project the
relevant characteristics of assets under management and mortgage programs and
generally match the projected dollar amount, interest rate and maturity
characteristics of the assets within the overall funding program. This is
accomplished through stated debt terms or effectively modifying such terms
through other instruments, primarily interest rate swap agreements and
revolving credit agreements. In our relocation business, we project the length
of time that a home will be held before being sold on behalf of the client.
Within our mortgage services business, we fund the mortgage loans on a
short-term basis until the mortgage loans are sold to unrelated investors,
which generally occurs within sixty days. Interest rate risk on mortgages
originated for sale is managed through the use of forward delivery contracts
and options. Financial derivatives are also used as a hedge to minimize
earnings volatility as it relates to mortgage servicing assets.
We support originated mortgages and advances under relocation contracts
primarily by issuing commercial paper, medium term notes and by maintaining
secured obligations. Such financing is not classified based on contractual
maturities, but rather is included in liabilities under management and mortgage
programs since such debt corresponds directly with high quality related assets.
We continue to pursue opportunities to reduce our borrowing requirements by
securitizing increasing amounts of our high quality assets. We currently have a
revolving sales agreement, under which an unaffiliated buyer (the "Buyer"),
Bishops Gate Residential Mortgage Trust, a special purpose entity, has
committed to purchase, at our option, mortgage loans originated by us on a
daily basis, up to the Buyer's asset limit of $2.1 billion. Under the terms of
this sale agreement, we retain the servicing rights on the mortgage loans sold
to the Buyer and arrange for the sale or securitization of the mortgage loans
into the secondary market. The Buyer retains the right to select alternative
sale or securitization arrangements. At December 31, 1999 and 1998, we were
servicing approximately $813 million and $2.0 billion, respectively, of
mortgage loans owned by the Buyer.
Following the execution of our agreement to dispose of our fleet
businesses, Fitch IBCA lowered our long-term debt rating from A+ to A and
affirmed our short-term debt rating at F1, and Standard and Poor's Corporation
affirmed our long-term and short-term debt ratings at A-/A2. Also, in
connection with the closing of the transaction, Duff and Phelps Credit Rating
Co. lowered our long-term debt rating from A+ to A and our short-term debt
rating was reaffirmed at D1. Moody's Investor Service lowered our long-term
debt rating from A3 to Baa1 and affirmed our short-term debt rating at P2. (A
security rating is not a recommendation to buy, sell or hold securities and is
subject to revision or withdrawal at any time).
We expect to continue to maximize our access to global capital markets by
maintaining the quality of our assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. Depending upon asset growth and financial market conditions, we utilize
the United States commercial paper markets, public and private debt markets, as
well as other cost-effective short-term instruments. Augmenting these sources,
we will continue to manage outstanding debt with the potential sale or transfer
of managed assets to third parties while retaining fee-related servicing
responsibility. At December 31, 1999, aggregate borrowings were comprised of
commercial paper, medium-term notes, secured obligations and other borrowings
of $0.6 billion, $1.3 billion, $0.3 billion, and $0.1 billion, respectively.
We have an effective shelf registration statement on file with the
Securities and Exchange Commission ("SEC") providing for the aggregate issuance
of up to $3.0 billion of medium-term note debt securities. These securities may
be offered from time to time, together or separately, based on terms to be
determined at the time of sale. As of December 31, 1999, we had approximately
$375 million of availability remaining under this shelf registration statement.
Proceeds from future offerings will continue to be used to finance assets we
manage for our clients and for general corporate purposes.
SECURED OBLIGATIONS
In December 1999, we renewed our 364 day financing agreement to sell
mortgage loans under an agreement to repurchase such mortgages. The agreement
is collateralized by the underlying mortgage loans held in safekeeping by the
custodian to the agreement. The total commitment under this agreement
10
is $500 million and is renewable on an annual basis at the discretion of the
lender in accordance with the securitization agreement. Mortgage loans financed
under this agreement at December 31, 1999 and 1998 totaled $345 million and
$378 million, respectively.
We are currently in the process of creating a new securitization facility
to purchase interests in the rights to payment related to our relocation
receivables. Although no assurances can be given, we expect that such facility
will be in place by the end of the first quarter of 2000.
OTHER CREDIT FACILITIES
To provide additional financial flexibility, our current policy is to
ensure that minimum committed facilities aggregate 100 percent of the average
amount of outstanding commercial paper. As of December 31, 1999, we maintained
$2.5 billion of unsecured committed credit facilities, which were provided by
domestic and foreign banks. On February 28, 2000, we reduced these facilities
to $1.5 billion to reflect our reduced borrowing needs after the disposition of
our fleet businesses. The facilities consist of a $750 million revolving credit
maturing in February 2001 and a $750 million revolving credit maturing in
February 2005. Our management closely evaluates not only the credit of the
banks but also the terms of the various agreements to ensure ongoing
availability. The full amount of our committed facilities at December 31, 1999
was undrawn and available. Our management believes that our current policy
provides adequate protection should volatility in the financial markets limit
our access to commercial paper or medium-term notes funding. We continuously
seek additional sources of liquidity to accommodate our asset growth and to
provide further protection from volatility in the financial markets.
In the event that the public debt market is unable to meet our funding
needs, we believe that we have alternative sources to provide adequate
liquidity, including current and potential future securitized obligations and
our $1.5 billion of revolving credit facilities.
RESTRICTIONS ON DIVIDENDS TO CENDANT
Pursuant to a covenant in our indenture with the trustee relating to our
medium-term notes, we are restricted from paying dividends, making
distributions, or making loans to Cendant to the extent that such payments are
collectively in excess of 40% of our consolidated net income (as defined in the
covenant) for each fiscal year, provided, however, that we can distribute to
Cendant 100% of any extraordinary gains from asset sales and capital
contributions previously made to us by Cendant. Notwithstanding the foregoing,
we are prohibited under such covenant from paying dividends or making loans to
Cendant if upon giving effect to such dividends and/or loan, our debt to equity
ratio exceeds 8 to 1, at the time of the dividend or loan, as the case may be.
LIQUIDITY AND CAPITAL RESOURCES -- DISCONTINUED OPERATIONS
Contribution of Fuel Card Business Subsidiaries by Cendant. Cendant
contributed its fuel card subsidiaries, Wright Express Corporation ("WEX") and
The Harpur Group, Ltd. ("Harpur"), to us in April 1999 which were included
within our fleet business segment. As both entities were under common control,
such transaction has been accounted for in a manner similar to a pooling of
interests. Accordingly, our historical financial results have been restated as
if the Company, WEX and Harpur had operated as one entity since inception. The
operating results of Harpur are included from January 20, 1998, the date on
which Harpur was acquired by Cendant pursuant to a purchase business
combination and, accordingly, when common control was established.
Divestiture. On June 30, 1999, we completed the disposition of our fleet
businesses, pursuant to an agreement with Avis Rent A Car, Inc. ("ARAC").
Pursuant to the agreement, ARAC acquired the net assets of our fleet segment
through the assumption and subsequent repayment of $1.44 billion of
intercompany debt and the issuance to us of $360 million of convertible
preferred stock of Avis Fleet Leasing and Management Corporation, a
wholly-owned subsidiary of ARAC. Coincident to the closing of the transaction,
ARAC refinanced the assumed debt under management programs which was payable to
us. Accordingly, we also received from ARAC $3.0 billion in cash proceeds and a
$30 million receivable. Utilizing the cash proceeds from the fleet businesses
disposition, we made a cash dividend
11
payment to Cendant totaling $1.1 billion. We recorded a net gain on the sale of
discontinued operations of $887 million ($871 million, after tax). The fleet
businesses disposition was structured as a tax-free reorganization and,
accordingly, no tax provision has been recorded on a majority of the gain.
However, pursuant to a recent interpretive ruling, the Internal Revenue Service
("IRS") has taken the position that similarly structured transactions do not
qualify as tax-free reorganizations under Internal Revenue Code Section
368(a)(1)(A). If the transaction is not considered a tax-free reorganization,
the resultant incremental liability could range between $10 million and $170
million depending upon certain factors including utilization of tax attributes
and contractual indemnification provisions. Notwithstanding the IRS
interpretive ruling, we believe that, based upon analysis of current tax law,
our position would prevail, if challenged.
CASH FLOWS
We generated $1.3 billion of cash flows from continuing operations in 1999
representing a $1.4 billion increase from 1998. The increase in cash flows from
operations was primarily due to a $2.1 billion net reduction in mortgage loans
held for sale, which reflects larger loan sales to the secondary markets in
proportion to loan originations.
We generated $1.2 billion in cash flows from investing activities in 1999,
representing a $1.5 billion increase from 1998. The incremental cash flows in
1999 from investing activities was primarily attributable to $1.8 billion in
net proceeds from the sale of discontinued operations (the fleet businesses).
Additionally, we increased our cash investment in management and mortgage
programs by $227 million.
We used net cash of $2.7 billion in financing activities in 1999 compared
to providing net cash of $700 million for such activities in 1998. The increase
of $3.4 billion of cash flows used in financing activities during 1999 was
primarily due to repayments of borrowings.
LITIGATION
Since the April 15, 1998 announcement by Cendant of the discovery of
accounting irregularities in the former CUC business units of our Parent
Company, approximately 70 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on Cendant's behalf and several other
lawsuits and arbitration proceedings have been commenced in various courts and
other forms against Cendant and other defendants by or on behalf of persons
claiming to have purchased or otherwise acquired securities or options issued
by CUC or Cendant between May 1995 and August 1998. The Court has ordered
consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
staff has advised Cendant that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. As
a result of the findings from Cendant's internal investigations, Cendant made
all financial statement adjustments considered necessary. Although Cendant can
provide no assurances that additional adjustments will not be necessary as a
result of these government investigations, Cendant does not expect that
additional adjustments will be necessary.
On December 7, 1999, Cendant announced that it reached a preliminary
agreement to settle the principal securities class action pending against
Cendant in the U.S. District Court in Newark, New Jersey relating to the
aforementioned class action lawsuits. Under the agreement, Cendant would pay
the class members approximately $2.85 billion in cash. The settlement remains
subject to execution of a definitive settlement agreement and approval by the
U.S. District Court. If the preliminary settlement is not approved by the U.S.
District Court, Cendant can make no assurances that the final outcome or
settlement of such proceedings will not be for an amount greater than that set
forth in the preliminary agreement.
The proposed settlements do not encompass all litigation asserting claims
associated with Cendant's accounting irregularities. Cendant does not believe
that it is feasible to predict or determine the final outcome or resolution of
these unresolved proceedings. We do not believe that the impact of such
unresolved proceedings would be material to our consolidated financial position
or liquidity.
12
OTHER INITIATIVES
We continue to explore ways to increase efficiencies and productivity and
to reduce the cost structures of our respective businesses. Such actions could
include downsizing, consolidating, restructuring or other related efforts,
which we anticipate would be funded through current operations. No assurance
may be given that any plan of action will be undertaken or completed.
YEAR 2000
The following disclosure is a Year 2000 readiness disclosure statement
pursuant to the Year 2000 Readiness and Disclosure Act:
In order to minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we identified, evaluated, implemented and
tested changes to our computer systems, applications and software necessary to
achieve Year 2000 compliance. Our computer systems and equipment successfully
transitioned to the Year 2000 with no material issues. We continue to keep our
Year 2000 project management in place to monitor latent problems that could
surface at key dates or events in the future. We do not anticipate any
significant problems related to these events. The total cost of our Year 2000
compliance plan was approximately $8 million. We expensed and capitalized the
costs to complete the compliance plan in accordance with appropriate accounting
policies.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," issued in
June 1998, to fiscal years commencing after June 15, 2000. SFAS No. 133
requires that all derivatives be recorded in the Consolidated Balance Sheets as
assets or liabilities and measured at fair value. If the derivative does not
qualify as a hedging instrument, changes in fair value are to be recognized in
net income. If the derivative does qualify as a hedging instrument, changes in
fair value are to be recognized either in net income or other comprehensive
income consistent with the asset or liability being hedged. We have developed
an implementation plan to adopt SFAS No. 133. Completion of the implementation
plan and determination of the impact of adopting SFAS No. 133 is expected to be
completed by the fourth quarter of 2000. We will adopt SFAS No. 133 on January
1, 2001, as required.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 draws upon the existing accounting rules and explains
those rules, by analogy, to other transactions that the existing rules do not
specifically address. We will adopt SAB No. 101 on January 1, 2000, as
required, and do not expect such adoption to have a material impact on our
Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
We make statements about our future results in this Annual Report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed or implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities at our Parent Company;
o our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
13
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our
existing businesses and growth in such businesses and our ability to
operate within the limitations imposed by financing arrangements; and
o the effect of changes in the level and volatility of current interest
rates.
We derived the forward-looking statements in this Annual Report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses various financial instruments, particularly interest rate
and currency swaps, forward delivery commitments, futures and options contracts
and currency forwards, to manage and reduce the interest rate risk related
specifically to its committed mortgage pipeline, mortgage loan inventory,
mortgage servicing rights, mortgage-backed securities, and debt. The Company
also uses foreign exchange forwards to manage and reduce the foreign currency
exchange rate risk related to its foreign currency denominated translational
exposures. The Company is exclusively an end user of these instruments, which
are commonly referred to as derivatives. The Company does not engage in
trading, market-making, or other speculative activities in the derivatives
markets. The Company's derivative financial instruments are designated as
hedges of underlying exposures, as those instruments demonstrate high
correlation in relation to the asset or transaction being hedged. More detailed
information about these financial instruments is provided in Notes 8 and 9 to
the Consolidated Financial Statements.
Interest and currency rate risks are the principal market exposures of the
Company.
o Interest rate movements in one country as well as relative interest rate
movements between countries can materially impact the Company's
profitability. The Company's primary interest rate exposure is to
interest rate fluctuations in the United States, specifically long-term
U.S. Treasury and mortgage interest rates due to their impact on
mortgagor prepayments, mortgage loans held for sale, and anticipated
mortgage production arising from commitments issued and LIBOR and
commercial paper interest rates due to their impact on variable rate
borrowings. The Company anticipates that such interest rates will remain
a primary market exposure of the Company for the foreseeable future.
o The Company's primary foreign currency rate exposure is to exchange rate
fluctuations of the British pound sterling. The Company anticipates that
such foreign currency exchange rate will remain a primary market exposure
of the Company for the foreseeable future.
The Company assesses its market risk based on changes in interest and
foreign currency exchange rates utilizing a sensitivity analysis. The
sensitivity analysis measures the potential loss in earnings, fair values, and
cash flows based on a hypothetical 10% change (increase and decrease) in
interest and currency rates.
The Company uses a discounted cash flow model in determining the fair
market value of investment in leases and leased vehicles, relocation
receivables, equity advances on homes, mortgages, commitments to fund
mortgages, mortgage servicing rights and mortgage-backed securities. The
primary assumptions used in these models are prepayment speeds and discount
rates. In determining the fair market value of mortgage servicing rights and
mortgage-backed securities, the models also utilize credit losses and mortgage
servicing revenues and expenses as primary assumptions. In addition, for
commitments to fund mortgages, the borrowers propensity to close their mortgage
loan under the commitment is used as a primary assumption. For mortgages and
commitments to fund mortgages forward delivery contracts and options, the
Company uses an option-adjusted spread ("OAS") model in determining the impact
of interest rate shifts. The Company also utilizes the OAS model to determine
the impact of interest rate
14
shifts on mortgage servicing rights and mortgage-backed securities. The primary
assumption in an OAS model is the implied market volatility of interest rates
and prepayment speeds and the same primary assumptions used in determining fair
market value.
The Company uses a duration-based model in determining the impact of
interest rate shifts on its debt portfolio and interest rate derivatives
portfolios. The primary assumption used in these models is that a 10% increase
or decrease in the benchmark interest rate produces a parallel shift in the
yield curve across all maturities.
The Company uses a current market pricing model to assess the changes in
the value of the U.S. dollar on foreign currency denominated derivatives and
monetary assets and liabilities. The primary assumption used in these models is
a hypothetical 10% weakening or strengthening of the U.S. dollar against all
currency exposures of the Company at December 31, 1999 and 1998.
The Company's total market risk is influenced by a wide variety of factors
including the volatility present within the markets and the liquidity of the
markets. There are certain limitations inherent in the sensitivity analyses
presented. While probably the most meaningful analysis permitted, these "shock
tests" are constrained by several factors, including the necessity to conduct
the analysis based on a single point in time and the inability to include the
complex market reactions that normally would arise from the market shifts
modeled.
The Company used December 31, 1999 and 1998 market rates on its
instruments to perform the sensitivity analyses separately for each of the
Company's market risk exposures -- interest and currency rate instruments. The
estimates are based on the market risk sensitive portfolios described in the
preceding paragraphs and assume instantaneous, parallel shifts in interest rate
yield curves and exchange rates.
The Company has determined that the impact of a 10% change in interest and
foreign currency exchange rates and prices on its earnings, fair values and
cash flows would not be material.
While these results may be used as benchmarks, they should not be viewed
as forecasts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statement Index commencing on page F-1 hereof.
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
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
Not applicable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
ITEM 14(a)(1) FINANCIAL STATEMENTS
See Financial Statement Index commencing on page F-1 hereof.
ITEM 14(a)(3) EXHIBITS
See Exhibit Index.
ITEM 14(b) REPORTS ON FORM 8-K
ON December 17, 1999, we filed a current report on Form 8-k to report under
Item 5 our Parent Company's preliminary settlement of its common stock class
action litigation.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly cause this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By: /s/ Richard A. Smith
---------------------
Richard A. Smith
President
March 9, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Principal Executive Officer:
/s/ Richard A. Smith
- ---------------------
Richard A. Smith
President
Principal Financial Officer:
/s/ Duncan H. Cocroft
- ---------------------
Duncan H. Cocroft
Executive Vice President,
Chief Financial Officer
Principal Accounting Officer:
/s/ Jon F. Danski
- ---------------------
Jon F. Danski
Executive Vice President, Finance
Board of Directors:
/s/ James E. Buckman
- ---------------------
James E. Buckman
Director
/s/ Stephen P. Holmes
- ---------------------
Stephen P. Holmes
Director
17
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1999,
1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
PHH Corporation
We have audited the accompanying consolidated balance sheets of PHH
Corporation and its subsidiaries (the "Company"), a wholly-owned subsidiary of
Cendant Corporation, as of December 31, 1999 and 1998 and the related
consolidated statements of operations, cash flows and shareholder's equity for
each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 28, 2000
F-2
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- -------- ---------
REVENUES
Service fees:
Relocation services (net of interest costs of $24, $27 and $32) $ 408 $ 436 $ 410
Mortgage services (net of amortization of mortgage servicing
rights and interest costs of $227, $221 and $181) 397 353 179
------ ----- -----
Service fees, net 805 789 589
Other 25 19 --
------ ----- -----
Net revenues 830 808 589
------ ----- -----
EXPENSES
Operating 425 387 343
General and administrative 75 105 99
Depreciation and amortization 36 26 13
Merger-related costs and other unusual charges (credits) -- (19) 190
------ ----- -----
Total expenses 536 499 645
------ ----- -----
INCOME (LOSS) BEFORE INCOME TAXES 294 309 (56)
Provision for income taxes 112 124 15
------ ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS 182 185 (71)
Discontinued operations:
Income from discontinued operations, net of tax 34 108 27
Gain on sale of discontinued operations, net of tax 871 -- --
------ ----- -----
NET INCOME (LOSS) $1,087 $ 293 $ (44)
====== ===== =====
See Notes to Consolidated Financial Statements.
F-3
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------
1999 1998
------------ ---------
ASSETS
Cash and cash equivalents $ 80 $ 281
Accounts and notes receivable, net of allowance for doubtful accounts of
$7 and $5 566 458
Property and equipment, net 167 150
Investment in convertible preferred stock 369 --
Other assets 379 256
Net assets of discontinued operations -- 967
------ ------
Total assets exclusive of assets under programs 1,561 2,112
------ ------
Assets under management and mortgage programs
Relocation receivables 530 659
Mortgage loans held for sale 1,112 2,416
Mortgage servicing rights 1,084 636
------ ------
2,726 3,711
------ ------
TOTAL ASSETS $4,287 $5,823
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 447 $ 708
Deferred income 32 27
------ ------
Total liabilities exclusive of liabilities under programs 479 735
------ ------
Liabilities under management and mortgage programs
Debt 2,314 3,692
Deferred income taxes 310 198
------ ------
2,624 3,890
------ ------
Commitments and contingencies (Note 10)
Shareholder's equity
Preferred stock -- authorized 3,000,000 shares; none issued and
outstanding -- --
Common stock, no par value -- authorized 75,000,000 shares; issued and
outstanding 1,000 shares 512 480
Retained earnings 674 745
Accumulated other comprehensive loss (2) (27)
------ ------
Total shareholder's equity 1,184 1,198
------ ------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,287 $5,823
====== ======
See Notes to Consolidated Financial Statements.
F-4
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
OPERATING ACTIVITIES
Net income (loss) $ 1,087 $ 293 $ (44)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Income from discontinued operations, net of tax (34) (108) (27)
Gain on sale of discontinued operations, net of tax (871) -- --
Depreciation and amortization 36 26 13
Gain on sales of mortgage servicing rights (13) (20) (16)
Merger-related costs and other unusual charges (credits) -- (19) 190
Payments of merger-related costs and other unusual charges (credits) (3) (35) (119)
Net changes in assets and liabilities from continuing operations:
Accounts and notes receivable (53) (31) (17)
Accounts payable and other accrued liabilities (339) 203 78
Deferred income taxes 121 166 (30)
Other, net (15) 62 46
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (84) 537 74
-------- -------- --------
Management and mortgage programs:
Depreciation and amortization 118 158 96
Origination of mortgage loans (25,025) (26,572) (12,217)
Proceeds on sale and payments from mortgage loans held for sale 26,328 25,792 11,829
-------- -------- --------
1,421 (622) (292)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 1,337 (85) (218)
-------- -------- --------
INVESTING ACTIVITIES
Property and equipment additions (69) (106) (34)
Proceeds from sales of marketable securities 14 -- --
Purchases of marketable securities (50) -- --
Net proceeds from sale of discontinued operations 1,803 -- --
Other, net (34) 12 19
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 1,664 (94) (15)
-------- -------- --------
Management and mortgage programs:
Equity advances on homes under management (7,608) (6,484) (6,845)
Repayment on advances on homes under management 7,688 6,624 6,863
Additions to mortgage servicing rights (727) (524) (270)
Proceeds from sales of mortgage servicing rights 156 119 49
-------- -------- --------
(491) (265) (203)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM CONTINUING OPERATIONS 1,173 (359) (218)
-------- -------- --------
FINANCING ACTIVITIES
Parent company capital contribution 20 46 90
Payment of dividends (1,158) (97) (7)
Other, net -- -- 22
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (1,138) (51) 105
-------- -------- --------
Management and mortgage programs:
Proceeds received for debt repayment in connection with the sale of discontinued
operations 3,017 -- --
Proceeds from debt issuance or borrowings 5,064 3,045 2,730
Principal payments on borrowings (7,728) (2,869) (1,664)
Net change in short term borrowings (1,803) (65) (515)
Net change in fundings to discontinued operations (101) 636 (200)
-------- -------- --------
(1,551) 747 351
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM CONTINUING OPERATIONS (2,689) 696 456
-------- -------- --------
Effect of changes in exchange rates on cash and cash equivalents (22) (7) (9)
Net cash provided by (used in) discontinued operations -- 34 (22)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (201) 279 (11)
Cash and cash equivalents, beginning of period 281 2 13
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 80 $ 281 $ 2
======== ======== ========
See Notes to Consolidated Financial Statements.
F-5
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------- RETAINED COMPREHENSIVE SHAREHOLDER'S
SHARES AMOUNT EARNINGS INCOME/(LOSS) EQUITY
---------------- -------- ------------- --------------- --------------
BALANCE AT JANUARY 1, 1997 34,956,835 $ 101 $ 600 $ (8) $ 693
COMPREHENSIVE LOSS:
Net loss -- -- (44) --
Currency translation adjustment -- -- -- (9)
TOTAL COMPREHENSIVE LOSS -- -- -- -- (53)
Cash dividends declared -- -- (7) -- (7)
Stock option plan transactions 876,264 22 -- -- 22
Retirement of common stock (35,832,099) -- -- -- --
Parent company capital contribution -- 166 -- -- 166
----------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1997 1,000 289 549 (17) 821
COMPREHENSIVE INCOME:
Net income -- -- 293 --
Currency translation adjustment -- -- -- (10)
TOTAL COMPREHENSIVE INCOME -- -- -- -- 283
Cash dividends declared -- -- (97) -- (97)
Parent company capital contribution -- 191 -- -- 191
----------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1998 1,000 480 745 (27) 1,198
COMPREHENSIVE INCOME:
Net income -- -- 1,087 --
Unrealized loss on marketable securities,
net of tax of $1 -- -- -- (1)
Currency translation adjustment -- -- -- (22)
Reclassification adjustment, net of tax
of $0 -- -- -- 48
TOTAL COMPREHENSIVE INCOME -- -- -- -- 1,112
Cash dividend declared -- -- (1,158) -- (1,158)
Parent company capital contribution -- 32 -- -- 32
----------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1999 1,000 $ 512 $ 674 $ (2) $ 1,184
=========== ====== ======= ==== =======
See Notes to Consolidated Financial Statements.
F-6
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
PHH Corporation is a provider of relocation and mortgage services. The
Consolidated Financial Statements include the accounts of PHH Corporation
and its wholly-owned subsidiaries (collectively, the "Company"). The
Company is a wholly-owned subsidiary of Cendant Corporation ("Cendant" or
the "Parent Company"). Pursuant to certain covenant requirements in the
indentures under which the Company issues debt, the Company continues to
operate and maintain its status as a separate public reporting entity,
which is the basis under which the accompanying Consolidated Financial
Statements and Notes thereto are presented. In presenting the Consolidated
Financial Statements, management makes estimates and assumptions that
affect reported amounts and related disclosures. Estimates, by their
nature, are based on judgement and available information. As such, actual
results could differ from those estimates. Certain reclassifications and
format changes have been made to prior year amounts to conform to the
current year presentation. Unless otherwise noted, all dollar amounts
presented are in millions.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
DEPRECIATION AND AMORTIZATION
Property and equipment is depreciated based upon a straight-line method
over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed utilizing the straight-line method over
the estimated lives of the related assets or the lease term, if shorter.
ASSET IMPAIRMENT
The Company periodically evaluates the recoverability of its long-lived
assets, comparing the respective carrying values to the current and
expected future cash flows, on an undiscounted basis, to be generated from
such assets.
REVENUE RECOGNITION AND BUSINESS OPERATIONS
Relocation. Relocation services provided by the Company include
facilitating the purchase and resale of the transferee's residence,
providing equity advances on the transferee's residence and home management
services. The home is purchased under a contract of sale and the Company
obtains a deed to the property; however, it does not generally record the
deed or transfer title. Transferring employees are provided equity advances
on the home based on their ownership equity of the appraised home value.
The mortgage is generally retired concurrently with the advance of the
equity and the purchase of the home. Based on its client agreements, the
Company is given parameters under which it negotiates for the ultimate sale
of the home. The gain or loss on resale is generally borne by the client
corporation. In certain transactions, the Company will assume the risk of
loss on the sale of homes; however, in such transactions, the Company will
control all facets of the resale process, thereby, limiting its exposure.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at a floating rate. Direct costs of managing the
home during the period the home is held for resale, including property
taxes and repairs and maintenance, are generally borne by the client
corporation. The client corporation generally advances funds to cover a
portion of such carrying costs.
Revenues and related costs associated with the purchase and resale of a
transferee's residence are recognized as services are provided. Relocation
services revenue is generally recorded net of costs reimbursed by client
corporations and interest expense incurred to fund the purchase of a
transferee's residence. Revenue for other fee-based programs, such as home
marketing assistance, household goods moves and destination services are
recognized over the periods in which the services are provided and the
related expenses are incurred.
F-7
Mortgage. Loan origination fees, commitment fees paid in connection with
the sale of loans, and certain direct loan origination costs associated
with loans are deferred until such loans are sold. Mortgage loans are
recorded at the lower of cost or market value on an aggregate basis. Sales
of mortgage loans are generally recorded on the date a loan is delivered to
an investor. Gains or losses on sales of mortgage loans are recognized
based upon the difference between the selling price and the carrying value
of the related mortgage loans sold. See Note 5 -- Mortgage Loans Held For
Sale.
Fees received for servicing loans owned by investors are credited to income
when earned. Costs associated with loan servicing are charged to expense as
incurred.
Mortgage servicing rights ("MSRs") are amortized over the estimated life of
the related loan portfolio in proportion to projected net servicing
revenues. Such amortization is recorded as a reduction of net servicing
revenue in the Consolidated Statements of Operations. The Company estimates
future prepayment rates based on current interest rate levels, other
economic conditions, and market forecasts, as well as relevant
characteristics of the servicing portfolio, such as loan types, interest
rate stratification and recent prepayment experience. Gains or losses on
the sale of MSRs are recognized when title and all risks and rewards have
irrevocably passed to the buyer and there are no significant unresolved
contingencies. See Note 6 -- Mortgage Servicing Rights.
PARENT COMPANY STOCK OPTION PLANS
Certain executives and employees of the Company participate in stock option
plans sponsored and administered by the Parent Company. The Company does
not sponsor or maintain any stock option plans. Accounting Principles Board
("APB") Opinion No. 25 is applied in accounting for options issued under
the Parent Company's plans. Under APB No. 25, because the exercise prices
of the stock options are equal to or greater than the market prices of the
underlying Parent Company stock on the date of grant, no compensation
expense is recognized.
In connection with the disposition of the fleet businesses, Parent Company
stock options associated with certain employees of the Company's fleet
businesses were modified. Accordingly, additional compensation cost of $14
million was recognized and was included in the calculation of the net gain
on the sale of discontinued operations. See Note 2 -- Discontinued
Operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 defers the
effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," issued in June 1998, to fiscal years commencing after
June 15, 2000. SFAS No. 133 requires that all derivatives be recorded in
the Consolidated Balance Sheets as assets or liabilities and measured at
fair value. If the derivative does not qualify as a hedging instrument,
changes in fair value are to be recognized in net income. If the derivative
does qualify as a hedging instrument, changes in fair value are to be
recognized either in net income or other comprehensive income consistent
with the asset or liability being hedged. The Company has developed an
implementation plan to adopt SFAS No. 133. Completion of the implementation
plan and determination of the impact of adopting SFAS No. 133 is expected
to be completed by the fourth quarter of 2000. The Company will adopt SFAS
No. 133 on January 1, 2001, as required.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 draws upon the existing accounting rules and
explains those rules, by analogy, to other transactions that the existing
rules do not specifically address. The Company will adopt SAB No. 101 on
January 1, 2000, as required, and does not expect such adoption to have a
material impact on the Consolidated Financial Statements.
2. DISCONTINUED OPERATIONS
Contribution of Fuel Card Subsidiaries by Parent Company. In April 1999,
the Parent Company contributed its fuel card subsidiaries, Wright Express
Corporation ("WEX") and The Harpur Group, Ltd. ("Harpur"), to the Company
which were included within the fleet businesses. As both entities
F-8
were under common control, such transaction has been accounted for in a
manner similar to a pooling of interests. Accordingly, financial results
for the years ended December 31, 1998 and 1997 have been previously
restated as if the Company, WEX and Harpur had operated as one entity since
inception. However, the operating results of Harpur are included from
January 20, 1998, the date on which Harpur was acquired by the Parent
Company pursuant to a purchase business combination and, accordingly, the
date on which common control was established.
Divestiture. On June 30, 1999, the Company completed the divestiture of the
fleet businesses pursuant to an agreement between the Company and Avis Rent
A Car, Inc. ("ARAC"). Pursuant to the agreement, ARAC acquired the net
assets of the fleet businesses through the assumption and subsequent
repayment of $1.44 billion of intercompany debt and the issuance of $360
million of convertible preferred stock of Avis Fleet Leasing and Management
Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC. During 1999,
the Company received dividends of $9 million, which increased the basis of
the underlying preferred stock investment (such amount is included as a
component of other revenue in the Consolidated Statements of Operations).
Coincident with the closing of the transaction, ARAC refinanced the assumed
debt under management programs which was payable to the Company.
Accordingly, the Company also received from ARAC $3.0 billion of cash
proceeds and a $30 million receivable. The Company used proceeds of $1.8
billion to repay outstanding fleet financing arrangements. Additionally
utilizing the cash proceeds, the Company made dividend payments to Cendant
totaling $1.1 billion.
The convertible preferred stock of Avis Fleet is convertible into
non-voting common stock of ARAC at the Company's option upon the
satisfaction of certain conditions, including the per share price of ARAC
Class A common stock equaling or exceeding $50 per share and the fleet
businesses attaining certain EBITDA (earnings before interest, income
taxes, depreciation and amortization) thresholds, as defined. There are
additional circumstances upon which the shares of Avis Fleet convertible
preferred stock are automatically or mandatorily convertible into ARAC
non-voting common stock.
The Company realized a net gain on the disposition of the fleet businesses
of $887 million ($871 million, after tax) which included income from
operations, subsequent to the measurement date of $6 million. The realized
gain is net of approximately $90 million of transaction costs. The fleet
businesses disposition was structured as a tax-free reorganization and,
accordingly, no tax provision has been recorded on a majority of the gain.
However, pursuant to a recent interpretive ruling, the Internal Revenue
Service ("IRS") has taken the position that similarly structured
transactions do not qualify as tax-free reorganizations under the Internal
Revenue Code Section 368(a)(1)(A). If the transaction is not considered a
tax free reorganization, the resultant incremental liability could range
between $10 million and $170 million depending upon certain factors
including utilization of tax attributes and contractual indemnification
provisions. Notwithstanding the IRS interpretive ruling, the Company
believes that, based upon analysis of current tax law, its position would
prevail, if challenged.
Summarized financial data of the Company's fleet businesses, inclusive of
WEX and Harpur, is as follows:
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ -------
Net revenues $166 $383 $324
==== ==== ====
Income before income taxes $ 52 $152 $ 59
Provision for income taxes 18 44 32
---- ---- ----
Net income $ 34 $108 $ 27
==== ==== ====
F-9
BALANCE SHEET
DECEMBER 31,
1998
-------------
Total assets exclusive of assets under programs $ 893
Assets under management programs 3,801
Total liabilities exclusive of liabilities under programs (379)
Liabilities under management programs (3,348)
--------
Net assets of discontinued operations $ 967
========
3. MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
The Company incurred merger-related costs and other unusual charges
("Unusual Charges") in 1997 of $251 million primarily associated with its
mergers with HFS Incorporated ("HFS") (the "HFS Merger") and CUC
International, Inc. ("CUC") (the "Cendant Merger") of which $190 million
related to continuing operations and $61 million related to businesses
which have been discontinued. Liabilities associated with Unusual Charges
are classified as a component of accounts payable and accrued liabilities.
The personnel related liabilities remaining at December 31, 1999 relate to
future severance and benefit payments, and the remaining facility related
liabilities represent future lease termination payments. The utilization of
such liabilities from inception is summarized by category of expenditure
and by charge as follows:
NET BALANCE AT BALANCE AT
UNUSUAL 1997 1998 1998 DECEMBER 31, 1999 DECEMBER 31,
CHARGES REDUCTIONS REDUCTIONS ADJUSTMENTS 1998 REDUCTIONS 1999
--------- ------------ ------------ ------------- -------------- ---------- -------------
Professional fees $ 14 $ (14) $ (4) $ 4 $-- $-- $--
Personnel related 148 (95) (23) (19) 11 (2) 9
Business terminations 69 (67) 4 (6) -- -- --
Facility related and
other 20 (5) (11) 1 5 (2) 3
----- ----- ----- ----- --- --- ---
Total Unusual Charges 251 (181) (34) (20) 16 (4) 12
Reclassification for
discontinued
operations (61) 56 4 1 -- -- --
----- ----- ----- ----- --- --- ---
Total Unusual Charges
related to continuing
operations $ 190 $(125) $ (30) $(19) $16 $(4) $12
===== ===== ===== ===== === ==== ===
HFS Merger $ 209 $(151) $ (20) $(24) $14 $(3) $11
Cendant Merger 42 (30) (14) 4 2 (1) 1
----- ----- ----- ----- --- --- ---
Total Unusual Charges 251 (181) (34) (20) 16 (4) 12
Reclassification for
discontinued
operations (61) 56 4 1 -- -- --
----- ----- ----- ----- --- --- ---
Total Unusual Charges
related to continuing
operations $ 190 $(125) $ (30) $(19) $16 $(4) $12
===== ===== ===== ===== === ==== ===
HFS MERGER CHARGE
The Company incurred $223 million of Unusual Charges in the second quarter
of 1997 primarily associated with the HFS Merger. During the fourth quarter
of 1997, as a result of changes in estimates, the Company reduced certain
merger-related liabilities, which resulted in a $14 million credit to
Unusual Charges. The Company incurred $110 million of professional fees and
executive compensation expenses directly as a result of the HFS Merger, and
also incurred $113 million of expenses resulting from reorganization plans
formulated prior to and implemented as of the merger date. The
F-10
HFS Merger afforded the combined company, at such time, an opportunity to
rationalize its combined corporate infrastructure as well as its businesses
and enabled the corresponding support and service functions to gain
organizational efficiencies and maximize profits. Management initiated a
plan just prior to the HFS Merger to continue the downsizing of fleet
businesses by reducing headcount and eliminating unprofitable products. In
addition, management initiated plans to integrate its relocation and
mortgage origination businesses along with the Parent Company's real estate
franchise business to capture additional revenues through the referral of
one business unit's customers to another. Management also formalized a plan
to centralize the management and headquarter functions of the world's
largest, second largest and other company-owned corporate relocation
business unit subsidiaries. The aforementioned reorganization plans
provided for 450 job reductions which included the elimination of corporate
functions and facilities in Hunt Valley, Maryland.
Professional fees of $14 million were primarily comprised of investment
banking, accounting and legal fees incurred in connection with the HFS
Merger. Personnel related costs included $136 million associated with
employee reductions necessitated by the planned and announced consolidation
of the Company's relocation service businesses worldwide, as well as the
consolidation of corporate activities. Personnel related charges also
included termination benefits such as severance, medical and other benefits
and provided for retirement benefits pursuant to pre-existing contracts
resulting from a change in control. Several grantor trusts were established
and funded by the Company in November 1996 to pay such benefits in
accordance with the terms of the merger agreement. The Company incurred
business termination charges of $39 million, which represented costs to
exit certain activities primarily within the Company's fleet businesses.
Such business termination charges included $35 million of asset write-offs,
of which $25 million related to businesses which have been discontinued.
Facility related and other charges included costs associated with contract
and lease terminations, asset disposals and other charges incurred in
connection with the consolidation and closure of excess office space.
During the year ended December 31, 1998, adjustments of $24 million were
made to Unusual Charges, of which $23 million related to continuing
operations and $1 million related to businesses which have been
discontinued. Such adjustments primarily included $19 million of costs
associated with a change in estimated severance costs. Liabilities of $11
million remained at December 31, 1999, which were attributable to future
severance and lease termination payments. The Company anticipates that
severance will be paid in installments through April 2003 and the lease
terminations will be paid in installments through August 2002.
CENDANT MERGER CHARGE
In connection with the Cendant Merger, in 1997 the Company originally
recorded a merger-related charge (the "Cendant Merger Charge") of $42
million. During 1998, an additional $4 million of professional fees were
expensed as incurred. The Cendant Merger Charge included approximately $30
million of termination costs associated with discontinued fleet businesses
and personnel related costs associated with a non-compete agreement, which
was terminated in December 1997 for which $11 million of outstanding
obligations were paid in January 1998.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------
IN YEARS 1999 1998
------------- ------ -------
Land -- $ 3 $ 9
Building and leasehold improvements 5 - 50 13 20
Furniture, fixtures and equipment 3 - 10 237 181
---- ----
253 210
Less accumulated depreciation and amortization 86 60
---- ----
$167 $150
==== ====
F-11
5. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. The Company sells
loans insured or guaranteed by various government sponsored entities and
private insurance agencies. The insurance or guarantee is provided
primarily on a non-recourse basis to the Company, except where limited by
the Federal Housing Administration and Veterans Administration and their
respective loan programs. At December 31, 1999 and 1998, mortgage loans
sold with recourse amounted to approximately $52 million and $58 million,
respectively. The Company believes adequate allowances are maintained to
cover any potential losses.
The Company has a revolving sales agreement, under which an unaffiliated
buyer, Bishops Gate Residential Mortgage Trust, a special purpose entity
(the "Buyer"), committed to purchase, at the Company's option, mortgage
loans originated by the Company on a daily basis, up to the Buyer's asset
limit of $2.1 billion. Under the terms of this sale agreement, the Company
retains the servicing rights on the mortgage loans sold to the Buyer and
arranges for the sale or securitization of the mortgage loans into the
secondary market. The Buyer retains the right to select alternative sale or
securitization arrangements. At December 31, 1999 and 1998, the Company was
servicing approximately $813 million and $2.0 billion, respectively, of
mortgage loans owned by the Buyer.
6. MORTGAGE SERVICING RIGHTS
Capitalized MSRs activity consisted of:
MSRs ALLOWANCE TOTAL
---------- ----------- ------------
BALANCE, JANUARY 1, 1997 $ 290 $(1) $ 289
Additions to MSRs 252 -- 252
Amortization (96) -- (96)
Write-down/provision -- (4) (4)
Sales (33) -- (33)
Deferred hedge, net 19 -- 19
Reclassification of mortgage-related
securities (54) -- (54)
------ --- ------
BALANCE, DECEMBER 31, 1997 378 (5) 373
Additions to MSRs 475 -- 475
Additions to hedge 49 -- 49
Amortization (82) -- (82)
Write-down/recovery -- 5 5
Sales (99) -- (99)
Deferred hedge, net (85) -- (85)
------ --- ------
BALANCE, DECEMBER 31, 1998 636 -- 636
Additions to MSRs 698 (5) 693
Additions to hedge 23 -- 23
Amortization (118) -- (118)
Write-down/recovery -- 5 5
Sales (161) -- (161)
Deferred hedge, net 6 -- 6
------ --- ------
BALANCE, DECEMBER 31, 1999 $1,084 $-- $1,084
====== === ======
The value of the Company's MSRs is sensitive to changes in interest rates.
The Company uses a hedge program to manage the associated financial risks
of loan prepayments. The Company uses certain derivative financial
instruments, primarily interest rate floors, interest rate swaps, principal
only swaps, futures and options on futures to administer its hedge program.
Premiums paid/received on the acquired derivative instruments are
capitalized and amortized over the life of the contracts. Gains and losses
associated with the hedge instruments are deferred and recorded as
adjustments to the basis of
F-12
the MSRs. In the event the performance of the hedge instruments do not meet
the requirements of the hedge program, changes in the fair value of the
hedge instruments will be reflected in the Consolidated Statements of
Operations in the current period. Deferrals under the hedge programs are
allocated to each applicable stratum of MSRs based upon its original
designation and included in the impairment measurement.
For purposes of performing its impairment evaluation, the Company
stratifies its portfolio on the basis of interest rates of the underlying
mortgage loans. The Company measures impairment for each stratum by
comparing estimated fair value to the recorded book value. The Company
records amortization expense in proportion to and over the period of the
projected net servicing revenue. Temporary impairment is recorded through a
valuation allowance in the period of occurrence.
7. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs consisted
of:
DECEMBER 31,
--------------------
1999 1998
-------- ---------
Commercial paper $ 619 $2,484
Medium-term notes 1,248 2,338
Secured obligations 345 1,902
Other 102 173
------ ------
2,314 6,897
------ ------
Reclassification for discontinued operations
Parent Company loans -- 1,955
Secured obligations -- 1,104
Other -- 146
------ ------
Total reclassification for discontinued operations -- 3,205
------ ------
DEBT UNDER MANAGEMENT AND MORTGAGE PROGRAMS APPLICABLE
TO CONTINUING OPERATIONS $2,314 $3,692
====== ======
COMMERCIAL PAPER
Commercial paper, which matures within 180 days, is supported by committed
revolving credit agreements described below and short-term lines of credit.
The weighted average interest rates on the Company's outstanding commercial
paper were 6.7% and 6.1% at December 31, 1999 and 1998, respectively.
MEDIUM-TERM NOTES
Medium-term notes primarily represent unsecured loans, which mature through
2002. The weighted average interest rates on such medium-term notes were
6.4% and 5.6% at December 31, 1999 and 1998, respectively.
SECURED OBLIGATIONS
The Company maintains separate financing facilities, the outstanding
borrowings under which are secured by corresponding assets under management
and mortgage programs. The collective weighted average interest rates on
such facilities were 7.0% and 5.9% at December 31, 1999 and 1998,
respectively. Such secured obligations are described below.
Mortgage Facility. In December 1999, the Company renewed its 364 day
financing agreement to sell mortgage loans under an agreement to repurchase
such mortgages. This agreement is collateralized by the underlying mortgage
loans held in safekeeping by the custodian to the agreement. The total
commitment under this agreement is $500 million and is renewable on an
annual basis at the discretion of the lender. Mortgage loans financed under
this agreement at December 31, 1999 and 1998 totaled $345 million and $378
million, respectively, and are included in mortgage loans held for sale in
the Consolidated Balance Sheets.
F-13
Relocation Facilities. The Company entered into a 364 day asset
securitization agreement, effective December 1998, under which an
unaffiliated buyer committed to purchase an interest in the right to
payments related to certain Company relocation receivables. The revolving
purchase commitment provided for funding up to a limit of $325 million and
was renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Under the terms of this
agreement, the Company retained the servicing rights related to the
relocation receivables. This facility matured and $248 million was repaid
on December 22, 1999. At December 31, 1998, the Company was servicing $248
million of assets, which were funded under this agreement.
The Company also maintained an asset securitization agreement with a
separate unaffiliated buyer, which had a purchase commitment up to a limit
of $350 million. The terms of this agreement were similar to the
aforementioned facility with the Company retaining the servicing rights on
the right of payment. This facility matured and approximately $85 million
was repaid on October 5, 1999. At December 31, 1998, the Company was
servicing $171 million of assets eligible for purchase under this
agreement.
OTHER
Other liabilities under management and mortgage programs are principally
comprised of unsecured borrowings under uncommitted short-term lines of
credit and other bank facilities, all of which mature in 2000. The weighted
average interest rates on such debt were 6.8% and 5.5% at December 31, 1999
and 1998, respectively.
Interest is incurred on borrowings used to finance relocation and mortgage
servicing activities. Interest related to equity advances on homes was $24
million, $27 million and $32 million for the years ended December 31, 1999,
1998 and 1997, respectively. Interest related to origination and mortgage
servicing activities was $109 million, $139 million and $78 million for the
years ended December 31, 1999, 1998 and 1997, respectively. Interest
expense incurred on borrowings used to finance both equity advances on
homes and mortgage servicing activities are recorded net within service fee
revenues in the Consolidated Statements of Operations. Total interest
payments were $196 million, $166 million and $133 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999, the Company maintained $2.5 billion in committed and
unsecured credit facilities, which were backed by domestic and foreign banks.
The facilities were comprised of $1.25 billion of syndicated lines of credit
maturing in March 2000 and $1.25 billion of syndicated lines of credit
maturing in 2002. Under such credit facilities, the Company paid annual
commitment fees of $4 million for the year ended December 31, 1999 and $2
million for each of the years ended December 31, 1998 and 1997. The full
amount of the Company's committed facility was undrawn and available at
December 31, 1999 and 1998. See Note 16 -- Subsequent Events.
On July 10, 1998, the Company entered into a Supplemental Indenture No. 1
(the "Supplemental Indenture") with a bank, as trustee, under the Senior
Indenture dated as of June 5, 1997, which formalizes the policy of the
Company limiting the payment of dividends and the outstanding principal
balance of loans to the Parent Company to 40% of consolidated net income
(as defined in the Supplemental Indenture) for each fiscal year provided,
however, that the Company can distribute to the Parent Company 100% of any
extraordinary gains from asset sales and capital contributions previously
made to the Company by the Parent Company. Notwithstanding the foregoing,
the Supplemental Indenture prohibits the Company from paying dividends or
making loans to the Parent Company if, upon giving effect to such dividends
and/or loan, the Company's debt to equity ratio exceeds 8 to 1, at the time
of the dividend or loan, as the case may be.
DISCONTINUED OPERATIONS
The purchases of leased vehicles were principally supported by the
Company's issuance of commercial paper and medium-term notes (coincident
with the Company's financing of other assets under management and mortgage
programs) and by the fleet businesses maintaining secured obligations.
Proceeds from public debt issuances were historically loaned to the fleet
businesses, pursuant to Parent Company loan agreements, consistent with the
funding requirements necessary for the purchases of leased vehicles.
F-14
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with
fluctuations in interest rates, foreign currency exchange rates, prices of
mortgage loans held for sale, anticipated mortgage loan closings arising
from commitments issued and changes in value of MSRs. The Company performs
analyses on an on-going basis to determine that a high correlation exists
between the characteristics of derivative instruments and the assets or
transactions being hedged. As a matter of policy, the Company does not
engage in derivative activities for trading or speculative purposes. The
Company is exposed to credit-related losses in the event of non-performance
by counterparties to certain derivative financial instruments. The Company
manages such risk by periodically evaluating the financial position of
counterparties and spreading its positions among multiple counterparties.
The Company presently does not anticipate non-performance by any of the
counterparties and no material loss would be expected from such
non-performance.
INTEREST RATE SWAPS The Company enters into interest rate swap agreements to
modify the contractual costs of debt financing. The swap agreements correlate
the terms of the assets to the maturity and rollover of the debt by
effectively matching a fixed or floating interest rate with the stipulated
revenue stream generated from the portfolio of assets being funded. Amounts
to be paid or received under interest rate swap agreements are accrued as
interest rates change and are recognized as an adjustment to interest expense
in the Consolidated Statement of Operations. The Company's hedging activities
had an immaterial effect on interest expense and the Company's weighted
average borrowing rate for the years ended December 31, 1999, 1998 and 1997.
The following table summarizes the maturity and weighted average rates of the
Company's interest rate swaps for medium-term notes at December 31, 1999:
PAY FLOATING/RECEIVE FIXED:
Notional amount $ 435
Weighted average receive rate 5.57%
Weighted average pay rate 6.29%
PAY FIXED/RECEIVE FLOATING:
Notional amount $ 175
Weighted average receive rate 6.29%
Weighted average pay rate 6.67%
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates, the Company enters into foreign exchange contracts on a
selective basis. Such contracts are utilized to hedge intercompany loans to
foreign subsidiaries. The principal currency hedged by the Company is the
British pound sterling. Gains and losses on foreign currency hedges related
to intercompany loans are deferred and recognized upon maturity of the
underlying loan in the Consolidated Statements of Operations.
OTHER FINANCIAL INSTRUMENTS
With respect to both mortgage loans held for sale and anticipated mortgage
loan closings arising from commitments issued, the Company is exposed to
the risk of adverse price fluctuations primarily due to changes in interest
rates. The Company uses forward delivery contracts and option contracts to
reduce such risk. Market value gains and losses on such positions used as
hedges are deferred and considered in the valuation of cost or market value
of mortgage loans held for sale.
With respect to the mortgage servicing portfolio, the Company acquired
certain derivative financial instruments, primarily interest rate floors,
interest rate swaps, principal only swaps, futures and options on futures
to manage the associated financial impact of interest rate movements.
F-15
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND SERVICING RIGHTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments.
The fair values of the financial instruments presented may not be
indicative of their future values.
MARKETABLE SECURITIES
Fair value at December 31, 1999 and 1998 was $80 million and $46 million,
respectively, and is based upon investment advisor estimates or discounted
cash flows using current market assumptions, whichever is practicable, which
approximates carrying value. Realized gains or losses on marketable
securities are calculated on a specific identification basis.
RELOCATION RECEIVABLES
Fair value approximates carrying value due to the short-term nature of the
relocation receivables.
PREFERRED STOCK INVESTMENTS
Fair value approximates carrying value of the preferred stock investments.
MORTGAGE LOANS HELD FOR SALE
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to purchase
loans net of mortgage-related positions. The value of embedded MSRs has
been considered in determining fair value.
MORTGAGE SERVICING RIGHTS
Fair value is estimated by discounting future net servicing cash flows
associated with the underlying securities using discount rates that
approximate current market rates and externally published prepayment rates,
adjusted, if appropriate, for individual portfolio characteristics.
DEBT
Fair value of the Company's medium-term notes is estimated based on quoted
market prices.
INTEREST RATE SWAPS AND OTHER FINANCIAL INSTRUMENTS
Fair value is estimated, using dealer quotes, as the amount that the
Company would receive or pay to execute a new agreement with terms
identical to those remaining on the current agreement, considering interest
rates at the reporting date.
The carrying amounts and fair values of material financial instruments at
December 31 are as follows:
1999 1998
---------------------------------- ---------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ---------- ----------- ----------- ---------- ----------
ASSETS UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Mortgage loans held for sale $ -- $1,112 $1,124 $ -- $2,416 $2,463
Mortgage servicing rights -- 1,084 1,202 -- 636 788
- ------------------------------------------ ---- ------ ------ ---- ------ ------
LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Debt -- 2,314 2,314 -- 3,692 3,690
- ------------------------------------------ ---- ------ ------ ---- ------ ------
OFF BALANCE SHEET DERIVATIVES RELATING
TO LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Interest rate swaps
in a gain position 161 -- -- 241 -- 2
in a loss position 449 -- 1 690 -- --
Foreign exchange forwards 21 -- -- -- -- --
- ------------------------------------------ ---- ------ ------ ---- ------ ------
F-16
1999 1998
---------------------------------- ---------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ---------- ----------- ----------- ---------- ----------
MORTGAGE-RELATED POSITIONS
Forward delivery commitments (a) 2,434 6 20 5,057 3 (4)
Option contracts to sell (a) 440 2 3 701 9 4
Option contracts to buy (a) 418 1 -- 948 5 1
Commitments to fund mortgages 1,283 -- 1 3,155 -- 35
Commitments to complete
securitizations (a) 813 -- (2) 2,031 -- 14
Constant maturity treasury floors (b) 4,420 57 13 3,670 44 84
Interest rate swaps (b)
in a gain position 100 -- -- 575 -- 35
in a loss position 250 -- (26) 200 -- (1)
Treasury futures (b) 152 -- (5) 151 -- (1)
Principal only swaps (b) 324 -- (15) 66 -- 3
- ----------
(a) Carrying amounts and gains (losses) on these mortgage-related
positions are already included in the determination of respective
carrying amounts and fair values of mortgage loans held for sale.
Forward delivery commitments are used to manage price risk on
sale of all mortgage loans to end investors including commitments
to complete securitizations on loans held by an unaffiliated
buyer as described in Note 5 -- Mortgage Loans Held for Sale.
(b) Carrying amounts and gains (losses) on these mortgage-related
positions are capitalized and recorded as a component of MSRs.
Gains (losses) on such positions are included in the
determination of the respective carrying amounts and fair value
of MSRs.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various equipment and
facilities, which expire through the year 2008. Rental expense for the years
ended December 31, 1999, 1998 and 1997 was $29 million, $23 million and $18
million, respectively.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1999 are as follows:
AMOUNT
-------
2000 $17
2001 17
2002 16
2003 11
2004 9
Thereafter 21
---
$91
===
LITIGATION
Parent Company Class Action Litigation and Government Irregularities. Since
the April 15, 1998 announcement by Cendant of the discovery of accounting
irregularities in former CUC business units of the Parent Company,
approximately 70 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on Cendant's behalf and several other
lawsuits and arbitration proceedings have been commenced in various courts
and other forums against Cendant and other defendants by or on behalf of
persons claiming to have purchased or otherwise acquired securities or
options issued by CUC or Cendant between May 1995 and August 1998. The
Court has ordered consolidation of many of the actions.
F-17
The SEC and the United States Attorney for the District of New Jersey are
also conducting investigations relating to the matters referenced above.
The SEC staff had advised Cendant that its inquiry should not be construed
as an indication by the SEC or its staff that any violations of law have
occurred. As a result of the findings from Cendant's internal
investigations, Cendant made all financial statement adjustments considered
necessary. Although Cendant can provide no assurances that additional
adjustments will not be necessary as a result of these government
investigations, Cendant does not expect that additional adjustments will be
necessary.
On December 7, 1999, Cendant announced that it reached a preliminary
agreement to settle the principal securities class action pending against
Cendant in the U.S. District Court in Newark, New Jersey relating to the
aforementioned class action lawsuits. Under the agreement, Cendant would
pay the class members approximately $2.85 billion in cash. The settlement
remains subject to execution of a definitive settlement agreement and
approval by the U.S. District Court. If the preliminary settlement is not
approved by the U.S. District Court, Cendant can make no assurances that
the final outcome or settlement of such proceedings will not be for an
amount greater than that set forth in the preliminary agreement.
The proposed settlements do not encompass all litigation asserting claims
associated with Cendant's accounting irregularities. Cendant does not
believe that it is feasible to predict or determine the final outcome or
resolution of these unresolved proceedings. The Company does not believe
that the impact of such unresolved proceedings would be material to its
consolidated financial position or liquidity.
Other pending litigation. The Company and its subsidiaries are involved in
pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
11. INCOME TAXES
The Company's income taxes are included in the consolidated federal income
tax return of Cendant. In addition, the Company files consolidated and
combined state income tax returns with Cendant in jurisdictions where
required. The provision for income taxes is computed as if the Company filed
its federal and state income tax returns on a stand-alone basis. Pre-tax
income is primarily generated from domestic sources.
The income tax provision consists of:
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ----------- ---------
Current
Federal $(11) $(36) $16
State -- (5) 1
Foreign 2 (1) --
----- ----- ----
(9) (42) 17
----- ----- ----
Deferred
Federal 102 143 (2)
State 19 21 --
Foreign -- 2 --
----- ----- ----
121 166 (2)
----- ----- ----
Provision for income taxes $112 $124 $15
===== ===== ====
F-18
Deferred income tax assets and liabilities are comprised of:
DECEMBER 31,
----------------
1999 1998
------ -------
DEFERRED INCOME TAX ASSETS
Depreciation and amortization $ 3 $ 4
Merger-related costs 8 14
Accrued liabilities and deferred income 22 22
Provision for doubtful accounts 2 1
Other -- 2
---- ----
DEFERRED INCOME TAX ASSETS EXCLUSIVE OF MANAGEMENT
AND MORTGAGE PROGRAMS $ 35 $ 43
==== ====
MANAGEMENT AND MORTGAGE PROGRAMS DEFERRED INCOME TAX ASSETS
Depreciation $ 7 $ 23
Accrued liabilities 11 27
---- ----
Management and mortgage programs deferred income tax assets 18 50
---- ----
MANAGEMENT AND MORTGAGE PROGRAMS DEFERRED INCOME TAX LIABILITIES
Depreciation -- --
Unamortized mortgage servicing rights 328 248
---- ----
Management and mortgage programs deferred income tax liabilities 328 248
---- ----
NET DEFERRED INCOME TAX LIABILITY UNDER MANAGEMENT AND MORTGAGE
PROGRAMS $310 $198
==== ====
No provision has been made for U.S. federal deferred income taxes on
approximately $8 million of accumulated and undistributed earnings of
foreign subsidiaries at December 31, 1999 since it is the present intention
of management to reinvest the undistributed earnings indefinitely in
foreign operations. In addition, the determination of the amount of
unrecognized U.S. federal deferred income tax liability for unremitted
earnings is not practicable.
Income tax payments (refunds), net were $5 million, ($11) million and ($1)
million for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company's effective income tax rate for continuing operations differs
from the federal statutory rate as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ------------
Federal statutory rate 35.0% 35.0% (35.0%)
Merger-related costs -- -- 58.3
State and local income taxes, net of federal tax benefit 4.2 3.4 1.1
Amortization of non-deductible goodwill 0.2 0.1 0.6
Taxes on foreign operations at rates different than statutory
U.S. federal rate (1.4) -- --
Other 0.1 1.6 1.8
---- ---- ------
38.1% 40.1% 26.8%
==== ==== ======
F-19
12. PENSION AND OTHER BENEFIT PROGRAMS
EMPLOYEE BENEFIT PLANS
On May 1, 1998, the Company's employee investment plan (the "Plan") was
merged into a Parent Company employee savings plan (the "Cendant Plan").
Coincident with the merger (the "Plan Merger"), Plan participants became
participants in the Cendant Plan. Accordingly, the participants' assets
that existed at the transfer date under the Plan were invested in
comparable investment categories in proportionate amounts in the Cendant
Plan. Effective as of the date of the Plan Merger, investment options for
participants under the Plan were terminated and all future contributions
were invested in options available under the Cendant Plan. After the Plan
Merger, participants maintained the same vesting schedule for their Company
contributions as was in effect under the Plan. The Company's contributions
vest in accordance with an employee's years of vesting service, with an
employee being 100% vested after three years of vesting service. Under the
Plan, the Company matched employee contributions up to 3% of their
compensation, with up to an additional 3% discretionary match available as
determined at the end of each plan year. Under the Cendant Plan, employees
are entitled to a 100% match of the first 3% of their compensation
contributed, with an additional 50% discretionary match up to an additional
3% of their compensation contributed. Such discretionary match is
determined at the end of each plan year. The Company's discretionary
matches were 50% in 1999, 1998 and 1997. The Company's contributions are
allocated based upon the investment elections noted above at the same
percentage as the respective employees' base salary withholdings. The
Company's costs for contributions were $6 million for each of the years
ended December 31, 1999 and 1998 and $3 million for the year ended
December 31, 1997.
PENSION AND SUPPLEMENTAL RETIREMENT PLANS
The Company maintains a non-contributory defined benefit pension plan (the
"Pension Plan") covering substantially all domestic employees of the
Company and its subsidiaries employed prior to July 1, 1997. Coincident
with the disposition of the fleet businesses, all participating employees
of the fleet businesses became fully vested in their accrued benefits under
the Pension Plan and substantially all such employees (with certain
exceptions) ceased accruing additional benefits under the Pension Plan.
Additionally, certain assets and liabilities relating to then currently
active Company employees located in the United Kingdom ("UK") were
transferred from a contributory defined benefit plan sponsored by a UK
subsidiary of the fleet businesses to a defined benefit plan sponsored by
Cendant. Participation in and transfer into such plan was at the employees'
option.
Under the domestic and foreign plans, benefits are based on an employee's
years of credited service and a percentage of final average compensation.
The Company's funding policy is to contribute amounts sufficient to meet
the minimum requirements plus other amounts as the Company deems
appropriate. The Company also sponsors two unfunded supplemental retirement
plans to provide certain key executives with benefits in excess of limits
under the federal tax law and to include annual incentive payments in
benefit calculations. A reconciliation of the projected benefit obligation,
plan assets and funded status of the funded pension plans and the amounts
included in the Company's Consolidated Balance Sheets is provided below.
1999 1998
----------- ---------
Change in projected benefit obligation
Benefit obligation at January 1 $119 $ 94
Service cost 5 5
Interest cost 8 7
Benefits paid (4) (3)
Acturial (gain) loss (13) 16
Curtailment (21) --
Special termination benefits 8 --
Transfers (3) --
----- ----
Benefit obligation at December 31 $ 99 $119
===== ====
F-20
1999 1998
--------- -----------
Change in plan assets
Fair value of plan assets at January 1 $94 $ 87
Actual return on plan assets 4 10
Benefits paid (5) (3)
Transfers 7 --
Other (2) --
---- -----
Fair value of plan assets at December 31 $98 $ 94
==== =====
Underfunded status of the plan $ 1 $ 25
Unrecognized net gain (loss) 5 (13)
---- -----
Accrued benefit cost $ 6 $ 12
==== =====
The projected benefit obligation and accumulated benefit obligation for the
unfunded pension plans with accumulated benefit obligations in excess of plan
assets were $3 million each as of December 31, 1999 and $2 million each as of
December 31, 1998.
Components of net periodic benefit costs consists of:
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
----------- -------- --------
Service cost $ 5 $ 6 $ 6
Interest cost 8 8 9
Expected return on plan assets (9) (11) (14)
Curtailment (10) -- --
Amortization of net gain -- 2 5
----- ----- -----
Net periodic pension cost (6) 5 6
Reclassification for discontinued operations 3 2 2
----- ----- -----
Net periodic pension cost (benefit) related to continuing
operations $ (9) $ 3 $ 4
===== ===== =====
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
Rate assumptions: ---------- ---------- ----------
Discount rate 7.75% 6.75% 7.75%
Rate of compensation increase 5.00% 5.00% 5.00%
Long-term rate of return on plan assets 10.00% 10.00% 10.00%
During 1999, the Company recognized a net curtailment gain of $10 million
primarily as a result of the freezing of pension benefits related to the
domestic defined benefit pension plan.
On December 31, 1998 (the "transfer date"), assets were transferred to the
Company's pension plan that related to certain Parent Company employees and
related plan obligations which were retained as a result of a Parent
Company transaction occurring in September 1997. The estimated projected
benefit obligation equaled the fair value of the plan's assets (primarily
cash) of $7 million at the transfer date.
POSTRETIREMENT BENEFIT PLANS
The Company provides certain health care and life insurance benefits for
retired employees up to the age of 65. A reconciliation of the accumulated
benefit obligation and funded status of the plans and the amounts included
in the Company's Consolidated Balance Sheets is provided below:
F-21
DECEMBER 31,
---------------------
1999 1998
--------- ---------
Change in accumulated benefit obligation
Benefit obligation at January 1 $13 $ 8
Service cost 1 1
Interest cost -- 1
Benefits paid (1) --
Actuarial (gain) loss (2) 3
Curtailment (1) --
Change in plan provisions (6) --
---- -----
Benefit obligation at December 31 $ 4 $ 13
==== =====
Funded status -- all unfunded $ 4 $ 13
Unrecognized prior service cost 4 --
Unrecognized transition obligation (3) (4)
Unrecognized net gain (loss) 1 (2)
---- -----
Accrued benefit cost $ 6 $ 7
==== =====
Components of net periodic postretirement benefit costs consists of:
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
---------- ------ -----
Service cost $ 1 $ 1 $ 1
Interest cost -- 1 1
Amortization of unrecognized prior service cost (1) -- --
Curtailment gain (1) -- --
---- --- ---
Net cost (1) 2 2
Reclassification for discontinued operations -- 1 1
---- --- ---
Net cost related to continuing operations $(1) $ 1 $ 1
==== === ===
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
Rate assumptions: ---------- ---------- ----------
Discount rate 7.75% 6.75% 7.75%
Health care costs trend rate for subsequent year 8.00% 8.00% 8.00%
The Company recognized a gain of $1 million, which reflects a curtailment
of the plan and the related contractual termination of benefits for certain
employees. The gain was recorded as a component of the net periodic
postretirement benefit cost for the year ended December 31, 1999.
The health care cost trend rate is assumed to decrease gradually through
the year 2004 when the ultimate trend rate of 4.75% is reached. The effects
of a one percentage point increase and decrease in the assumed health care
cost trend rates on the aggregate service and interest cost components of
net periodic postretirement benefit costs and on the accumulated
postretirement benefit obligation are not material.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company is allocated certain expenses
from the Parent Company for corporate-related functions including executive
management, finance, human resources, information technology, legal and
facility related expenses. The Parent Company allocates corporate expenses to
its subsidiaries based on a percentage of forecasted revenues of its
subsidiaries. Such expenses allocated to the continuing operations of the
Company amounted to $18 million, $37 million and $34 million for the years
ended December 31, 1999, 1998 and 1997, respectively, and are included in
general and administrative expenses in the Consolidated Statements of
Operations. In addition, at December 31, 1999, 1998 and 1997, the Company had
outstanding balances of $57 million, $273 million and $102 million,
respectively, payable to the Parent Company, representing the accumulation of
F-22
corporate allocations and amounts paid by the Parent Company on behalf of the
Company. Amounts payable to the Parent Company are included in accounts
payable and accrued liabilities in the Consolidated Balance Sheets.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The after-tax components of accumulated other comprehensive income (loss)
are as follows:
UNREALIZED ACCUMULATED
CURRENCY LOSSES ON OTHER
TRANSLATION MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME/(LOSS)
------------- ------------ --------------
Beginning balance, January 1, 1997 $ (8) $-- $ (8)
Current-period change (9) -- (9)
----- --- -----
Ending balance, December 31, 1997 (17) -- (17)
Current-period change (10) -- (10)
----- --- -----
Ending balance, December 31, 1998 (27) -- (27)
Current-period change 26 (1) 25
----- ---- -----
Ending balance, December 31, 1999 $ (1) $(1) $ (2)
===== ==== =====
The currency translation adjustments are not currently adjusted for income
taxes since they relate to indefinite investments in foreign subsidiaries.
15. SEGMENT INFORMATION
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is defined
as earnings before non-operating interest, income taxes, and depreciation
and amortization (exclusive of depreciation and amortization on assets
under management and mortgage programs), adjusted to exclude Unusual
Charges. Such Unusual Charges are of a non-recurring or unusual nature and
are not measured in assessing segment performance or are not segment
specific. Interest expense incurred on indebtedness which is used to
finance relocation and mortgage origination and servicing activities is
recorded net within revenues in the applicable reportable operating segment
(see Note 7 -- Liabilities Under Management and Mortgage Programs). The
Company determined that it has two reportable operating segments comprising
its continuing operations based primarily on the types of services it
provides, the consumer base to which marketing efforts are directed and the
methods used to sell services. Inter-segment net revenues were not
significant to the net revenues of any one segment. A description of the
services provided within each of the Company's reportable operating
segments is as follows:
RELOCATION
Relocation services are provided to client corporations for the transfer of
their employees. Such services include appraisal, inspection and selling of
transferees' homes, providing equity advances to transferees (generally
guaranteed by the corporate customer), purchase of a transferee's home
which is sold within a specified time period for a price which is at least
equivalent to the appraised value, certain home management services,
assistance in locating a new home at the transferee's destination,
consulting services and other related services.
MORTGAGE
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. Revenues are earned from the sale of mortgage
loans to investors as well as from fees earned on the servicing of loans
for investors. The Company markets a variety of mortgage products to
consumers through relationships with corporations, affinity groups,
financial institutions, real estate brokerage firms and other mortgage
banks.
Mortgage services customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
F-23
certificates issued or guaranteed by Fannie Mae, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association, while
generally retaining mortgage servicing rights. Mortgage servicing consists of
collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage-related expenses such
as taxes and insurance, and otherwise administering the Company's mortgage
loan servicing portfolio.
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1999
TOTAL RELOCATION MORTGAGE OTHER
-------- ------------ ---------- ------
Net revenues $ 830 $ 415 $ 397 $ 18
Adjusted EBITDA 330 122 182 26
Depreciation and amortization 36 17 19 --
Segment assets 4,287 1,033 2,817 437
Capital expenditures 69 21 48 --
YEAR ENDED DECEMBER 31, 1998
TOTAL RELOCATION MORTGAGE OTHER
-------- ------------ ---------- ------
Net revenues $ 808 $ 444 $ 353 $ 11
Adjusted EBITDA 316 125 186 5
Depreciation and amortization 26 17 9 --
Segment assets 4,856 1,130 3,504 222
Capital expenditures 106 70 36 --
YEAR ENDED DECEMBER 31, 1997
TOTAL RELOCATION MORTGAGE OTHER
-------- ------------ ---------- --------
Net revenues $ 589 $ 410 $ 179 $ --
Adjusted EBITDA 147 89 75 (17)
Depreciation and amortization 13 8 5 --
Segment assets 3,447 1,061 2,246 140
Capital expenditures 42 23 16 3
Provided below is a reconciliation of total Adjusted EBITDA and total assets
for reportable segments to the consolidated amounts.
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------ -------- ---------
Adjusted EBITDA for reportable segments $330 $ 316 $ 147
Depreciation and amortization 36 26 13
Merger-related costs and other unusual charges (credits) -- (19) 190
---- ----- -----
Consolidated income (loss) before income taxes $294 $ 309 $ (56)
==== ===== =====
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Total assets for reportable segments $4,287 $4,856 $3,447
Net assets of discontinued operations -- 967 704
------ ------ ------
Consolidated total assets $4,287 $5,823 $4,151
====== ====== ======
F-24
GEOGRAPHIC SEGMENT INFORMATION
UNITED UNITED ALL OTHER
TOTAL STATES KINGDOM COUNTRIES
-------- -------- --------- ----------
1999
Net revenues $ 830 $ 811 $ 11 $ 8
Assets 4,287 4,228 39 20
Long-lived assets 167 166 1 --
1998
Net revenues $ 808 $ 785 $ 13 $10
Assets 5,823 5,339 452 32
Long-lived assets 150 149 1 --
1997
Net revenues $ 589 $ 564 $ 13 $12
Assets 4,151 3,912 196 43
Long-lived assets 76 66 9 1
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property and
equipment.
16. SUBSEQUENT EVENTS
PHH CREDIT FACILITIES
On February 28, 2000, the Company reduced the availability of its unsecured
committed credit facilities from $2.5 billion to $1.5 billion to reflect
its reduced borrowing needs as a result of the disposition of its fleet
businesses.
--------------
F-25
EXHIBIT INDEX
EXHIBITS:
EXHIBIT NO.
- ------------- DESCRIPTION
2-1 Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS
Incorporated, PHH Corporation and Mercury Acquisition Corp., filed as Annex 1 in the
Joint Proxy Statement/Prospectus included as part of Registration No. 333-24031. (*)
3-1 Charter of PHH Corporation, as amended August 23, 1996, filed as Exhibit 3-1 to the
Company's Transition Report on Form 10-K filed on July 29, 1997. (*)
3-2 By-Laws of PHH Corporation, as amended October, filed as Exhibit 3-1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. (*)
4-1 Indenture between PHH Corporation and Bank of New York, Trustee, dated as of May 1,
1992, filed as Exhibit 4(a)(iii) to Registration Statement 33-48125. (*)
4-2 Indenture between PHH Corporation and First National Bank of Chicago, Trustee, dated as
of March 1, 1993, filed as Exhibit 4(a)(i) to Registration Statement 33-59376. (*)
4-3 Indenture between PHH Corporation and First National Bank of Chicago, Trustee, dated as
of June 5, 1997, filed as Exhibit 4(a) to Registration Statement 333-27715. (*)
4-4 Indenture between PHH Corporation and Bank of New York, Trustee, dated as of June 5,
1997, filed as Exhibit 4(a)(11) to Registration Statement 333-27715. (*)
10-1 364-Day Credit Agreement Among PHH Corporation, the Lenders and Chase Manhattan
Bank, as Administrative Agent, dated February 28, 2000, filed as Exhibit 10.24 (a) to
Cendant Corporation's Form 10-K for the year ended December 31, 1999.(*)
10-2 Five-year Credit Agreement among PHH Corporation, the Lenders and Chase Manhattan
Bank, as Administrative Agent, dated February 28, 2000, filed as Exhibit 10.24 (b) to
Cendant Corporation's Form 10-K for the year ended December 31, 1999.(*)
10-3 Distribution Agreement between the Company and CS First Boston Corporation; Goldman,
Sachs & Co.; Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated; and
J.P. Morgan Securities, Inc. dated November 9, 1995, filed as Exhibit 1 to Registration
Statement 33-63627. (*)
10-4 Distribution Agreement between the Company and Credit Suisse; First Boston Corporation;
Goldman Sachs & Co. and Merrill Lynch & Co., dated June 5, 1997 filed as Exhibit 1 to
Registration Statement 333-27715. (*)
10-5 Distribution Agreement, dated March 2, 1998, among PHH Corporation, Credit Suisse First
Boston Corporation, Goldman Sachs & Co., Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and J.P. Morgan Securities, Inc. filed as Exhibit 1 to Form 8-K
dated March 3, 1998, File No. 1-07797. (*)
10-6 Agreement and Plan of Merger and Reorganization dated May 22, 1999, by and among PHH
Corporation, PHH Holdings Corporation and Avis Rent A Car, Inc. and Avis Fleet Leasing
and Management Corporation, filed as Exhibit (C) to Cendant Corporation's Schedule 13E-4
dated June 16, 1999. (*)
10-7 Agreement between PHH Corporation and Bishop's Gate Residential Mortgage Trust, dated
as of December 11, 1998. (**)
EXHIBIT NO.
- ------------- DESCRIPTION
12 Schedule containing information used in the computation of the ratio of earnings to fixed
charges. (**)
23 Consent of Deloitte & Touche LLP. (**)
27 Financial Data Schedule (filed electronically only). (**)
The registrant hereby agrees to furnish to the Commission upon request a copy of all
constituent instruments defining the rights of holders of long-term debt of the registrant and
all its subsidiaries for which consolidated or unconsolidated financial statements are required
to be filed under which instruments the total amount of securities authorized does not
exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
- ------------
* Incorporated by reference
** Filed herewith