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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
COMMISSION FILE NO. 1-7797
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PHH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND
(STATE OR OTHER 52-0551284
JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION
ORGANIZATION) NUMBER)
1 CAMPUS DRIVE
PARSIPPANY, NEW JERSEY
(ADDRESS OF PRINCIPAL 07054
EXECUTIVE OFFICE) (ZIP CODE)
(973) 428-9700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure
format.
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<Page>
PHH CORPORATION AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE
----
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three
and nine months ended September 30, 2001 and 2000 1
Consolidated Condensed Balance Sheets as of September 30, 2001
and December 31, 2000 2
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Narrative Analysis of Financial Condition and
Results of Operations 10
PART II Other Information
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</Table>
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN MILLIONS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
2001 2000 2001 2000
------- ------ ------ ------
REVENUES
Service fees, net $321 $ 257 $ 846 $ 636
Fleet leasing 378 -- 898 --
Other -- 7 87 23
---- ----- ------- -----
Net revenues 699 264 1,831 659
---- ----- ------- -----
EXPENSES
Operating 185 112 546 352
Vehicle depreciation, lease charges and interest, net 307 -- 729 --
General and administrative 48 22 117 64
Non-vehicle depreciation and amortization 20 11 55 31
Other charges (credits) -- (1) 8 1
---- ----- ------- -----
Total expenses 560 144 1,455 448
---- ----- ------- -----
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 139 120 376 211
Provision for income taxes 55 47 151 84
Minority interest, net of tax 1 -- 1 --
---- ----- ------- -----
INCOME FROM CONTINUING OPERATIONS 83 73 224 127
Loss on sale of discontinued operations, net of tax -- (9) -- (9)
---- ----- ------- -----
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 83 64 224 118
Cumulative effect of accounting change, net of tax -- -- (35) --
---- ----- ------- -----
NET INCOME $ 83 $ 64 $ 189 $ 118
==== ===== ======= =====
See Notes to Consolidated Condensed Financial Statements.
</Table>
1
<Page>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Cash and cash equivalents $ 121 $ 288
Receivables, net 470 246
Property and equipment, net 195 159
Investment in convertible preferred stock -- 388
Goodwill, net 563 30
Other assets 702 445
------ -------
Total assets exclusive of assets under programs 2,051 1,556
------ -------
Assets under management and mortgage programs
Mortgage loans held for sale 826 879
Relocation receivables 339 329
Vehicle-related, net 3,870 --
Mortgage servicing rights 1,949 1,653
------ -------
6,984 2,861
------ -------
TOTAL ASSETS $9,035 $ 4,417
====== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and other current liabilities $ 811 $ 316
Deferred income 46 31
Deferred income taxes 47 4
------ -------
Total liabilities exclusive of liabilities under
programs 904 351
------ -------
Liabilities under management and mortgage programs
Debt 5,726 2,040
Deferred income taxes 656 476
------ -------
6,382 2,516
------ -------
Commitments and contingencies (Note 5)
Stockholder'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 799 762
Retained earnings 946 792
Accumulated other comprehensive income (loss) 4 (4)
------ -------
Total stockholder's equity 1,749 1,550
------ -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $9,035 $ 4,417
====== =======
See Notes to Consolidated Condensed Financial Statements.
</Table>
2
<Page>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income $ 189 $ 118
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on sale of discontinued operations, net of tax -- 9
Non-vehicle depreciation and amortization 55 31
Cumulative effect of accounting change 59 --
Non-cash portion of other charges (3) --
Deferred income taxes 26 11
Net change in assets and liabilities, excluding
the impact of acquired businesses:
Receivables (2) 211
Income taxes 85 76
Accounts payable and other current liabilities 49 (140)
Other, net 4 (179)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 462 137
-------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Depreciation and amortization 807 113
Origination of mortgage loans (28,959) (17,980)
Proceeds on sale of and payments
from mortgage loans held for sale 29,044 17,839
-------- --------
892 (28)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,354 109
-------- --------
INVESTING ACTIVITIES
Property and equipment additions (43) (21)
Proceeds from sales of marketable securities 29 14
Purchases of marketable securities (16) (62)
Net assets acquired (net of cash acquired of
$134 million) and acquisition-related payments (825) (20)
Other, net (61) 28
-------- --------
NET CASH USED IN INVESTING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (916) (61)
-------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Investment in vehicles (4,322) --
Payments received on investment in vehicles 3,522 --
Equity advances on homes under management (4,949) (6,025)
Repayment on advances on homes under management 4,937 6,534
Net additions to mortgage servicing rights
and related hedges (505) (664)
Proceeds from sales of mortgage servicing rights 45 93
-------- --------
(1,272) (62)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,188) (123)
-------- --------
FINANCING ACTIVITIES
Net borrowings from Parent 126 237
Payment of dividends (36) (40)
Other, net (13) --
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 77 197
-------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Proceeds from borrowings 6,144 3,237
Principal payments on borrowings (5,641) (4,283)
Net change in short-term borrowings 87 875
-------- --------
590 (171)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 667 26
-------- --------
Effect of changes in exchange rates on
cash and cash equivalents -- 2
-------- --------
Net increase (decrease) in cash and cash
equivalents (167) 14
Cash and cash equivalents, beginning of period 288 80
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 121 $ 94
======== ========
See Notes to Consolidated Condensed Financial Statements.
</Table>
3
<Page>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNLESS OTHERWISE NOTED, ALL AMOUNTS ARE IN MILLIONS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements
include the accounts and transactions of PHH Corporation and its subsidiaries
(collectively, the "Company" or "PHH"). The Company is a wholly-owned
subsidiary of Cendant Corporation ("Cendant" or the "Parent Company").
Pursuant to the issuance of public debt, the Company operates and maintains
status as a separate public reporting entity, which is the basis under which
the accompanying Consolidated Condensed Financial Statements and Notes
thereto are presented.
In management's opinion, the Consolidated Condensed Financial Statements
contain all normal recurring adjustments necessary for a fair presentation of
interim results reported. The results of operations reported for interim
periods are not necessarily indicative of the results of operations for the
entire year or any subsequent interim period. In addition, management is
required to make estimates and assumptions that affect the amounts reported
and related disclosures. Estimates, by their nature, are based on judgment
and available information. Accordingly, actual results could differ from
those estimates. The Consolidated Condensed Financial Statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2001, the Company adopted the provisions of the Emerging Issues
Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Interests in Securitized Financial
Assets." EITF Issue No. 99-20 modified the accounting for interest income and
impairment of beneficial interests in securitization transactions, whereby
beneficial interests determined to have an other-than-temporary impairment
are required to be written down to fair value. The adoption of EITF Issue No.
99-20 resulted in the recognition of a non-cash charge of $46 million ($27
million, after tax) during first quarter 2001 to account for the cumulative
effect of the accounting change.
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133, as amended and interpreted, established accounting
and reporting standards for derivative instruments and hedging activities. As
required by SFAS No. 133, the Company has recorded all such derivatives at
fair value in the Consolidated Condensed Balance Sheet at January 1, 2001.
The adoption of SFAS No. 133 resulted in the recognition of a non-cash charge
of $13 million ($8 million, after tax) in the Consolidated Condensed
Statement of Income on January 1, 2001 to account for the cumulative effect
of the accounting change relating to derivatives designated in fair value
type hedges prior to adopting SFAS No. 133, to derivatives not designated as
hedges and to certain embedded derivatives. As provided for in SFAS No. 133,
the Company also reclassified certain financial investments as trading
securities at January 1, 2001, which resulted in a pre-tax benefit of $82
million recorded in other revenues within the Consolidated Condensed
Statement of Income.
On December 31, 2000, the Company adopted the disclosure requirements of SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125."
During second quarter 2001, the Company adopted the remaining provisions of
this standard. SFAS No. 140 revised the criteria for accounting for
securitizations, other financial-asset transfers and collateral and
introduced new disclosures, but otherwise carried forward most of the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" without amendment. The
impact of adopting the remaining provisions of this standard was not material
to the Company's financial position or results of operations.
4
<Page>
DERIVATIVE INSTRUMENTS
The Company uses derivative 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 the fair value of its mortgage servicing rights. As a matter of
policy, the Company does not use derivatives for trading or speculative
purposes.
o All freestanding derivatives are recorded at fair value either as
assets or liabilities.
o Changes in fair value of derivatives not designated as hedging
instruments and of derivatives designated as fair value hedging
instruments are recognized currently in earnings and included in net
revenues in the Consolidated Condensed Statement of Income.
o Changes in fair value of the hedged item in a fair value hedge are
recorded as an adjustment to the carrying amount of the hedged item
and recognized currently in earnings.
o The effective portion of changes in fair value of derivatives
designated as cash flow hedging instruments is recorded as a
component of other comprehensive income. The ineffective portion is
reported currently in earnings.
o Amounts included in other comprehensive income are reclassified into
earnings in the same period during which the hedged item affects
earnings.
The Company is also party to certain contracts containing embedded
derivatives. As required by SFAS No. 133, certain embedded derivatives have
been bifurcated from their host contracts and are recorded at fair value in
the Consolidated Condensed Balance Sheet. The total fair value of the
Company's embedded derivatives and changes in fair value were not material to
the Company's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and requires additional
disclosures for material business combinations completed after such date.
This standard also addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at
acquisition. On July 1, 2001, the Company adopted the provisions relating to
any acquisitions made subsequent to June 30, 2001, as required. The
provisions regarding the classification of previously acquired intangible
assets will be adopted simultaneously with the provisions of SFAS No. 142 on
January 1, 2002, as required.
SFAS No. 142 addresses financial accounting and reporting for intangible
assets acquired outside of a business combination. The standard also
addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. The Company will be
required to assess goodwill and other intangible assets for impairment
annually, or more frequently if circumstances indicate a potential
impairment. On July 1, 2001, the Company adopted the provisions requiring
that goodwill and certain other intangible assets acquired after June 30,
2001 not be amortized. The Company will adopt the remaining provision of this
standard on January 1, 2002, as required. Transition-related impairment
losses, if any, resulting from the initial assessment of goodwill and certain
other intangible assets will be recognized by the Company as a cumulative
effect of accounting change as of January 1, 2002. The Company is currently
evaluating the impact of adopting the remaining provisions on its financial
position and results of operations. Based upon a preliminary assessment of
previously acquired goodwill and certain other intangible assets that will no
longer be amortized upon the adoption of SFAS No. 142, the Company believes
that the related reduction to amortization expense during the nine months
ended September 30, 2001 and 2000 would not have been material.
During October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and replaces the accounting and
reporting provisions of APB Opinion No. 30, "Reporting Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
as it relates to the disposal of a segment of a business. SFAS No. 144
requires the use of a single accounting model for long-lived assets to be
disposed of by sale, including discontinued operations, by requiring those
long-lived assets to be measured at the lower of carrying amount or fair
value less cost to sell. The impairment recognition and measurement
provisions
5
<Page>
of SFAS No. 121 were retained for all long-lived assets to be held
and used with the exception of goodwill. The Company will adopt this standard
on January 1, 2002.
2. ACQUISITION
On March 1, 2001, the Company acquired all of the outstanding shares of Avis
Group Holdings, Inc. ("Avis"), one of the world's leading service and
information providers for comprehensive automotive transportation and vehicle
management solutions, for approximately $994 million. In connection with the
acquisition, the Company's investment in the convertible preferred stock of
an Avis subsidiary was recapitalized. The acquisition was primarily funded
from cash on hand and borrowings from Cendant, which were subsequently repaid
during first quarter 2001. Simultaneous with the acquisition, the Company
distributed the car rental operations of Avis ("ARAC") to a Cendant
subsidiary not within the Company's ownership structure. Accordingly, the
Company currently owns and operates the fleet management business of Avis
("Fleet").
The acquisition was accounted for using the purchase method of accounting;
accordingly, assets acquired and liabilities assumed were recorded on the
Company's Consolidated Condensed Balance Sheet at March 1, 2001 based upon
their estimated fair values at such date. The results of operations of Fleet
have been included in the Consolidated Condensed Statement of Income since
the date of acquisition.
The excess of the purchase price over the estimated fair value of the
underlying assets acquired and liabilities assumed was allocated to goodwill
and is being amortized over 40 years on a straight-line basis until the
adoption of SFAS No. 142. The allocation of the excess purchase price is
based upon preliminary estimates and assumptions and is subject to revision
when appraisals have been finalized. Accordingly, revisions to the
allocation, which may be significant, will be recorded by the Company as
further adjustments to the purchase price allocation. The preliminary
allocation of the purchase price is summarized as follows:
<Table>
<Caption>
AMOUNT
------
Cash consideration $ 937
Fair value of converted options 17
Transaction costs and expenses 40
-------
Total purchase price 994
Book value of Cendant's existing net investment in Avis 409
-------
Cendant's basis in Avis 1,403
Portion of Cendant's basis attributable to ARAC (403)
-------
PHH's basis in Fleet 1,000
Historical value of net assets acquired of Fleet (451)
Fair value adjustments (26)
-------
Excess purchase price over assets acquired and liabilities assumed $ 523
=======
</Table>
In connection with the acquisition, the Company is in the process of
integrating the operations of Fleet and expects to incur transition costs
relating to such integration. Transition costs may result from integrating
operating systems, relocating employees, closing facilities, reducing
duplicative efforts and exiting and consolidating certain other activities.
These costs will be recorded on the Company's Consolidated Condensed Balance
Sheet as adjustments to the purchase price or on the Company's Consolidated
Condensed Statement of Income as expenses, as appropriate.
Pro forma net revenues, income from continuing operations and net income
would have been as follows had the acquisition of Fleet occurred on January
1st for each period presented:
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------
2001 2000
------ -------
Net revenues $2,083 $ 1,742
Income from continuing operations 222 142
Net income 187 133
</Table>
These pro forma results do not give effect to any synergies expected to
result from the acquisition of Fleet and are not necessarily indicative of
what actually would have occurred if the acquisition had been consummated on
January 1st of each period, nor are they necessarily indicative of future
consolidated results.
6
<Page>
3. OTHER CHARGES (CREDITS)
During the nine months ended September 30, 2001, the Company incurred unusual
charges totaling $8 million primarily related to the acquisition and
integration of Fleet.
As a result of changes in business and in consumer behavior following the
September 11th terrorist attacks, the Company is reviewing its organizational
alignment and its work force at a number of business locations. The Company
will record charges during fourth quarter 2001 in connection with this
initiative. The Company is also monitoring the valuation of certain assets
primarily relating to its investment in mortgage servicing rights. The value
of mortgage servicing rights is subject to early prepayment risk due to a
decrease in interest rates. A general slowdown of the economy and, more
significantly, the impact of the September 11th terrorist attacks have
resulted in continued interest rate cuts. Accordingly, the Company is
reviewing the valuation of its current portfolio of mortgage servicing rights
for possible impairment. Any adjustment to the carrying value of the
portfolio would result in a non-cash charge, which, based upon the current
environment, is not expected to exceed $60 million after-tax and would not be
material relative to the size of the portfolio.
4. DEBT
MEDIUM-TERM NOTES. During first quarter 2001, the Company issued $650 million
of unsecured medium-term notes under an existing shelf registration
statement. These notes bear interest at a rate of 8 1/8% per annum and mature
in February 2003. As of September 30, 2001, the Company had a total of $1.6
billion of medium-term notes outstanding, $830 million of which were issued
by the Company's special purpose entity, Greyhound Funding LLC.
SHORT-TERM BORROWINGS. As of September 30, 2001, the Company had
approximately $1.7 billion of short-term borrowings outstanding, which
primarily related to commercial paper.
SECURITIZED BORROWINGS. As of September 30, 2001, the Company had
outstanding borrowings of $2.4 billion under securitized facilities.
CREDIT FACILITIES. During first quarter 2001, the Company renewed its $750
million syndicated revolving credit facility, which was due in 2001. The new
facility bears interest at LIBOR plus an applicable margin, as defined in the
agreement, and terminates on February 21, 2002. The Company is required to
pay a per annum utilization fee of .25% if usage under the facility exceeds
25% of aggregate commitments. Under the new facility, any loans outstanding
as of February 21, 2002 may be converted into a term loan with a final
maturity of February 21, 2003. As of September 30, 2001, the Company had the
full $750 million available under this facility. Additionally, the Company
maintains a $750 million five-year syndicated committed revolving credit
facility, which matures in February 2005, and two other committed facilities
aggregating $275 million with maturity dates in November 2002.
5. COMMITMENTS AND CONTINGENCIES
In June 1999, the Company disposed of certain businesses. The dispositions
were structured as a tax-free reorganization and, accordingly, no tax
provision was recorded on a majority of the gain. However, pursuant to an
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.
Notwithstanding the IRS interpretive ruling, the Company believes that, based
upon analysis of current tax law, its position would prevail, if challenged.
Cendant is involved in litigation asserting claims associated with the
accounting irregularities discovered in former CUC business units outside of
the principal common stockholder class action litigation. Cendant does not
believe that it is feasible to predict or determine the final outcome or
resolution of these unresolved proceedings. However, Cendant does not believe
that the impact of such unresolved proceedings should result in a material
liability to the Company in relation to its consolidated financial position
or liquidity.
The Company is 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.
7
<Page>
6. COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 83 $64 $ 189 $118
Other comprehensive income (loss):
Currency translation adjustments (1) 3 (3) 1
Unrealized gains on marketable securities, net of tax (4) 1 11 4
---- --- ----- ----
Total comprehensive income $ 78 $68 $ 197 $123
==== === ===== ====
</Table>
The after-tax components of accumulated other comprehensive income (loss) for
the nine months ended September 30, 2001 are as follows:
<Table>
<Caption>
UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) OTHER
TRANSLATION ON MARKETABLE COMPREHENSIVE
ADJUSTMENTS SECURITIES INCOME/(LOSS)
----------- ---------- -------------
Balance, January 1, 2001 $(1) $ (3) $(4)
Current period change (3) 11 8
--- ---- ---
Balance, September 30, 2001 $(4) $ 8 $ 4
=== ==== ===
</Table>
7. DERIVATIVES
Consistent with its risk management policies, the Company manages foreign
currency and interest rate risks using derivative instruments.
FOREIGN CURRENCY RISK
The Company uses foreign currency forward contracts to manage its exposure to
changes in foreign currency exchange rates associated with its foreign
currency denominated receivables and forecasted earnings of foreign
subsidiaries. The Company primarily hedges its foreign currency exposure to
the British pound, Canadian dollar and Euro. These forward contracts do not
qualify for hedge accounting treatment under SFAS No. 133. The fluctuations
in the value of these foreign currency forwards do, however, effectively
offset the impact of changes in the value of the underlying risk that they
are intended to economically hedge.
INTEREST RATE RISK
The Company's mortgage-related assets and the debt used to finance much of
its operations are exposed to interest rate fluctuations. The Company uses
various hedging strategies and derivative financial instruments to create a
desired mix of fixed and floating rate assets and liabilities. Derivative
instruments currently used in managing the Company's interest rate risks
include swaps, forward delivery commitments and instruments with option
features. A combination of fair value hedges, cash flow hedges and financial
instruments that do not qualify for hedge accounting treatment under SFAS No.
133 are used to manage the Company's portfolio of interest rate sensitive
assets and liabilities.
The Company uses fair value hedges to manage its mortgage servicing rights,
mortgage loans held for sale and certain fixed rate debt. During the three
and nine months ended September 30, 2001, the net impact of these fair value
hedges was a loss of $8 million and $11 million, respectively. These losses
are included in net revenues within the Consolidated Condensed Statements of
Income and consist of losses of $24 million and $47 million, respectively, to
reflect the ineffective portion of these fair value hedges, which were
partially offset by gains of $16 million and $36 million, respectively, to
reflect the amount that was excluded from the Company's assessment of hedge
effectiveness.
The Company uses cash flow hedges to manage the interest expense incurred on
its floating rate debt. Ineffectiveness resulting from these cash flow
hedging relationships during the three and nine months ended September 30,
2001 was not material to the Company's results of operations. Derivative
gains and losses
8
<Page>
included in other comprehensive income are reclassified into earnings when
interest payments impact earnings. During the three and nine months ended
September 30, 2001, the amount of gains or losses reclassified from other
comprehensive income to earnings was not material to the Company's results
of operations. The Company had no material derivatives designated as cash
flow hedges as of September 30, 2001.
8. SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes and depreciation and amortization
calculation. For this purpose, Adjusted EBITDA is defined as earnings before
non-vehicle interest, income taxes and non-vehicle depreciation and
amortization, adjusted to exclude certain items which are of a non-recurring
or unusual nature and are not measured in assessing segment performance or
are not segment specific.
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
2001 2000
------------------------ ------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
-------- ------ -------- ------
Real Estate Services $321 $138 $257 $123
Fleet Management 378 21 -- --
---- ---- ---- ----
Total Reportable Segments 699 159 257 123
Corporate and Other(a) -- -- 7 7
---- ---- ---- ----
Total $699 $159 $264 $130
==== ==== ==== ====
</Table>
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
2001 2000
------------------------ ------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
-------- ------ -------- ------
Real Estate Services $ 846 $299 $636 $222
Fleet Management 898 54 -- --
------ ---- ---- ----
Total Reportable Segments 1,744 353 636 222
Corporate and Other(a) 87 86 23 21
------ ---- ---- ----
Total $1,831 $439 $659 $243
====== ==== ==== ====
</Table>
----------
(a) Included in Corporate and Other are unallocated corporate overhead
and the eliminations of transactions between segments.
Total assets for the Company's Fleet Management segment were $4.9 billion as
of September 30, 2001.
Provided below is a reconciliation of Adjusted EBITDA to income before income
taxes and minority interest.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
Adjusted EBITDA $ 159 $ 130 $ 439 $ 243
Non-vehicle depreciation and amortization (20) (11) (55) (31)
Other (charges) credits -- 1 (8) (1)
----- ----- ----- -----
Income before income taxes and minority interest $ 139 $ 120 $ 376 $ 211
===== ===== ===== =====
</Table>
9. SUBSEQUENT EVENT
ISSUANCE OF ASSET-BACKED NOTES. On October 23, 2001, Greyhound Funding LLC, a
subsidiary of the Company, issued $750 million of floating rate callable
asset backed notes for net proceeds of approximately $747 million. Greyhound
Funding LLC finances the leases and related vehicles owned by the Company's
fleet management business. The notes bear interest at one-month LIBOR plus an
applicable spread and were issued in two tranches: $425 million maturing in
September 2006 and $325 million maturing in September 2013. The Company has
the option to prepay these notes in whole on certain dates after March 2003.
9
<Page>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES THERETO INCLUDED
ELSEWHERE HEREIN. UNLESS OTHERWISE NOTED, ALL DOLLAR AMOUNTS ARE IN MILLIONS.
RESULTS OF CONSOLIDATED OPERATIONS - 2001 VS. 2000
On March 1, 2001, we acquired all of the outstanding shares of Avis Group
Holdings, Inc., one of the world's leading service and information providers
for comprehensive automotive transportation and vehicle management services,
for approximately $994 million, including $40 million of transaction costs
and expenses and $17 million related to the conversion of Avis employee stock
options into CD common stock options. The acquisition was primarily funded
from cash on hand and borrowings from Cendant, which were subsequently repaid
during first quarter 2001. Simultaneous with the acquisition, we distributed
the car rental operations of Avis to a Cendant subsidiary not within our
ownership structure. Accordingly, we currently own and operate the fleet
management business of Avis ("Fleet"). The results of operations of Fleet
have been included in our consolidated results of operations since the date
of acquisition.
We continue to assess the impact of the September 11th terrorist attacks on
our businesses and are currently expecting that our operating cash flows and
results of operations will be negatively impacted by a considerable decline
in travel for the near term (which will primarily affect our Fleet Management
segment) and a modest decline in relocations (which will primarily affect our
Real Estate Services segment). However, access to liquidity through various
other sources, including public debt and equity markets and financial
institutions, provide sufficient liquidity to fund our current business plans
and obligations. In addition, we are reviewing our organizational alignment
and our work force at a number of business locations to increase efficiencies
and productivity and to reduce the cost structures of our businesses. Such
review will result in rightsizing, consolidation, restructuring or other
related efforts. We will record charges during fourth quarter 2001 in
connection with these initiatives, which will be funded through current
operations.
We are also monitoring the valuation of certain assets primarily relating to
our investment in mortgage servicing rights. The value of mortgage servicing
rights is subject to early prepayment risk due to a decrease in interest
rates. Accordingly, we are reviewing the valuation of our current portfolio
of mortgage servicing rights for possible impairment. Any adjustment to the
carrying value of the portfolio would result in a non-cash charge, which,
based upon the current environment, is not expected to exceed $60 million
after-tax and would not be material relative to the size of the portfolio. A
general slowdown of the economy and, more significantly, the impact of the
September 11th terrorist attacks have resulted in continued interest rate
cuts. The decline in interest rates, although potentially impacting the value
of our mortgage servicing rights, has contributed to a strong increase in
applications for mortgage refinancings, which we expect will have a positive
impact on the operating results of our mortgage business in subsequent
quarters.
The addition of the operations of Fleet and strong contributions from both
our mortgage and relocation businesses contributed to revenue growth of $435
million and $1.2 billion for the three and nine months ended September 30,
2001, respectively. Our expenses increased $416 million and $1.0 billion for
the three and nine months ended September 30, 2001, respectively, primarily
as a result of the acquisition of Fleet.
Our overall effective tax rate was 40% for the three and nine months ended
September 30, 2001 and 39% and 40% for three and nine months ended September
30, 2000, respectively.
As a result of the revenue growth, income from continuing operations
increased $10 million and $97 million in the three and nine months ended
September 30, 2001, respectively.
RESULTS OF REPORTABLE SEGMENTS
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-vehicle interest,
income taxes and non-vehicle depreciation and amortization, adjusted to
exclude certain items which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific.
Our management believes such discussions are the most informative
representation of how management evaluates performance. However, our
presentation of Adjusted EBITDA may not be comparable with similar measures
used by other companies.
10
<Page>
THREE MONTHS ENDED SEPTEMBER 30, 2001 VS. THREE MONTHS ENDED
SEPTEMBER 30, 2000
<Table>
<Caption>
REVENUES ADJUSTED EBITDA
------------------------- ---------------------------
% %
2001 2000 CHANGE 2001 2000 CHANGE
---- ---- ------ ---- ---- ------
Real Estate Services $321 $257 25% $138 $123(b) 12%
Fleet Management 378 -- * 21 -- *
---- ---- ---- ----
Total Reportable Segments 699 257 159 123
Corporate and Other(a) -- 7 * -- 7 *
---- ---- ---- ----
Total Company $699 $264 $159 $130
==== ==== ==== ====
</Table>
---------
* Not meaningful.
(a) Included in Corporate and Other are unallocated corporate overhead and
the elimination of transactions between segments.
(b) Excludes a credit of $1 million related to the reduction of certain
merger-related liabilities recorded in prior years.
REAL ESTATE SERVICES
Revenues and Adjusted EBITDA increased $64 million (25%) and $15 million
(12%), respectively. The increase in operating results was primarily driven
by substantial growth in mortgage loan production due to increased
refinancing activity and purchase volume.
Revenues generated from the sale of mortgage loans increased $77 million
(72%) as actual mortgage loans sold increased $3.3 billion (49%) to $10.1
billion. Closed mortgage loans increased $4.7 billion (72%) to $11.2 billion
consisting of a $3.3 billion increase (approximately nine fold) in
refinancings and a $1.4 billion increase (23%) in purchase mortgage closings.
Beginning in January 2001, Merrill Lynch outsourced its mortgage originations
and servicing operations to us, and new Merrill Lynch business accounted for
16% of our mortgage closings in third quarter 2001. A significant portion of
mortgages closed in any quarter will generate revenues in future periods as
such loans are packaged and sold (revenues are recognized upon the sale of
the loan, typically 45-60 days after closing). Partially offsetting record
production revenues was an $18 million decline in net loan servicing revenue.
The average servicing portfolio grew $27 billion (42%) as a result of the
high volume of mortgage loan originations and Merrill Lynch's outsourcing of
its mortgage origination operations to us. However, increased servicing
amortization expenses during third quarter 2001, reflecting higher
refinancing activity, more than offset the increase in recurring servicing
fees from the portfolio growth. Additionally, operating expenses within this
segment increased to support the higher volume of mortgage originations and
related servicing activities.
FLEET MANAGEMENT
The businesses comprising this segment were acquired in the acquisition of
Fleet, which provides fully integrated fleet management services to corporate
customers including vehicle leasing, advisory services, fuel and maintenance
cards, other expense management programs and productivity enhancement.
Fleet management operations contributed revenues and EBITDA of $378 million
and $21 million, respectively, for third quarter 2001. Assuming the
acquisition had occurred on January 1, 2000, revenues and EBITDA losses for
third quarter 2000 would have been $361 million and $12 million,
respectively. Revenues and EBITDA would have increased by $17 million (5%)
and $33 million, respectively.
11
<Page>
NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
<Table>
<Caption>
REVENUES ADJUSTED EBITDA
-------------------------- ---------------------------
% %
2001 2000 CHANGE 2001 2000 CHANGE
------ ---- ------ ---- ---- ------
Real Estate Services $ 846 $636 33% $299 $222(c) 35%
Fleet Management 898 -- * 54(b) -- *
------ ---- ---- ----
Total Reportable Segments 1,744 636 353 222
------ ---- ---- ----
Corporate and Other(a) 87 23 * 86(b) 21 *
------ ---- ---- ----
Total Company $1,831 $659 $439 $243
====== ==== ==== ====
</Table>
---------
* Not meaningful.
(a) Included in Corporate and Other are unallocated corporate overhead and
the elimination of transactions between segments.
(b) Excludes a charge of $4 million primarily related to the acquisition and
integration of Fleet.
(c) Excludes a charge of $2 million related to the consolidation of
business operations, partially offset by a credit of $1 million relating
to the reduction of certain merger-related liabilities recorded in prior
years.
REAL ESTATE SERVICES
Revenues and Adjusted EBITDA increased $210 million (33%) and $77 million
(35%), respectively. The increase in operating results was primarily driven
by substantial growth in mortgage loan production due to increased
refinancing activity and purchase volume. Increases in relocation services
also contributed to the favorable operating results.
Collectively, mortgage loans sold increased $10.7 billion (70%) to $25.9
billion, generating incremental revenues of $214 million, a 91%
year-over-year increase. Closed mortgage loans increased $14.4 billion (88%)
to $30.7 billion. This growth consisted of a $10 billion increase
(approximately ten fold) in refinancings and a $4.3 billion increase (29%) in
purchase mortgage closings. Beginning in January 2001, Merrill Lynch
outsourced its mortgage originations and servicing operations to us. New
Merrill Lynch business accounted for 14% of our mortgage closings in nine
months 2001. Partially offsetting record production revenues was a $32
million decline in loan net servicing revenue. The average servicing
portfolio grew $29 billion (50%) as a result of the high volume of mortgage
loan originations and Merrill Lynch's outsourcing of its mortgage origination
operations to us. However, accelerated servicing amortization expenses, due
primarily to refinancing activity, more than offset the increase in recurring
servicing fees from the portfolio growth. Additionally, operating expenses
within this segment increased to support the higher volume of mortgage
originations and related servicing activities.
Service based fees from relocation activities also contributed to the
increase in revenues and Adjusted EBITDA. Relocation referral fees increased
$14 million and net interest income from relocation operations was $9 million
favorable due to the maintenance of lower debt levels.
FLEET MANAGEMENT
Fleet management operations contributed revenues and Adjusted EBITDA of $898
million and $54 million, respectively, for the nine months ended September
30, 2001. Assuming the acquisition of Fleet had occurred on January 1st for
each period presented, revenues and Adjusted EBITDA would have been $1.2
billion and $70 million, respectively, for the nine months ended September
30, 2001 and $1.1 billion and $47 million, respectively, for the nine months
ended September 30, 2000. Revenues and Adjusted EBITDA would have increased
by $67 million (6%) and $23 million (49%), respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our businesses, comprised of vehicle management, relocation and mortgage
services, purchase assets or finance the purchase of assets on behalf of
our clients. Assets generated in this process are classified as assets
under management and mortgage programs. We seek to offset the interest
rate exposures inherent in our assets under management and mortgage
programs by matching such assets with financial liabilities that have
similar term and interest rate characteristics. As a result, we minimize
the interest rate risk associated with managing these assets and create
greater certainty around the financial income that they produce. Fees
generated from our clients are used, in part, to repay the interest and
principal associated with these liabilities. Funding for our assets under
management and mortgage programs is also provided by both unsecured
corporate borrowings and securitized financing arrangements, which are
classified as liabilities under management and mortgage programs. Cash
inflows and outflows relating to the generation of assets and the
principal debt repayment or financing of such assets are classified as
activities of our management and mortgage programs.
FINANCIAL CONDITION
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000 CHANGE
------------- ------------ ------
Total assets exclusive of assets under programs $2,051 $1,556 $ 495
Assets under programs 6,984 2,861 4,123
Total liabilities exclusive of liabilities under programs $ 904 $ 351 $ 553
Liabilities under programs 6,382 2,516 3,866
Stockholder's equity 1,749 1,550 199
</Table>
Total assets exclusive of assets under programs increased primarily due to an
increase in goodwill resulting from the acquisition of Fleet. Assets under
programs increased primarily due to vehicle-related assets acquired in the
acquisition, as well as subsequent purchases.
12
<Page>
Total liabilities exclusive of liabilities under programs increased primarily
due to liabilities assumed in the acquisition. Liabilities under programs
increased primarily due to approximately $3.0 billion of debt assumed in the
acquisition, the first quarter 2001 debt issuance of $650 million and an
increase in deferred income taxes due to the acquisition.
Stockholder's equity increased primarily due to net income of $189 million
during 2001.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2001 2000 CHANGE
------- ------ -------
Cash provided by (used in):
Operating activities $ 1,354 $ 109 $ 1,245
Investing activities (2,188) (123) (2,065)
Financing activities 667 26 641
Effects of exchange rate changes on cash and cash equivalents -- 2 (2)
------- ----- -------
Net change in cash and cash equivalents $ (167) $ 14 $ (181)
======= ===== =======
</Table>
Cash flows from operating activities increased primarily due to the impact of
the acquisition of Fleet and a net inflow of funds generated from mortgage
loan activity.
Cash flows used in investing activities increased primarily due to the
utilization of cash to fund the acquisition, a net outflow of cash used in
investing activities of Fleet and a net outflow of funds generated from net
mortgage servicing rights and related hedge activity.
Cash flows from financing activities increased primarily due to a net inflow
of funds from borrowings.
CAPITAL EXPENDITURES
Capital expenditures during 2001 amounted to $43 million and were utilized to
support operational growth, enhance marketing opportunities and develop
operating efficiencies through technological improvements. We anticipate a
capital expenditure investment during 2001 of approximately $60 million. Such
amount represents an increase from 2000 primarily due to capital expenditures
related to Fleet.
DEBT FINANCING
Debt related to our management and mortgage programs increased $3.7 billion
to $5.7 billion at September 30, 2001. Such increase was primarily related to
debt assumed in the acquisition of Fleet, principally comprising $1.0 billion
of securitized term notes and $1.7 billion of securitized interest bearing
notes, and also additional unsecured medium-term notes issuances of $650
million under an existing shelf registration statement.
The additional $650 million of unsecured medium-term notes issued during
first quarter 2001 bear interest at a rate of 8 1/8% per annum and mature in
February 2003.
During first quarter 2001, we renewed our $750 million syndicated
revolving credit facility, which was due in 2001. The new facility bears
interest at LIBOR plus an applicable margin, as defined in the agreement,
and terminates on February 21, 2002. We are required to pay a per annum
utilization fee of .25% if usage under the facility exceeds 25% of
aggregate commitments. Under the new facility, any loans outstanding as of
February 21, 2002 may be converted into a term loan with a final maturity
of February 21, 2003. We currently have the full $750 million available
under this facility. Additionally, we maintain a $750 million five-year
syndicated committed revolving credit facility, which matures in February
2005, and two other committed facilities aggregating $275 million with
maturity dates in November 2002.
On October 23, 2001, our Greyhound Funding LLC subsidiary, which finances the
leases and related vehicles owned by our fleet management business, issued
$750 million of floating rate callable asset backed notes for net proceeds of
approximately $747 million. The notes bear interest at one-month LIBOR plus
an applicable spread and were issued in two tranches: $425 million maturing
in September 2006 and $325 million maturing in September 2013. We have the
option to prepay these notes in whole on certain dates after March 2003.
13
<Page>
STRATEGIC BUSINESS INITIATIVES
We continually explore and conduct discussions with regard to acquisitions
and other strategic corporate transactions in our industries in addition to
transactions previously announced. As part of our regular on-going evaluation
of acquisition opportunities, we currently are engaged in a number of
separate, unrelated preliminary discussions concerning possible acquisitions.
The purchase price for the possible acquisitions may be paid in cash, through
the issuance of debt securities or common stock of our parent corporation,
Cendant Corporation, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other
things, initiate and complete satisfactorily our due diligence
investigations; negotiate the financial and other terms (including price) and
conditions of such acquisitions; obtain appropriate board of directors,
regulatory and shareholder or other necessary consents and approvals; and, if
necessary, secure financing. No assurance can be given with respect to the
timing, likelihood or business effect of any possible transaction. In the
past, we have been involved in both relatively small acquisitions and
acquisitions which have been significant.
In addition, we continually review and evaluate our portfolio of existing
businesses to determine if they continue to meet our business objectives. As
part of our ongoing evaluation of such businesses, we intend from time to
time to explore and conduct discussions with regard to joint ventures,
divestitures and related corporate transactions. However, we can give no
assurance with respect to the magnitude, timing, likelihood or financial or
business effect of any possible transaction. We also cannot predict whether
any divestitures or other transactions will be consummated or, if
consummated, will result in a financial or other benefit to us.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and requires additional
disclosures for material business combinations completed after such date.
This standard also addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at
acquisition. On July 1, 2001, the Company adopted the provisions relating to
any acquisitions made subsequent to June 30, 2001, as required. The
provisions regarding the classification of previously acquired intangible
assets will be adopted simultaneously with the provisions of SFAS No. 142 on
January 1, 2002, as required.
SFAS No. 142 addresses financial accounting and reporting for intangible
assets acquired outside of a business combination. The standard also
addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. The Company will be
required to assess goodwill and other intangible assets for impairment
annually, or more frequently if circumstances indicate a potential
impairment. On July 1, 2001, the Company adopted the provisions requiring
that goodwill and certain other intangible assets acquired after June 30,
2001 not be amortized. The Company will adopt the remaining provision of this
standard on January 1, 2002, as required. Transition-related impairment
losses, if any, resulting from the initial assessment of goodwill and certain
other intangible assets will be recognized by the Company as a cumulative
effect of accounting change as of January 1, 2002. The Company is currently
evaluating the impact of adopting the remaining provisions on its financial
position and results of operations. Based upon a preliminary assessment of
previously acquired goodwill and certain other intangible assets that will no
longer be amortized upon the adoption of SFAS No. 142, we believe that the
related reduction to amortization expense during the nine months ended
September 30, 2001 and 2000 would not have been material.
During October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and replaces the accounting and
reporting provisions of APB Opinion No. 30, "Reporting Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
as it relates to the disposal of a segment of a business. SFAS No. 144
requires the use of a single accounting model for long-lived assets to be
disposed of by sale, including discontinued operations, by requiring those
long-lived assets to be measured at the lower of carrying amount or fair
value less cost to sell. The impairment recognition and measurement
provisions of SFAS No. 121 were retained for all long-lived assets to be held
and used with the exception of goodwill. The Company will adopt this standard
on January 1, 2002.
14
<Page>
FORWARD-LOOKING STATEMENTS
Forward-looking statements in our public filings or other public statements
are subject to known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements.
Forward-looking statements include the information concerning our future
financial performance, business strategy, projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical facts. You should
understand that the following important factors and assumptions could affect
our future results and could cause actual results to differ materially from
those expressed in such forward-looking statements:
o the impacts of the September 11, 2001 terrorist attacks on New York
City and Washington, D.C. are not known at this time, but are
expected to include negative impacts on financial results due to
reduced demand for travel in the near term; other attacks, acts of
war; or measures taken by governments in response thereto may
negatively affect the travel industry, our financial results and
could also result in a disruption in our business;
o the effect of economic conditions and interest rate changes on the
economy on a national, regional or international basis and the
impact thereof on our businesses;
o the effects of changes in current interest rates, particularly on
our mortgage business;
o the resolution or outcome of Cendant's unresolved pending litigation
relating to the previously announced accounting irregularities and
other related litigation;
o our ability to develop and implement operational, technological and
financial systems to manage growing operations and to achieve
enhanced earnings or effect cost savings;
o competition in our existing and potential future lines of business
and the financial resources of, and products available to,
competitors;
o failure to reduce quickly our substantial technology costs in
response to a reduction in revenue, particularly in our computer
reservations business;
o our ability to integrate and operate successfully acquired and
merged businesses and risks associated with such businesses,
including the acquisition of the fleet business of Avis, the
compatibility of the operating systems of the combining companies,
and the degree to which our existing administrative and back-office
functions and costs and those of the acquired companies are
complementary or redundant;
o our ability to obtain financing on acceptable terms to finance our
growth strategy and to operate within the limitations imposed by
financing arrangements and rating agencies;
o and changes in laws and regulations, including changes in accounting
standards and privacy policy regulation.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. Most of these factors are
difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us and our businesses
generally. Except for our ongoing obligations to disclose material
information under the federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events unless required by
law. For any forward-looking statements contained in any document, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
15
<Page>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
See Exhibit 99 attached hereto regarding available pro forma financial data
giving effect to the acquisition of Avis Group Holdings, Inc. on March 1, 2001
for the nine months ended September 30, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Exhibit Index
(b) REPORT ON FORM 8-K
None.
16
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PHH CORPORATION
By: /s/ Duncan H. Cocroft
------------------------------
Duncan H. Cocroft
Executive Vice President and
Chief Financial Officer
By: /S/ John T. McClain
------------------------------
John T. McClain
Senior Vice President, Finance and
Corporate Controller
Date: November 14, 2001
17
<Page>
EXHIBIT INDEX
<Table>
<Caption>
Exhibit No. Description
3.1 Charter of PHH Corporation, as amended August 23, 1996 (incorporated by
reference to 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 15, 1990 (incorporated
by reference to Exhibit 3-1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges.
99 Pro Forma Financial Information (unaudited)
</Table>