PHH VEHICLE MANAGEMENT SERVICES
Combined Financial Statements as of December 31, 1998 and 1997, and for the
Years Ended December 31, 1998, 1997 and 1996 Independent Auditors' Report
Unaudited Condensed Combined Financial Statements as of March 31, 1999 and for
the Three Months Ended March 31, 1999 and 1998
TABLE OF CONTENTS
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Page
Independent Auditors' Report 1
Combined Balance Sheets 2
Combined Income Statements 3
Combined Statements of Cash Flows 4
Combined Statements of Shareholders' Equity 5
Notes to the Combined Financial Statements 6-21
Unaudited Condensed Combined Balance Sheets 22
Unaudited Condensed Combined Income Statements 23
Unaudited Condensed Combined Statements of Cash Flows 24
Notes to the Condensed Combined Financial Statements 25-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PHH Corporation
We have audited the accompanying combined balance sheets of PHH Vehicle
Management Services (the "Group") as of December 31, 1998 and 1997, and the
related combined statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. All entities in
the Group are directly or indirectly wholly-owned subsidiaries of Cendant
Corporation. These combined financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of PHH Vehicle Management Services as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Parsippany, New Jersey
June 18, 1999
PHH VEHICLE MANAGEMENT SERVICES
COMBINED BALANCE SHEETS
(In Thousands)
December 31,
------------------------
1998 1997
---------- ----------
ASSETS:
Cash and cash equivalents $ 21,059 $ 11,938
Accounts and loans receivable - net of
allowance of $11,272 and $8,702 508,901 383,830
Property and equipment - net 93,529 39,066
Goodwill - net of accumulated amortization
of $22,849 and $17,108 219,192 31,439
Other intangibles - net 17,246 1,179
Deferred income taxes 39,945 39,696
Other assets 40,099 33,546
---------- ----------
Total assets exclusive of assets under
management programs 939,971 540,694
---------- ----------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles
Operating leases 2,956,676 3,030,187
Direct financing leases 830,753 563,290
Accrued interest 899 941
---------- ----------
3,788,328 3,594,418
---------- ----------
TOTAL ASSETS $4,728,299 $4,135,112
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 181,718 $ 219,229
Accrued liabilities 113,499 56,598
Income taxes payable 108,089 44,828
Deferred revenue 41,146 46,447
Due to affiliates 182,061 242,850
Certificate of deposit 25,000 --
Borrowed funds 22,207 39,677
---------- ----------
Total liabilities exclusive of liabilities
under management programs 673,720 649,629
---------- ----------
LIABILITIES UNDER MANAGEMENT PROGRAMS:
Debt:
Affiliates 1,859,683 2,531,863
Third party 1,250,628 269,213
Deferred income taxes 213,444 244,241
---------- ----------
3,323,755 3,045,317
---------- ----------
TOTAL LIABILITIES 3,997,475 3,694,946
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 15) -- --
SHAREHOLDERS' EQUITY 730,824 440,166
---------- ----------
TOTAL LIABIILITIES AND SHAREHOLDERS' EQUITY $4,728,299 $4,135,112
========== ==========
See notes to combined financial statements.
2
PHH VEHICLE MANAGEMENT SERVICES
COMBINED INCOME STATEMENTS
(In Thousands)
For the Years Ended
December 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
REVENUE
Fleet leasing revenue $ 1,286,896 $ 1,187,193 $ 1,128,495
Fleet management services 182,356 184,047 167,512
Other revenue 135,811 81,455 61,032
----------- ----------- -----------
Total revenues 1,605,063 1,452,695 1,357,039
----------- ----------- -----------
EXPENSES
Depreciation on leased vehicles 1,015,511 953,551 912,830
Interest expense 183,560 177,149 167,687
Selling, general and administrative expenses 232,724 211,123 193,822
Depreciation and amortization on assets
other than leased vehicles 25,680 14,943 16,585
Merger-related costs and other unusual
charges (credits) (1,280) 61,090 --
----------- ----------- -----------
Total expenses 1,456,195 1,417,856 1,290,924
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 148,868 34,839 66,115
PROVISION FOR INCOME TAXES 55,800 23,649 25,323
----------- ----------- -----------
NET INCOME $ 93,068 $ 11,190 $ 40,792
=========== =========== ===========
See notes to combined financial statements.
3
PHH VEHICLE MANAGEMENT SERVICES
COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Years
Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
OPERATING ACTIVITIES:
Net Income $ 93,068 $ 11,190 $ 40,792
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation on leased vehicles 1,015,511 953,551 912,830
Depreciation and amortization on assets other
than leased vehicles 25,680 14,943 16,585
Merger-related costs and other unusual charges
(credits) (1,280) 61,090 --
Other non-cash charges 5,140 2,961 2,047
Changes in other assets and liabilities:
Accounts and loans receivable (134,007) (25,022) (2,990)
Income taxes payable 101,511 35,732 (20,419)
Accounts payable and other accrued liabilities 50,620 (28,957) 67,995
Due to Affiliates (24,642) (89,600) (96,299)
Deferred income taxes (64,743) 44,784 55,432
Other assets, net (2,017) 602 (8,556)
----------- ----------- -----------
Net cash provided by operating activities 1,064,841 981,274 967,417
----------- ----------- -----------
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles (2,516,895) (2,185,270) (1,918,531)
Repayments of investment in leases and leased vehicles 1,088,036 756,939 726,246
Proceeds from sales and transfers of leases and
leased vehicles 224,597 229,303 117,753
Net purchases of property and equipment (59,823) (13,171) (13,750)
Cash acquired in acquisition of business, net of
contribution from affiliates 2,341 -- --
----------- ----------- -----------
Net cash used in investing activities (1,261,744) (1,212,199) (1,088,282)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from certificate of deposit 25,000 -- --
Net change in line of credit (18,360) 5,552 6,170
Payment of dividends to PHH -- -- (19,302)
Capital contribution -- -- 4,985
Liabilities under management programs
Proceeds from third party debt issuance 4,431,004 1,596,668 1,669,418
Principal payments on third party debt issuance (3,005,694) (1,611,431) (1,558,814)
Proceeds from debt from affiliates 1,401,573 2,078,077 1,026,697
Principal payments on debt from affiliates (2,607,726) (1,843,035) (1,002,354)
----------- ----------- -----------
Net cash provided by financing activities 225,797 225,831 126,800
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (19,773) (2,806) 3,496
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,121 (7,900) 9,431
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,938 19,838 10,407
CASH AND CASH EQUIVALENTS, END OF YEAR $ 21,059 $ 11,938 $ 19,838
=========== =========== ===========
Interest paid $ 184,285 $ 160,421 $ 148,320
=========== =========== ===========
Income taxes paid $ 23,804 $ 22,422 $ 22,444
=========== =========== ===========
Non-cash investing and financing information:
Business acquired:
Fair value of assets acquired, excluding cash $ 294,287
Liabilities assumed (86,006)
Capital contribution from affiliate for acquisition (190,597)
Additional purchase consideration payable (20,025)
-----------
Net cash acquired $ (2,341)
===========
See notes to combined financial statements
4
PHH VEHICLE MANAGEMENT SERVICES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
Balance, January 1, 1996 $ 352,353
Comprehensive income:
Net income 40,792
Currency translation 12,173
---------
Total comprehensive income 52,965
---------
Capital contribution 4,985
Dividends paid to PHH (19,302)
---------
Balance, December 31, 1996 391,001
---------
Comprehensive income:
Net income 11,190
Currency translation (8,852)
---------
Total comprehensive income 2,338
---------
Capital contribution 46,827
---------
Balance, December 31, 1997 440,166
---------
Comprehensive income:
Net income 93,068
Currency translation 3,018
Pension Plan additional minimum liability, net (1,306)
---------
Total comprehensive income 94,780
---------
Capital contribution 190,597
Benefit of tax losses received from outside the Group 5,281
---------
Balance, December 31, 1998 $ 730,824
=========
See notes to combined financial statements
5
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS
(In Thousands Unless Identified Differently)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
PHH Vehicle Management Services (the "Group") is a combined reporting
entity engaged in the business of providing fleet and fuel management
services primarily consisting of the management, purchase, leasing and
resale of vehicles for corporate and government agencies. All entities
within the Group are directly or indirectly wholly-owned subsidiaries of
PHH Corporation ("PHH") and PHH is a wholly-owned subsidiary of Cendant
Corporation ("Cendant" or the "Parent Company"). Services provided by the
Group include fuel, maintenance, safety, and accident management programs
and other fee-based services for vehicle fleets. The Group leases vehicles
under operating and direct financing lease arrangements. The Group
operates in the United States, Canada, United Kingdom, Ireland and
Germany. The combined and consolidated financial statements represent the
aggregation of the accounts and transactions of the following legal
entities and their subsidiaries:
PHH Vehicle Management Services Corporation and its wholly-owned
subsidiaries ("PHH VMS Corporation"), excluding Trac Funding III, Inc.
PHH Vehicle Management Services Inc. and its subsidiaries
("PHH VMS Canada")
PHH Personalease Corporation
Dealers Holding, Inc. and its wholly-owned subsidiaries
PHH Commercial Leasing, Inc.
PHH Corner Leasing, Inc.
PHH Page Leasing, Inc.
PHH St. Paul Leasing, Inc.
PHH Continental Leasing, Inc.
PHH Caribbean Leasing, Inc.
PHH Market Leasing, Inc.
PHH Milford Leasing, Inc.
PHH National Leasing, Inc.
PHH Power Leasing, Inc.
PHH Vehicle Management Services Plc
PHH Investment Services Ltd.
PHH Financial Services Ltd.
PHH Leasing (No. 9) Ltd.
PHH Card Services Ltd.
Allstar Petrol Card Limited
PHH Truck Management Services Ltd.
Pointeuro Limited and its wholly-owned subsidiaries
Wright Express Corporation and its wholly-owned subsidiaries
("Wright Express")
PHH Deutschland Inc.
PHH Charitable Trust
Wright Express Financial Services Corporation (the "Bank"), a subsidiary
of Wright Express, is licensed as an industrial loan corporation pursuant
to the laws of the State of Utah and its deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is subject to
competition from other financial institutions and to the regulations of
certain federal and state agencies and undergoes examination by those
agencies.
The combined financial statements include the accounts and transactions of
all of the above-mentioned legal entities. All significant balances and
transactions between the combined entities have been
6
eliminated. Remaining balances with affiliates relate to PHH and Cendant
or their subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Group considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Accounts and Loans Receivable
Accounts and loans receivable at December 31, 1998 includes $122 million
of credit card receivables of the Bank.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method over
the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed by the straight-line method over the
estimated useful lives of the related assets or the lease term, if
shorter.
Goodwill
Goodwill, which represents the excess of cost over fair value of net
assets acquired, is amortized on a straight-line basis over the estimated
useful lives, which range from 25 to 40 years.
Intangible Assets
Intangible assets represent the value placed on customer lists. Intangible
assets are amortized on a straight-line basis over their estimated useful
lives of 7 to 14 years.
Asset Impairment
The Company periodically evaluates the recoverability of its investments,
intangible assets and long-lived assets, comparing the respective carrying
values to the current and expected future cash flows, on an undiscounted
basis, to be generated from such assets. Property and equipment is
evaluated separately within each business. The recoverability of goodwill
is evaluated on a separate basis for each acquisition.
Recognition of Revenues and Expenses
Fleet Leasing Services - The Group primarily leases vehicles under three
standard arrangements: open-end operating leases, closed-end operating
leases or open-end finance leases (direct financing leases). These leases
are accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases." Each lease is either
classified as an operating lease or direct financing lease, as defined.
The Group records the cost of the leased vehicle as an "investment in
leases and leased vehicles."
7
Vehicles are depreciated using the straight-line method over the expected
lease term. The lease terms range from 12 months to 144 months. Amounts
charged to the lessees for interest on the unrecovered investment are
credited to income on a level yield method, which approximates the
contractual terms. Amounts received from the motor companies are partially
recognized at the time of acquisition of the leased vehicle, a portion is
deferred and recognized straight line over the lease term of the vehicle,
and a portion is deferred and recognized at the time the vehicle is
disposed of.
Fleet Management Services - Revenues from fleet management services other
than leasing are recognized over the period in which services are provided
and the related expenses are incurred.
Service, maintenance and repairs provision - Service, maintenance and
repairs ("SMR") are provided for vehicles under certain leases. These
leases include a revenue component for SMR costs. The Group accrues
estimated losses on those leases where estimated SMR costs exceed
revenues.
Income Taxes
The U.S. entities are included in the consolidated income tax return of
Cendant. In the United Kingdom, the Group files combined income tax
returns with other members of Cendant. The Group's share of the
consolidated federal income tax liability is allocated to each company on
a separate return basis. Separate income tax returns are filed in states
or countries where consolidated returns are not permitted. In 1998 the
income taxes payable for the Group has been reduced by approximately
$5,281 for tax benefits received from other members of Cendant. The
benefit has been accounted for as a capital contribution. For the other
European companies, separate income tax returns are filed in countries
where consolidated returns are not permitted. The provision for income
taxes includes deferred income taxes resulting from items reported in
different periods for income tax and financial statement purposes.
Deferred tax assets and liabilities represent the expected future tax
consequences of the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
The effects of changes in tax rates on deferred tax assets and liabilities
are recognized in the period that includes the enactment date.
Intercompany Transactions
The Group borrows principally from PHH Corporation and PHH Dublin
Unlimited to fund its leasing operations, except for PHH VMS Canada which
raises its own funds through its commercial paper program. The costs of
these funds are passed on to the leasing customers. In addition, PHH
Corporation has guaranteed certain transactions entered into by the Group.
Cendant provides certain administrative services to the Group. The Group
records the cost of these services as expenses when incurred. These
services are discussed in Note 12.
Translation of Foreign Currencies
The combined financial statements are expressed in U.S. dollars solely for
the purpose of presenting the Group's financial position and results of
operations. Assets and liabilities of foreign entities are translated at
the exchange rates as of the balance sheet dates, equity accounts are
translated at historical exchange rates and revenues, expenses and cash
flows are translated at the average exchange rates for the periods
presented. Translation gains and losses are included as a component of
other comprehensive income in the statement of shareholders' equity.
New Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities-The Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in June 1998. This Standard
establishes accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts, and
for hedging activities. It
8
requires a company to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair
value. This standard is expected to be effective for fiscal years
beginning after June 15, 2000. The Group has not completed its assessment
of the effect on the combined financial statements that will result from
the adoption of SFAS No. 133.
3. MERGER RELATED COSTS AND OTHER UNUSUAL CHARGES
In connection with the merger of PHH with HFS Incorporated in the second
quarter of 1997 and the merger of HFS Incorporated with CUC International,
Inc. in the fourth quarter of 1997 (the "Mergers"), the Group recorded
$62,662 of merger-related costs and other unusual charges. The Mergers
afforded the Parent Company, at such time, an opportunity to rationalize
its businesses, gain organizational efficiencies and maximize profits.
Parent Company management initiated a plan to continue the downsizing of
fleet operations by providing for 143 job reductions and eliminating
unprofitable products. In conjunction with these charges during 1997, the
Parent Company made a non-cash capital contribution of $46,827.
Personnel related charges of $7,662 included termination benefits such as
severance, medical and other benefits as well as retirement benefits
pursuant to pre-existing contracts resulting from a change in control.
Business termination charges of $55,000 represented costs to exit certain
activities including: (i) $30,000 payment to terminate a relationship with
a third-party associated with certain credit card operations and (ii)
$25,000 goodwill impairment loss recorded as a result of abandoning
certain unprofitable closed-end leasing activities. The Group determined
that servicing certain small closed-end lease customers was not
profitable. The decision to discontinue service of such customers resulted
in reduced revenues and cash flows associated with operations previously
acquired. Undiscounted future expected cash flows were not sufficient to
support the carrying value of the related goodwill and accordingly, an
impairment loss was recorded based on the discounted cash flows. The plan
was substantially completed by December 31, 1997 and the Group recorded a
credit to merger-related costs and other unusual charges in 1997 due to a
change in estimate. The remaining liability at December 31, 1997
represented severance payments, which were paid in 1998 with any excess
liability reversed as a credit to merger-related costs and other unusual
charges as the plan was completed in 1998. The following table summarizes
the activity by category of expenditure:
Personnel Business
Total Related Terminations
---------------------------------
1997 activity:
Original Charge $ 62,662 $ 7,662 $ 55,000
Cash Payments (34,028) (4,028) (30,000)
Non-cash reductions (25,000) -- (25,000)
Adjustments (1,572) (1,572) --
-------- -------- --------
Balance December 31, 1997 $ 2,062 $ 2,062 $ --
======== ======== ========
1998 activity:
Cash Payments $ (782) $ (782) $ --
Adjustments (1,280) (1,280) --
-------- -------- --------
Balance December 31, 1998 $ -- $ -- $ --
======== ======== ========
4. ACQUISITIONS AND DIVESTITURES
a) On January 20, 1998, Cendant acquired The Harpur Group Ltd ("Harpur")
for an initial purchase price of approximately $194 million, including
acquisition costs. Additional purchase consideration of approximately $20
million was accrued as of December 31, 1998, upon the attainment of
certain revenue thresholds as specified in the purchase agreement. The
excess of the aggregate purchase price over the fair value of net assets
acquired of approximately $189 million has been allocated to goodwill.
Harpur was subsequently contributed by Cendant to PHH and is included
within the Pointeuro Limited
9
legal entity. The operating results of Harpur are included in the combined
income statement of the Group since the Cendant acquisition date. Harpur
provides fuel card and fleet management services to corporate clients in
the United Kingdom.
Pro forma Information (unaudited)
The underlying unaudited pro forma information includes the amortization
expense associated with the assets acquired, the Group's financing
arrangements and related income tax effects. The pro forma results are not
necessarily indicative of the operating results that would have occurred
had the Harpur acquisition been consummated on January 1, 1997, nor are
they intended to be indicative of results that may occur in the future.
The underlying pro forma information includes the amortization expense
associated with assets acquired, the Group's financing arrangements and
related income tax effects. Pro forma results of operations for the year
ended December 31, 1998, assuming the acquisition of Harpur had occurred
on January 1, 1998, have not been presented as the effect is not material.
The following table reflects the operating results of the Group for the
year ended December 31, 1997 on a pro forma basis, which gives effect to
the acquisition of Harpur as if such acquisition occurred on January 1,
1997.
Year ended
December 31, 1997
-----------------
Net revenues $1,475,034
Pre-tax $ 27,379
Net income $ 7,179
b) In January 1997, PHH VMS Corporation sold 50 percent of its interest in
a subsidiary, which contained certain credit card operations to a third
party, resulting in a gain of $17.5 million included in other revenue in
the combined statement of income.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
December 31,
Useful Lives -------------------------
in Years 1998 1997
--------- ---------
Building 50 $ 22,106 $ 8,977
Leasehold improvements 2-10 9,646 7,880
Software 3-5 7,033 4,187
Furniture, fixtures and equipment 3-8 146,047 88,034
Construction in progress -- 7,879 1,521
--------- ---------
192,711 110,599
Accumulated depreciation and amortization (99,182) (71,533)
--------- ---------
Property and equipment, net $ 93,529 $ 39,066
========= =========
6. NET INVESTMENT IN LEASES AND LEASED VEHICLES
The Group offers primarily three leasing arrangements to its customers.
These arrangements are:
Open-end Operating Leases - Under these leases, the minimum lease term is
12 months with a month to month renewal thereafter. In addition, resale of
the vehicles upon termination of the lease is generally for the account of
the lessee except for a minimum residual value, which the Group has
guaranteed. The Group guarantees 16% of the original cost of the unit for
the first 24 months of the lease, and then 16% of the fair market value of
the unit at inception of the month to month renewals thereafter. The
original cost and accumulated depreciation of vehicles under these leases
was $5.1 billion and $2.5 billion, respectively at December 31, 1998 and
$4.9 billion and $2.4 billion, respectively at December 31, 1997.
Closed-end Operating Leases - Under these leases, the minimum lease term
is for 12 months or longer. However, 24 and 36 month lease terms are the
most prevalent. These leases are cancelable under certain
10
conditions. Resale of the vehicles upon termination is for the account of
the lessor. The original cost and accumulated depreciation of vehicles
under these leases was $430 million and $108 million, respectively at
December 31, 1998. The original cost and accumulated depreciation of
vehicles under these leases were $328 million and $75 million,
respectively at December 31, 1997.
Direct Financing Leases - Under these leases, the minimum lease term is 12
months with a month to month renewal thereafter. In addition, resale of
the vehicles upon termination of the lease is for either the account of
the lessor (Europe) or the lessee (both North America and Europe). The net
investment in leases and leased vehicles consisted of the following:
December 31,
-----------------------
1998 1997
---------- ----------
Vehicles under open-end operating leases $2,634,000 $2,552,000
Vehicles under closed-end operating leases 322,676 478,187
Direct financing leases 830,753 563,290
Accrued interest on leases 899 941
---------- ----------
Net investment in leases and leased vehicles $3,788,328 $3,594,418
---------- ----------
At December 31, 1998, future minimum lease payments are as follows:
Direct
Operating Financing
Year Leases Leases Total
---- ---------- ---------- ----------
1999 $ 267,094 $ 280,317 $ 547,411
2000 37,289 218,825 256,114
2001 17,779 134,781 152,560
2002 3,013 42,223 45,236
2003 1,068 4,867 5,935
Thereafter 946 -- 946
---------- ---------- ----------
Total $ 327,189 $ 681,013 $1,008,202
========== ========== ==========
Fleet leasing revenue consisted of:
Year Ended December 31,
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
Operating leases $1,197,616 $1,121,722 $1,071,129
Direct financing leases 89,280 65,471 57,366
---------- ---------- ----------
$1,286,896 $1,187,193 $1,128,495
========== ========== ==========
Other managed vehicles with net carrying amounts of $222 million and $158
million at December 31, 1998 and 1997, respectively, are included in
special purpose entities which are not owned by the Group. These entities
do not require consolidation as they are not controlled by the Group and
all risks and rewards rest with the owners. Additionally, managed vehicles
totaling approximately $82 and $70 million at December 31, 1998 and 1997,
respectively, are owned by special purpose entities, which are owned by
the Group. However, such assets and related liabilities have been netted
in the combined balance sheets since there is a two-party agreement with
determinable accounts, a legal right of offset exists and the Group
exercises its right of offset in settlement with client corporations.
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7. DEBT UNDER MANAGEMENT PROGRAMS
The components of the Group's debt under management programs are as
follows:
Balance outstanding at December 31,
-----------------------------------
1998 1997
-----------------------------------------------------------------------====-----------====--------------
Installment notes payable on leased vehicles -
Represents loans under a loan agreement with PHH
Corporation to fund specific leases. Repayment of these
notes is matched to payments on the underlying leases
including the disposal of the vehicles at maturity. The
interest rate can be either a fixed rate or floating
rate as it is matched to the underlying lease and is
based upon PHH Corporation's cost of funds. The average
interest rates were 5.92% and 5.93% for 1998 and 1997,
respectively. $1,012,712 $2,133,613
--------------------------------------------------------------------------------------------------------
Secured loans - Represents two five year secured
transactions completed in December 1998 through two
wholly-owned subsidiaries, PHH Trac Funding and PHH Trac
Funding II, with banks. Specified beneficial interests
in leases totaling $600,008 and $725,296, respectively,
were contributed into the subsidiaries by PHH VMS
Corporation. The loans are secured by the specified
beneficial interests. 1,104,300 --
--------------------------------------------------------------------------------------------------------
Commercial paper - Borrowing outstanding which is used to
fund the leased inventory in Canada. At December 31, 1998,
all outstanding debt matured on February 1999. The average
interest rates were 5.41% and 3.37% for
1998 and 1997, respectively. 89,042 117,178
--------------------------------------------------------------------------------------------------------
Self-fund notes - Represents loans made by customers to
purchase leased vehicles. Repayment of these notes is
matched to payments on the underlying leases including
the disposal of the vehicles at maturity. Interest rate
characteristics can be fixed or floating, depending on
the underlying leases. Notes in the amount of $15,039
include full recourse provisions to the Group during
1998. The average interest rates were 5.88% and 5.85%
for 1998 and 1997, respectively. 24,096 27,583
--------------------------------------------------------------------------------------------------------
Intercompany position - Short-term financing needs are met
under revolving loan agreements with PHH Corporation and PHH
Dublin Unlimited. Interest is based upon their average
commercial paper cost for the month the loan is outstanding.
These loans fund working capital needs and there is no stated
maturity. Interest is paid monthly with respect to PHH
Corporation and twice yearly for PHH Dublin Unlimited. 846,971 421,474
--------------------------------------------------------------------------------------------------------
Overnight loan - Short-term financing needs are met by
overnight loans from a bank. This loan funded working capital
needs. The rates of interest were 6% for 1998 and 1997. 33,190 101,228
--------------------------------------------------------------------------------------------------------
Total debt under management programs $3,110,311 $2,801,076
========== ==========
PHH VMS Canada has an unsecured line of credit with a bank. The Group
carries the line as a backup for outstanding commercial paper. At December
31, 1998, the Group had no borrowings outstanding under this line of
credit. The total amount available under this line of credit is $3.3
million. The line of credit does not have a stated maturity date.
Cendant Business Answers (Europe) Plc and its subsidiaries has an
unsecured line of credit providing for borrowing of up to $33.2 million
with a bank expiring in January 2000. At December 31, 1998 Cendant
Business Answers (Europe) Plc had no borrowings outstanding under this
line.
12
Cendant Business Answers (Europe) Plc maintains Bills of Exchange
available to meet short-term financing needs. At December 31, 1998,
Cendant Business Answers (Europe) Plc had no borrowings outstanding under
this arrangement.
Projections of estimated repayments of debt under management programs as
of December 31, 1998 are set forth as follows:
Year
1999 $ 1,798,118
2000 774,753
2001 355,669
2002 115,720
2003 39,402
Thereafter 26,649
------------
$ 3,110,311
============
8. SALE-LEASEBACK TRANSACTIONS
The Group entered into several sale-leaseback transactions as described
below:
During 1998, the Group entered into an agreement with an independent third
party to sell and leaseback vehicles subject to operating leases.
Accordingly, vehicles with a net carrying amount of $100,600 were removed
from the Group's books. Since the net carrying value of these vehicles was
equal to their sales value, there was no gain or loss recognized on the
sale. The lease agreement entered into between the Group and the
counterparty was for a minimum lease term of 12 months with three one-year
renewal options. This lease qualified as an operating lease. For the year
ended December 31, 1998, the total rental expense incurred by the Group
under this lease was $17,700.
The Group entered into two sale-leaseback transactions with an independent
third party ("Counterparty") in Canada. Under these arrangements, the
Group sells its net investment in operating leases and leased vehicles to
the Counterparty. Then, it repurchases the leased vehicles (the
Counterparty retains the lease rights). Subsequently, the Group leases the
vehicles under a direct financing lease to the Counterparty. The
Counterparty prepays all lease payments except for an agreed-upon residual
amount. These residual amounts are typically 3% to 4.5% of the total lease
payments. These residual amounts represent the Group's total exposure from
these transactions. The total amounts of net investment in operating
leases and leased vehicles sold under these agreements were $185,900 and
$162,000 during 1998 and 1997, respectively. The total outstanding prepaid
rent under such agreements were $240,100 and $225,000 at December 31, 1998
and 1997, respectively. The residual amounts outstanding were $9,400 and
$8,000 at December 31, 1998 and 1997, respectively. The total revenues
recognized under these agreements were $90,600, $88,000 and $84,000 for
1998, 1997 and 1996, respectively.
During 1998, the Group purchased and leased back to a provincial
government unit a fleet of vehicles with a carrying value of $24,800. The
lease under this transaction qualified as an operating lease. Subsequent
to this transaction, the Group entered into a sale-leaseback transaction
with a financial institution similar to the arrangement with the
Counterparty described above, except that the financial institution
prepaid all the rent. At December 31, 1998, the total prepaid rent
outstanding under this agreement was $19,000. For the year ended December
31, 1998, the total rental revenue recognized from the provincial
government and rental expense incurred to the financial institution under
these agreements was $7,400.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used to manage exposure to market
risks associated with
13
fluctuations in interest rates. Analyses are performed 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, derivatives activities are not
engaged for trading or speculative purposes. Exposure to credit-related
losses exist in the event of non-performance by counterparties to certain
derivative financial instruments. Such risk is managed by periodically
evaluating the financial position of counterparties and spreading the
positions among multiple counterparties. Non-performance is presently not
expected by any of the counterparties.
Interest Rate Swaps - If the interest rate characteristics of the funding
mechanism that the Group uses does not match the interest rate
characteristics of the assets being funded, interest rate swap agreements
are entered into to offset the interest rate risk associated with such
funding. The swap agreements correlate the terms of the assets to the
maturity and rollover of the debt by effectively matching a fixed or
floating interest rate with the stipulated revenue stream generated from
the portfolio of assets being funded. Amounts to be paid or received under
interest rate swap agreements are accrued as interest rates change and are
recognized over the life of the swap agreements as an adjustment to
interest expense. For the years ended December 31, 1998, 1997 and 1996,
hedging activities increased interest expense $3,600, $7,800 and $7,060,
respectively, and had no effect on the weighted average borrowing rate.
The fair value of the swap agreements is not recognized in the combined
financial statements since they are accounted for as matched swaps.
The following table summarizes the maturity and weighted average rates of
interest rate swaps at December 31, 1998.
Maturities
Total 1999 2000 2001 2002
-----------------------------------------------------------------------
North America
Pay fixed/receive floating:
Notional value $ 42,061 $ 35,690 $ 5,526 $ 845
Weighted average receive rate 5.07% 5.07% 5.07%
Weighted average pay rate 5.10% 4.89% 4.93%
Pay floating/receive floating:
Notional value $ 47,852 $ 29,055 $ 13,208 $ 4,486 $ 1,103
Weighted average receive rate 5.45% 5.30% 5.24% 5.23%
Weighted average pay rate 5.46% 5.45% 5.45% 5.45%
United Kingdom
Pay fixed/receive floating
Notional value $ 663,800 $ 256,392 $ 207,438 $ 145,206 $ 54,764
Weighted average receive rate 6.26% 6.26% 6.26% 6.26%
Weighted average pay rate 6.81% 6.71% 6.30% 6.30%
Deutschland
Pay fixed/receive floating
Notional value $ 31,897 $ 21,165 $ 9,242 $ 1,490
Weighted average receive rate 3.24% 3.24% 3.24%
Weighted average pay rate 4.28% 4.29% 4.29%
Additionally, depending on market fundamentals of the price of gasoline
and other conditions, Wright Express may purchase put options to reduce or
eliminate the risk of gasoline price declines. Put options purchased by
Wright Express effectively establish a minimum sales transaction fee for
the volume of gasoline purchased on Wright Express's programs. An increase
in the value of the options is highly correlated to a decrease in the
average price of gasoline purchased by Wright Express's cardholders. Put
options permit Wright Express to participate in price increases above the
option price. The cost of an option is amortized in the month the option
expires. Gains from the sale or exercise of options are recognized when
the underlying option is sold.
14
At December 31, 1998, the total contract amount of such options was 32.4
million gallons of gasoline and the unamortized cost of options was $499
and is included in other assets in the accompanying combined balance
sheet. There were no gasoline option contracts during 1997.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Group in estimating
fair value disclosures for material financial instruments. The fair values
of the financial instruments presented may not be indicative of their
future values.
Cash and Cash Equivalents -The carrying amounts for cash and cash
equivalents approximate fair value.
Loans Receivable -The carrying amounts for loans receivable approximate
fair value.
Direct Financing Leases - The contractual minimum lease terms on these
contracts is 12 months. The estimated fair value of these short-term
instruments approximates the carrying amounts.
Borrowed Funds - The carrying amount of borrowed funds approximates fair
value.
Debt under Management Programs - The fair value was determined based on
quoted market prices for similar issues or on current rates available to
the Group for debt on similar terms.
Interest Rate Swaps - The fair value of interest rate swaps are estimated,
using dealer quotes, as the amount that the Group would receive or pay to
execute a new agreement with terms identical to those remaining on the
current agreement, considering interest rates at the reporting date.
The carrying amounts and fair values of the Group's financial instruments
at December 31, 1998 and 1997 were as follows:
1998 1997
----------------------------------- ----------------------------------------
Estimated Estimated
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
-------- -------- --------- -------- -------- --------
Cash and cash equivalent $ 21,059 $ 21,059 $ 11,938 $ 11,938
Loans receivable 121,705 121,705 -- --
Options 499 1,233 -- --
Direct financing leases 830,753 830,753 563,290 563,290
Borrowed funds 22,207 22,207 39,677 39,677
Liabilities under management
programs:
Debt
Affiliates 1,859,683 1,859,683 2,531,863 2,531,863
Third party 1,250,628 1,250,628 269,213 269,213
Off balance sheet derivatives:
Interest rate swaps $ 785,611 $ 634,332
In a gain position 828 2,823
In a loss position (13,470) (1,370)
15
11. INCOME TAXES
The income tax provision consisted of the following:
For the Year Ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Current:
U.S. federal $ 91,096 $ 24,518 $ (23,483)
State and local 13,621 2,734 (1,918)
Foreign 14,523 17,429 648
--------- --------- ---------
119,240 44,681 (24,753)
--------- --------- ---------
Deferred:
U.S. federal (65,476) (13,308) 38,186
State and local (10,205) (791) 4,251
Foreign 12,241 (6,933) 7,639
--------- --------- ---------
(63,440) (21,032) 50,076
--------- --------- ---------
Provision for income taxes $ 55,800 $ 23,649 $ 25,323
========= ========= =========
Net deferred income tax assets and liabilities are comprised of the
following:
For the Year Ended December 31,
-------------------------------------
1998 1997
==== ====
Net deferred income taxes:
Provision for doubtful accounts $ 3,721 $ 2,382
Net operating losses 510 941
Accrued liabilities and deferred
income 11,344 16,358
Alternative minimum tax credit
carry forward 19,800 19,800
Other 4,570 215
--------- ---------
Net deferred tax asset $ 39,945 $ 39,696
========= =========
Management program net deferred
income taxes:
Depreciation $(214,898) $(243,938)
Other 1,454 (303)
--------- ---------
Net deferred tax liability $(213,444) $(244,241)
========= =========
At December 31, 1998, Wright Express had net operating losses of
approximately $1,300 available for tax purposes which expire through 2001.
Deferred taxes have not been provided on approximately $169,000 of
cumulative undistributed earnings of foreign subsidiaries at December 31,
1998, as those earnings are considered to be permanently reinvested. The
determination of unrecognized deferred US tax liability for unremitted
earnings is not practicable. The Group's effective income tax rate differs
from the statutory federal rate as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 1.5% 3.5% 2.3%
Foreign taxes differential (0.9)% 0.8% (0.5%)
Non-deductible goodwill 1.2% 1.7% 1.2%
Merger-related costs -- 24.3% --
Other 0.7% 2.6% 0.3%
---- ---- ----
37.5% 67.9% 38.3%
==== ==== ====
16
12. RELATED PARTY TRANSACTIONS
The Group receives the benefit of certain administrative services from
Cendant and subsidiaries. For these administrative services, the Group was
charged $6,970, $18,892 and $4,379 for the years ended December 31, 1998,
1997 and 1996, respectively. The Group also purchases data processing
services from Cendant, which amounted to $4,947, $5,094 and $5,509 for the
years ended December 31, 1998, 1997 and 1996, respectively. Such expenses
are included in selling, general and administrative expenses in the
combined income statement. These charges represent allocations from the
parent companies who owned the Group during each of the three years and
are not indicative of amounts which would have been incurred had the Group
been under common ownership for all years or if the Group had operated
independently.
PHH Financial Services Limited makes loans from time to time to Cendant
Relocation Plc. The balance of such loans receivable were $55,500 and
$18,200 at December 31, 1998 and 1997, respectively. Associated interest
charges were $1,940, $1,276 and $1,476 for 1998, 1997 and 1996,
respectively. Overhead expenses of $1,720, $453 and $628 were also
allocated to this subsidiary by Cendant Business Answers (Europe) Plc
during 1998, 1997 and 1996 respectively.
During 1998, PHH Deutschland, Inc. charged Cendant $703 in respect to
office expenses for shared facilities.
The Group established a $7,000 revolving loan agreement with Cendant
effective December 23, 1998. At December 31, 1998, the Group had $5,847
outstanding under this revolving loan with an interest rate of
approximately 6%. This liability is included in Due to Affiliates in the
combined balance sheet. During February 1999, such revolving loan
availability was increased to $40,000.
During 1996, Deutschland, Inc. received a cash capital contribution from
PHH of approximately $4,985 to meet minimum capital requirements.
See Note 7 for a description of related party financing activities.
13. BENEFIT PLANS
The majority of domestic employees of the Group are participants in the
defined benefit and defined contribution plans of Cendant. Effective May
1, 1998, former defined contribution plans of PHH Corporation were merged
into Cendant's plans. Substantially all domestic employees are covered.
Accumulated plan benefit data is not available for the individual
companies participating in the defined benefit plan. Employees of Wright
Express are also participants in the defined contribution plan. Benefit
plan expenses were $2,583, $2,300 and $2,006 for the years ended December
31, 1998, 1997 and 1996, respectively.
Foreign employees can participate in a contributory defined benefit
pension plan, at the employee's option. Benefits are based on an
employee's years of credited service and a percentage of final average
compensation.
Net costs for the foreign plan included the following:
December 31,
-----------------------------
1998 1997 1996
------- ------- -------
Service cost $ 1,147 $ 1,343 $ 853
Interest cost 1,123 1,074 714
Actual return on assets (1,330) (1,091) (664)
Net amortization and deferral 55 53 56
------- ------- -------
Net periodic pension cost $ 995 $ 1,379 $ 959
======= ======= =======
17
The changes in benefit obligations and plan assets, as well as the funded
status of the foreign pension plan are as follows:
1998 1997
-------- --------
Change in benefit obligation
Benefit obligation at January 1, $ 16,097 $ 12,718
Service cost 1,147 1,343
Interest cost 1,123 1,074
Benefit payments (209) (198)
Net loss/gain 7,391 (29)
Contributions 737 371
Translation -- 818
-------- --------
Benefit obligation at December 31, $ 26,286 $ 16,097
======== ========
Change in plan assets
Fair value of plan assets at January 1, $ 15,491 $ 10,857
Actual return of plan assets 1,332 2,317
Benefit payments (378) (361)
Contributions 2,515 1,891
Other 696 --
Translation 88 787
-------- --------
Fair value of plan assets at December 31, $ 19,744 $ 15,491
======== ========
Funded status $ (6,542) $ (606)
Unrecognized net gain/loss from past
experience different from that assumed
and effects of change in assumptions 6,514 (248)
Unrecognized prior service cost 237 260
Unrecognized net obligation 91 132
-------- --------
Prepaid/(accrued) benefit cost $ 300 $ (462)
======== ========
The plan resulted in a net prepaid pension asset of $300 at December 31,
1998 and a liability of $462 at 1997. This amount is classified as other
assets and accrued liabilities in the Group's combined balance sheet at
December 31, 1998 and 1997, respectively.
The Group recorded an additional minimum liability of $2,222 at December
31, 1998. This liability represents the amount by which the accumulated
benefit obligation exceeds the sum of the fair market value of plan assets
and accrued amounts previously recorded. The additional liability may be
offset by an asset to the extent of previously unrecognized prior service
cost. The asset amount of $328 is included in other assets in the Group's
combined balance sheet at December 31, 1998. The remaining amount of
$1,976 is recorded as a reduction to other comprehensive income, net of
related tax benefits of $670.
The following weighted-average assumptions were used to determine the
obligations under the foreign plan:
December 31,
-------------------------
1998 1997 1996
---- ---- ----
Discount rate 5.25% 7.00% 8.50%
Expected rate of return on plan assets 6.25% 8.00% 9.50%
Rate of compensation increase 3.25% 3.25% 5.50%
14. PROFIT INCENTIVE PLANS
The Group has established Incentive Plans for both Sales/Client Relations
personnel and managerial
18
positions. Sales/Client Relations personnel's incentives are based upon
revenues, profitability, individual objectives and the department's and
Cendant's earnings before interest, taxes, depreciation and amortization
adjusted to exclude nonrecurring or unusual items ("Adjusted EBITDA"). The
incentive plan for managers is based upon individual objectives and the
department's and Cendant's Adjusted EBITDA targets. The total expense was
$5,111, $7,394 and $5,631 for 1998, 1997 and 1996, respectively.
15. COMMITMENTS AND CONTINGENCIES
Lines of Credit - Wright Express has entered into commitments to extend
credit in the normal course of business in order to meet the financing
needs of its customers. Wright Express's exposure to loss in the event of
nonperformance by the other party for commitments to extend credit is
represented by the contractual notional amount of those instruments.
Wright Express uses the same credit policies in making commitments as it
does for on-balance sheet instruments. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Since many of the commitments
significantly exceed the normal draw upon the line, the total commitment
amounts do not necessarily represent future cash requirements. Wright
Express evaluates each customer's creditworthiness on a case-by-case
basis. At December 31, 1998, Wright Express had $361,000 of commitments to
extend additional credit.
Leases - Certain facilities and equipment are leased under short-term
lease agreements expiring at various dates through 2002 and beyond. All
such leases are accounted for as operating leases. Total rental expense
for premises and equipment amounted to $11,841, $6,135 and $5,308 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease payments under non-cancelable operating leases which
have an initial term of more than twelve months are as follows:
Year
----
1999 $ 7,238
2000 6,854
2001 6,297
2002 5,606
2003 2,453
Thereafter 21,031
--------
Total minimum lease payments $ 49,479
========
Group guarantees - A composite cross guarantee exists between companies
included within the Cendant Business Answers (Europe) Plc group and The
Harpur Group Limited group, with National Westminster Bank Plc. This
guarantee includes Cendant Relocation Plc.
A cross guarantee exists between Cendant Business Answers (Europe) Plc and
PHH Allstar Limited, with Bank of Ireland.
Litigation - In April 1998, Cendant publicly announced that it discovered
accounting irregularities in the former business units of CUC
International Inc. Such discovery prompted investigations into such
matters by Cendant and the Audit Committee of Cendant's Board of
Directors. As a result of the findings from the investigations, Cendant
restated its previously reported financial results for 1997, 1996 and
1995. Since such announcement, more than 70 lawsuits claiming to be class
actions, two lawsuits claiming to be brought derivatively on Cendant's
behalf and several individual lawsuits have been filed in various courts
against Cendant and other defendants. The Court has ordered consolidation
of many of the actions. The SEC and the United States Attorney for the
district of New Jersey are conducting investigations relating to the
matters referenced above. The SEC advised 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 the
investigations, Cendant made all adjustments considered necessary which
19
are reflected in its financial statements. However, Cendant can provide no
assurances that additional adjustments will not be necessary as a result
of these government investigations.
Cendant does not believe that it is feasible to predict or determine the
final outcome of these proceedings or investigations or to estimate the
amount or potential range of loss with respect to these proceedings or
investigations. The possible outcome or resolutions of the proceedings
could include judgments and against Cendant or settlements and could
require substantial payments by Cendant. In addition, the timing of the
final resolution of the proceedings or investigations is uncertain. The
Group is currently not a party to such litigation and management does not
currently believe that there is any basis for asserting a claim thereunder
against the Group.
In the ordinary course of business, the Group has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying combined financial statements. In addition, the Group is a
defendant in several claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition
of these matters is not expected to have a material adverse effect on the
financial condition of the Group.
16. SEGMENT INFORMATION
Effective December 31, 1998, the Group adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The provisions
of SFAS No. 131 established revised standards for public companies
relating to reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports. It also established standards for
related disclosures about products and services, and geographic areas. The
Group operates in a single segment, fleet and fuel card management.
Geographic Segment Information
United United All Other
Total States Kingdom Countries
----- ------ ------- ---------
1998
Total revenues $1,605,063 $1,286,368 $ 231,363 $ 87,332
Assets 4,728,299 3,199,614 1,326,890(1) 201,795
Long-lived assets 93,529 27,095 61,734 4,700
1997
Total revenues $1,452,695 $1,218,104 $ 153,556 $ 81,035
Assets 4,135,112 3,165,686 788,859 180,567
Long-lived assets 39,066 16,009 22,065 992
1996
Total revenues $1,357,039 $1,151,353 $ 125,312 $ 80,374
Assets 3,852,827 2,934,683 639,843 278,301
Long-lived assets 39,364 14,435 23,346 1,583
----------
(1) Includes $294.3 million of assets acquired in connection with the
Harpur acquisition.
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property
and equipment.
20
17. SUBSEQUENT EVENT
On May 24, 1999, PHH announced that they had executed an agreement with
Avis Rent A Car, Inc. ("Avis"), pursuant to which Avis will acquire the
net assets of the Group from PHH for $1.44 billion in assumed intercompany
debt of PHH Holdings, a wholly-owned subsidiary of PHH, and the issuance
of $360 million in convertible preferred stock of Avis Fleet Leasing and
Management Corporation, a wholly-owned subsidiary of Avis. The transaction
is subject to customary regulatory approvals and is expected to close on
or about June 30, 1999.
21
PHH VEHICLE MANAGEMENT SERVICE
CONDENSED COMBINED BALANCE SHEETS
(In Thousands)
UNAUDITED
March 31 December 31,
---------- ------------
1999 1998
---------- ------------
ASSETS:
Cash and cash equivalents $ 74,211 $ 21,059
Accounts and loans receivable, net 506,325 508,901
Property and equipment, net 96,919 93,529
Goodwill and other intangibles,net 227,351 236,438
Deferred income taxes 39,200 39,945
Other assets 20,272 40,099
---------- ----------
Total assets exclusive of assets
under management programs 964,278 939,971
---------- ----------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles 3,867,856 3,788,328
---------- ----------
TOTAL ASSETS $4,832,134 $4,728,299
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued liabilities $ 443,596 $ 295,217
Income taxes payable 119,093 108,089
Deferred revenue 43,590 41,146
Due to affiliates 228,160 182,061
Borrowed funds 20,769 47,207
---------- ----------
Total liabilities exclusive of liabilities
under management programs 855,208 673,720
---------- ----------
LIABILITIES UNDER MANAGEMENT PROGRAMS:
Debt 3,014,758 3,110,311
Deferred income taxes 213,059 213,444
---------- ----------
3,227,817 3,323,755
---------- ----------
TOTAL LIABILITIES 4,083,025 3,997,475
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 749,109 730,824
---------- ----------
TOTAL LIABIILITIES AND SHAREHOLDERS' EQUITY $4,832,134 $4,728,299
========== ==========
See notes to condensed combined financial statements.
22
PHH VEHICLE MANAGEMENT SERVICES
CONDENSED COMBINED INCOME STATEMENTS
(In Thousands)
UNAUDITED
For the three months ended
March 31, 1999 March 31, 1998
---------------------------------
REVENUE $400,253 $391,305
EXPENSES
Depreciation on leased vehicles 253,743 249,384
Interest expense 46,457 43,183
Selling, general and administrative expenses 63,569 55,425
Depreciation and amortization on assets
other than leased vehicles 7,332 6,341
-------- --------
Total expenses 371,101 354,333
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 29,152 36,972
PROVISION FOR INCOME TAXES 11,002 13,857
-------- --------
NET INCOME $ 18,150 $ 23,115
======== ========
See notes to condensed combined financial statements.
23
PHH VEHICLE MANAGEMENT SERVICES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
UNAUDITED
For the three months ended
March 31,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES: $ 509,890 $ 284,470
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles (560,758) (626,170)
Repayments of investment in leases and leased vehicles 133,455 222,021
Proceeds from sales and transfers of
leases and leased vehicles 44,640 27,284
Net purchases of property and equipment (8,586) (14,852)
Cash acquired in acquisition of business,
net of contribution from Parent -- 2,341
--------- ---------
Net cash used in investing activities (391,249) (389,376)
--------- ---------
FINANCING ACTIVITIES:
Other, net (26,438) 23,023
Liabilities under management programs
Proceeds from debt issuance 112,061 162,789
Principal payments on debt issuance (162,574) (103,292)
--------- ---------
Net cash (used in) provided by financing activities (76,951) 82,520
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 11,462 10,448
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 53,152 (11,938)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 21,059 11,938
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 74,211 $ --
========= =========
Non-cash investing and financing information:
Business acquired:
Fair value of assets acquired, excluding cash $ 294,287
Liabilities assumed (86,006)
Capital contribution from affiliate for acquisition (190,597)
Additional purchase consideration payable (20,025)
---------
Net cash acquired $ (2,341)
=========
See notes to condensed combined financial statements
24
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed combined balance sheet of the Group as of March 31, 1999 and
the condensed combined statements of income and cash flows for the three
months ended March 31, 1999 and 1998 are unaudited. In the opinion of
management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation of such financial statements
are included. The accompanying unaudited combined financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. The December 31, 1998
condensed combined balance sheet was derived from the Group's audited
financial statements for the year ended December 31, 1998, and should be
read in conjunction with such combined financial statements and notes
thereto.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
2. ACQUISITIONS
On January 20, 1998, Pointeuro Limited acquired the Harpur Group Limited
("Harpur") for an initial purchase price of approximately $194 million,
including acquisition costs. Additional purchase consideration of
approximately $20 million was accrued as of December 31, 1998, upon the
attainment of certain revenue thresholds as specified in the purchase
agreement. Harpur provides fuel card and fleet management services to
corporate clients in the United Kingdom. The transaction was accounted for
as a purchase and, accordingly, the operating results of Harpur have been
included in the Group's combined financial statements since the date of
acquisition.
The excess of the aggregate purchase price over the fair value of net
assets acquired of approximately $189 million has been allocated to
goodwill. Pro forma results of operations for the three months ended March
31, 1998, assuming the acquisition of Harpur had occurred on January 1,
1998, have not been presented as the effect is not material.
3. SEGMENT INFORMATION
The Group operates in a single segment, fleet and fuel card management.
Geographic Segment Information
United United All Other
Total States Kingdom Countries
---------- ---------- ---------- -----------
1999
Revenues $ 400,253 $ 333,464 $ 59,316 $ 7,473
Assets 4,832,134 3,216,939 1,386,131 229,064
Long-lived assets 96,919 27,396 64,653 4,870
1998
Revenues $ 391,305 $ 330,306 $ 54,195 $ 6,804
Assets 4,483,710 3,184,333 1,072,076 227,301
Long-lived assets 50,373 16,664 32,718 991
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4. COMPREHENSIVE INCOME
Components of comprehensive income (loss) are summarized as follows:
Three months ended
March 31,
-----------------------
1999 1998
-------- --------
Net income $ 18,150 $ 23,115
Other comprehensive income:
Currency translation 201 (1,630)
-------- --------
Comprehensive income $ 18,351 $ 21,485
======== ========
5. SUBSEQUENT EVENT
On May 24, 1999, PHH announced that they had executed an agreement with
Avis Rent A Car, Inc. ("Avis") pursuant to which Avis will acquire the net
assets of the Group from PHH for $1.44 billion in assumed intercompany
debt of PHH Holdings, a wholly-owned subsidiary of PHH, and the issuance
of $360 million in convertible preferred stock of Avis Fleet Leasing and
Management Corporation, a wholly-owned subsidiary of Avis. The transaction
is subject to customary regulatory approval and is expected to close on
or about June 30, 1999.
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