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, 1999
Commission File No. 1-7797
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PHH Corporation
(Exact name of Registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive (Zip Code)
office)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
The Registrant 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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues
Service fees:
Mortgage services (net of amortization of mortgage
servicing rights and interest of $58.5, $71.9, $177.7
and $173.2, respectively) $ 113.8 $ 79.9 $ 313.6 $ 251.9
Relocation services (net of interest of $6.9, $6.7, $17.7
and $21.2,respectively) 116.8 130.8 314.5 340.7
-------- --------- --------- ---------
Service fees, net 230.6 210.7 628.1 592.6
Other 7.1 2.2 10.7 2.5
--------- --------- --------- ---------
Net revenues 237.7 212.9 638.8 595.1
--------- --------- --------- ---------
Expenses
Operating 106.2 92.9 317.1 295.9
General and administrative 23.1 27.0 70.1 72.4
Depreciation and amortization 8.8 7.3 26.2 18.0
Merger-related costs and other unusual charges - - - 9.1
--------- --------- --------- ---------
Total expenses 138.1 127.2 413.4 395.4
--------- --------- --------- ---------
Income from continuing operations before income taxes 99.6 85.7 225.4 199.7
Provision for income taxes 37.3 33.0 85.3 78.9
--------- --------- --------- ---------
Income from continuing operations 62.3 52.7 140.1 120.8
Income from discontinued operations, net of tax - 23.4 33.7 82.1
Gain on sale of discontinued operations, net of tax - - 871.2 -
--------- --------- --------- ---------
Net income $ 62.3 $ 76.1 $ 1,045.0 $ 202.9
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
September 30, December 31,
1999 1998
------------- -------------
Assets
Cash and cash equivalents $ 130.3 $ 281.3
Accounts and notes receivable, net 690.3 457.7
Property and equipment, net 161.4 149.6
Investment in convertible preferred stock 360.0 -
Other assets 400.8 256.3
Net assets of discontinued operations - 967.5
------------- -------------
Total assets exclusive of assets under programs 1,742.8 2,112.4
------------- -------------
Assets under management and mortgage programs
Relocation receivables 571.1 659.1
Mortgage loans held for sale 1,786.0 2,416.0
Mortgage servicing rights 968.7 635.7
------------- -------------
3,325.8 3,710.8
------------- -------------
Total assets $ 5,068.6 $ 5,823.2
============= =============
Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 903.2 $ 707.6
Deferred income 31.1 27.4
------------- -------------
Total liabilities exclusive of liabilities under programs 934.3 735.0
------------- -------------
Liabilities under management and mortgage programs
Debt 2,793.6 3,691.6
Deferred income taxes 175.5 198.3
Commitments and contingencies (Note 5)
Shareholder's equity
Preferred stock - authorized 3,000,000 shares - -
Common stock, no par value - authorized 75,000,000 shares;
issued and outstanding 1,000 shares 512.1 479.9
Retained earnings 656.8 744.9
Accumulated other comprehensive loss (3.7) (26.5)
-------------- --------------
Total shareholder's equity 1,165.2 1,198.3
------------- -------------
Total liabilities and shareholder's equity $ 5,068.6 $ 5,823.2
============= =============
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months Ended
September 30,
-------------------------------
1999 1998
------------- -------------
Operating Activities
Net income $ 1,045.0 $ 202.9
Adjustments to reconcile net income to net cash provided by (used in)
operating activities of continuing operations
Income from discontinued operations, net of tax (33.7) (82.1)
Gain on sale of discontinued operations, net of tax (871.2) -
Depreciation and amortization 26.2 18.0
Merger-related costs and other unusual charges - 9.1
Payments of merger-related costs and other unusual charge liabilities (3.2) (29.0)
Other, net (150.9) 303.5
-------------- -------------
12.2 422.4
------------- -------------
Management and mortgage programs:
Amortization 88.2 75.4
Origination of mortgage loans (20,841.0) (18,599.3)
Proceeds on sale and payments from mortgage loans
held for sale 21,471.0 17,874.9
------------- -------------
718.2 (649.0)
------------- --------------
Net cash provided by (used in) operating activities of continuing operations 730.4 (226.6)
------------- --------------
Investing Activities
Property and equipment additions (52.6) (81.9)
Net proceeds from disposition of fleet segment 1,803.7 -
Other, net (53.2) 28.4
-------------- -------------
1,697.9 (53.5)
------------- --------------
Management and mortgage programs:
Equity advances on homes under management (6,025.7) (5,186.5)
Repayment on advances on homes under management 6,032.5 5,333.8
Additions to mortgage servicing rights (559.2) (338.7)
Proceeds from sales of mortgage servicing rights 83.7 49.6
------------- -------------
(468.7) (141.8)
-------------- --------------
Net cash provided by (used in) investing activities of continuing operations 1,229.2 (195.3)
------------- --------------
Financing Activities
Proceeds received from Parent Company capital contribution - 46.0
Payment of dividends to Parent Company (1,113.1) (60.0)
-------------- --------------
(1,113.1) (14.0)
-------------- --------------
Management and mortgage programs:
Proceeds received for debt repayment in connection
with disposition of fleet segment 3,016.9 -
Proceeds from debt issuance or borrowings 4,132.7 2,314.2
Principal payments on borrowings (6,252.0) (2,075.3)
Net change in short-term borrowings (1,751.9) 339.3
Net change in fundings to discontinued operations (100.6) (193.5)
-------------- --------------
(954.9) 384.7
-------------- -------------
Net cash (used in) provided by financing activities of continuing operations (2,068.0) 370.7
-------------- -------------
Effect of changes in exchange rates on cash and cash equivalents (42.6) 13.0
-------------- -------------
Cash provided by discontinued operations - 46.3
------------- -------------
Net (decrease) increase in cash and cash equivalents (151.0) 8.1
Cash and cash equivalents, beginning of period 281.3 2.1
------------- -------------
Cash and cash equivalents, end of period $ 130.3 $ 10.2
============= =============
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
PHH Corporation, together with its wholly-owned subsidiaries (the
"Company"), is a leading provider of mortgage and relocation services and
is a wholly-owned subsidiary of Cendant Corporation ("Cendant" or the
"Parent Company"). Pursuant to certain covenant requirements in the
indentures under which the Company issues debt, the Company continues to
operate and maintain its status as a separate public reporting entity,
which is the basis under which the accompanying unaudited consolidated
financial statements and notes are presented.
The consolidated balance sheet of the Company as of September 30, 1999,
the consolidated statements of income for the three and nine months ended
September 30, 1999 and 1998 and the consolidated statements of cash flows
for the nine months ended September 30, 1999 and 1998 are unaudited. In
the opinion of management, all adjustments consisting of normal recurring
accruals necessary for a fair presentation of such financial statements
are included. The accompanying unaudited consolidated financial
statements of the Company for the three and nine months ended September
30, 1998 set forth herein have been restated to give effect to: (i) the
contribution by Cendant in April 1999 of certain fuel card subsidiaries
to the Company's fleet business segment (the "fleet segment" or "fleet
businesses"), and (ii) the reclassification of the Company's fleet
segment to a discontinued operation pursuant to an agreement, executed on
May 22, 1999 which provided for the disposition of the Company's fleet
segment (see Note 3 - Discontinued Operations). The accompanying
consolidated financial statements include the accounts and transactions
of the Company and all wholly-owned subsidiaries and have been prepared
in accordance with generally accepted accounting principles for interim
financial information. The December 31, 1998 consolidated balance sheet
was derived from the Company's audited financial statements included in
the Company's Annual Report on Form 10-K/A for the year ended December
31, 1998, filed with the Securities and Exchange Commission ("SEC") on
August 16, 1999 and should be read in conjunction therewith. Operating
results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
Certain reclassifications have been made to the 1998 consolidated
financial statements to conform with the presentation used in 1999.
2. Comprehensive Income
Components of comprehensive income (loss) are summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(In millions) 1999 1998 1999 1998
--------- --------- --------- --------
Net income $ 62.3 $ 76.1 $ 1,045.0 $ 202.9
Other comprehensive income (loss):
Currency translation adjustment (1.0) 18.7 25.1 12.0
Net unrealized loss on marketable securities,
net of tax (0.8) - (2.3) -
--------- --------- ---------- --------
Comprehensive income $ 60.5 $ 94.8 $ 1,067.8 $ 214.9
========= ========= ========= ========
The components of accumulated other comprehensive loss for the nine months
ended September 30, 1999 are as follows:
Net unrealized Accumulated
Currency loss on other
translation marketable comprehensive
(In millions) adjustment securities loss
----------- --------------- -------------
Balance, January 1, 1999 $ (26.5) $ - $ (26.5)
Current period change 25.1 (2.3) 22.8
----------- ------------ -------------
Balance, September 30, 1999 $ (1.4) $ (2.3) $ (3.7)
=========== ============ =============
3. Discontinued Operations
Contribution of Fuel Card Subsidiaries by Parent Company. In April 1999,
the Parent Company contributed its fuel card subsidiaries, Wright Express
Corporation ("WEX") and The Harpur Group, Ltd. ("Harpur"), to the Company.
As both entities were under common control, such transaction has been
accounted for in a manner similar to a pooling of interests. Accordingly,
financial results for the three and nine months ended September 30, 1998
have been restated as if the Company, WEX and Harpur had operated as one
entity since inception. However, the operating results of Harpur are
included from January 20, 1998, the date on which Harpur was acquired by
the Parent Company for $190.7 million pursuant to a purchase business
combination and, accordingly, the date on which common control was
established.
Divestiture. On May 22, 1999 (the "Measurement Date"), the Company executed
an agreement with Avis Rent A Car, Inc. ("ARAC") providing for the
disposition of the Company's fleet segment (the "Agreement"), which
included PHH Vehicle Management Services Corporation, WEX, Harpur and other
subsidiaries, to ARAC. The Company's fleet segment primarily consisted of
providing fleet and fuel card related products and services to corporate
clients and government agencies. These services included management and
leasing of vehicles, fuel card payment and reporting and other fee-based
services for clients' vehicle fleets. Vehicles were leased primarily to
corporate fleet users under operating and direct financing lease
arrangements.
On June 30, 1999, the Company completed the divestiture of the fleet
businesses. Pursuant to the Agreement, ARAC acquired the net assets of the
Company's fleet businesses through the assumption and subsequent repayment
of $1.44 billion of intercompany debt of PHH Holdings, a wholly-owned
subsidiary of the Company, and the issuance of $360.0 million in
convertible preferred stock of Avis Fleet Leasing and Management
Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC, which is
included in Investment in convertible preferred stock on the balance sheet.
Coincident to the closing of the transaction, ARAC refinanced the assumed
debt under management programs which was payable to the Company.
Accordingly, on June 30, 1999, the Company received additional
consideration from ARAC of $3,047.5 million comprised of $3,016.9 million
of cash proceeds and a $30.6 million note receivable. On such date, the
Company used proceeds of $1,809.4 million to repay outstanding fleet
segment financing arrangements. Additionally, in July and August 1999,
utilizing the cash proceeds from the fleet segment disposition, the Company
made dividend payments to Cendant in the amounts of $1,033.0 million and
$56.3 million, respectively. Such dividends were in compliance with the
dividend restriction covenant pursuant to the Indenture under which the
Company issues medium-term notes. The remaining proceeds were designated to
repay outstanding corporate debt as it matures (the borrowings of which had
been loaned to the fleet segment to finance the purchases of leased
vehicles) and to finance other assets under management and mortgage
programs.
The convertible preferred stock of Avis Fleet pays dividends at an annual
rate of 5% and is convertible into common stock of ARAC at the Company's
option upon the satisfaction of certain conditions, including the per share
price of ARAC Class A common stock equaling or exceeding $50 per share and
the fleet segment attaining certain EBITDA (earnings before interest,
taxes, depreciation and amortization) thresholds, as defined. There are
additional circumstances upon which the shares of Avis Fleet convertible
preferred stock are automatically or mandatorily convertible into ARAC
common stock. The transaction followed a competitive bidding process.
In connection with the disposition of the Company's fleet segment, the
Company recorded an after tax gain on sale of discontinued operations of
$871.2 million in the second quarter of 1999, which included income from
operations subsequent to the Measurement Date of $5.5 million. The fleet
segment disposition was structured in accordance with applicable tax law to
be treated as a tax-free reorganization and, accordingly, no tax provision
has been recorded on a majority of the gain. Should the transaction be
deemed taxable, the resultant tax liability could be material.
Summarized financial data of the Company's fleet segment, inclusive of the
fuel card subsidiaries contributed by the Parent Company, are as follows:
Statements of Income:
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------------
1998 1999 1998
------------------ --------- -----------
Net revenues $ 92.6 $ 166.2 $ 284.9
----------- --------- -----------
Income before income taxes 33.1 51.7 116.1
Provision for income taxes 9.7 18.0 34.0
----------- --------- -----------
Net income $ 23.4 $ 33.7 $ 82.1
=========== ========= ===========
Balance Sheet:
(In millions) December 31,
1998
-------------
Total assets exclusive of assets under programs $ 893.7
Assets under management programs 3,801.1
Total liabilities exclusive of liabilities under programs (379.4)
Liabilities under management programs (3,347.9)
------------
Net assets of discontinued operations $ 967.5
============
The effect on the consolidated financial statements of the restatement
resulting from the Parent Company's contribution of its WEX and Harpur
subsidiaries ("Parent Company Subsidiaries") and the subsequent
reclassification of the fleet segment to a discontinued operation for the
three and nine months ended September 30, 1998 are as follows:
Statements of Income
(In millions)
Three Months Ended September 30, 1998
------------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
----------- ---------------- --------------- -------------
Net revenues $ 280.2 $ 25.3 $ (92.6) $ 212.9
Total expenses 168.7 18.0 (59.5) 127.2
Provision for income taxes 39.7 3.0 (9.7) 33.0
----------- ---------------- --------------- -------------
Income from continuing operations 71.8 4.3 (23.4) 52.7
Income from discontinued
operations, net of tax - - 23.4 23.4
----------- ---------------- -------------- -------------
Net income $ 71.8 $ 4.3 $ - $ 76.1
=========== ================ =============== =============
(In millions)
Nine Months Ended September 30, 1998
------------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
----------- ---------------- --------------- -------------
Net revenues $ 810.0 $ 70.0 $ (284.9) $ 595.1
Total expenses 510.4 53.8 (168.8) 395.4
Provision for income taxes 106.0 6.9 (34.0) 78.9
----------- ---------------- --------------- -------------
Income from continuing operations 193.6 9.3 (82.1) 120.8
Income from discontinued
operations, net of tax - - 82.1 82.1
----------- ---------------- --------------- -------------
Net income $ 193.6 $ 9.3 $ - $ 202.9
=========== ================ =============== =============
4. Merger-Related Costs and Other Unusual Charges
During the nine months ended September 30, 1998, the Company recorded a net
charge of $9.1 million associated with changes in the estimate of
liabilities previously recorded in connection with merger-related costs and
other unusual charges. The net charge included $24.1 million of additional
future costs related to lease terminations partially offset by $15.0
million of net credits primarily related to a change in estimated severance
costs.
5. Commitments and Contingencies
Parent Company Litigation. Since the April 15, 1998 announcement by the
Parent Company of the discovery of accounting irregularities in the former
business units of CUC International Inc. ("CUC"), approximately 70 lawsuits
claiming to be class actions, two lawsuits claiming to be brought
derivatively on the Parent Company's behalf and several individual lawsuits
and arbitration proceedings have commenced in various courts and other
forums against the Parent Company and other defendants by or on behalf of
persons claiming to have purchased or otherwise acquired securities or
options issued by CUC or Cendant between May 1995 and August 1998. The
Court has ordered consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Parent Company 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, the Parent
Company made all adjustments considered necessary which are reflected in
its financial statements. Although the Parent Company can provide no
assurances, the Parent Company does not expect that additional adjustments
will be necessary.
While the Parent Company is engaged in discussions with counsel for the
plaintiffs in certain of these actions seeking a settlement of them, the
Parent Company does not believe it is feasible to predict or determine the
final outcome or resolution of these proceedings or to estimate the amounts
or potential range of loss with respect to these proceedings and
investigations. In addition, the timing of the final resolution of these
proceedings and investigations is uncertain. The possible outcomes or
resolutions of these proceedings and investigations could include
judgements against the Parent Company or settlements and could require
substantial payments by the Parent Company. Management believes that
material adverse outcomes with respect to such Parent Company proceedings
and investigations could have a material adverse impact on the Company's
financial position, results of operations or cash flows.
Other pending litigation. The Company and its subsidiaries are involved in
pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
6. New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise effective January 1, 1999. SFAS No. 134 requires that after the
securitization of mortgage loans, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other
interests based on its ability and intent to sell or hold those
investments. As of January 1, 1999, the Company reclassified
mortgage-backed securities and other interests retained after the
securitization of mortgage loans from the trading to the available for sale
category. Subsequent to the adoption of SFAS No. 134, such securities and
interests are accounted for in accordance with SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". The adoption of SFAS
No. 134 did not have a material impact on the financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 requires
the Company to record all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. If the derivative does
not qualify as a hedging instrument, the change in the derivative fair
values will be immediately recognized as a gain or loss in earnings. If the
derivative does qualify as a hedging instrument, the gain or loss on the
change in the derivative fair values will either be recognized (i) in
earnings as offsets to the changes in the fair value of the related item
being hedged or (ii) be deferred and recorded as a component of other
comprehensive income and reclassified to earnings in the same period during
which the hedged transactions occur. The Company has not yet determined
what impact the adoption of SFAS No. 133 will have on its financial
statements. Implementation of this standard has recently been delayed by
the FASB for a twelve month period. The Company will adopt SFAS No. 133 as
required for its first quarterly filing of fiscal year 2001.
7. Segment Information
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is defined
as earnings before non-operating interest, income taxes, and depreciation
and amortization (exclusive of amortization on assets under management and
mortgage programs), adjusted to exclude items which are of a non-recurring
or unusual nature, and are not measured in assessing segment performance or
are not segment specific. Interest expense incurred on indebtedness which
is used to finance relocation and mortgage origination and servicing
activities is recorded net within revenues in the applicable reportable
operating segment. The Company determined that it has two reportable
operating segments comprising its continuing operations based primarily on
the types of services it provides, the consumer base to which marketing
efforts are directed and the methods used to sell services. Inter-segment
net revenues were not significant to the net revenues of any one segment or
the consolidated net revenues of the Company. A description of the services
provided within each of the Company's reportable operating segments is as
follows:
Mortgage
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. Revenues are earned from the sale of mortgage
loans to investors as well as from fees earned on the servicing of loans
for investors. The Company markets a variety of mortgage products to
consumers through relationships with corporations, affinity groups,
financial institutions, real estate brokerage firms and other mortgage
banks.
Mortgage services customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association, while
generally retaining mortgage servicing rights. Mortgage servicing consists
of collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage-related expenses
such as taxes and insurance, and otherwise administering the Company's
mortgage loan servicing portfolio.
Relocation
Relocation services are provided to client corporations for the transfer of
their employees. Such services include appraisal, inspection and selling of
transferees' homes and providing equity advances to transferees (generally
guaranteed by the corporate customer). Additional services provided include
certain home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.
Segment Information
(In millions) Three Months Ended September 30,
------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
------------- ---------------- ------------- --------------
Mortgage $ 113.8 $ 59.3 $ 79.9 $ 45.4
Relocation 116.8 42.0 130.8 45.6
Other 7.1 7.1 2.2 2.0
------------- ---------------- ------------- --------------
Total $ 237.7 $ 108.4 $ 212.9 $ 93.0
============= ================ ============= ==============
Nine Months Ended September 30,
------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
------------- ---------------- ------------- --------------
Mortgage $ 313.6 $ 153.0 $ 251.9 $ 127.7
Relocation 314.5 94.0 340.7 97.6
Other 10.7 4.6 2.5 1.5
------------- ---------------- ------------- --------------
Total $ 638.8 $ 251.6 $ 595.1 $ 226.8
============= ================ ============= ==============
Provided below is a reconciliation of total Adjusted EBITDA for reportable
segments to income from continuing operations before income taxes.
Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
---------------------- ------------------------
1999 1998 1999 1998
--------- -------- --------- ---------
Adjusted EBITDA for reportable segments $ 108.4 $ 93.0 $ 251.6 $ 226.8
Depreciation and amortization 8.8 7.3 26.2 18.0
Merger-related costs and other unusual charges - - - 9.1
-------- -------- --------- ---------
Income from continuing operations before
income taxes $ 99.6 $ 85.7 $ 225.4 $ 199.7
========= ======== ========= =========
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES
OVERVIEW
We are a leading provider of mortgage and relocation services and a wholly-owned
subsidiary of Cendant Corporation ("Cendant" or the "Parent Company"). Pursuant
to certain covenant requirements in the indentures under which we issue debt, we
continue to operate and maintain our status as a separate public reporting
entity.
On June 30, 1999, pursuant to Cendant's previously announced program to divest
non-strategic businesses and assets, we completed the disposition of our fleet
segment for aggregate consideration of $1.8 billion. The fleet segment has been
classified as a discontinued operation herein (See "Liquidity and Capital
Resources- Discontinued Operations").
Results of Operations - Three Months Ended September 30, 1999
vs.
Three Months Ended September 30, 1998
This discussion should be read in conjunction with the information contained in
our Consolidated Financial Statements and accompanying Notes thereto appearing
elsewhere in this Form 10-Q.
The underlying discussion of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes and depreciation and amortization (exclusive of amortization on
assets under management and mortgage programs), adjusted to exclude 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
discussion is the most informative representation of how we evaluate
performance. We determined that we have two reportable operating segments
comprising our continuing operations based primarily on the types of services we
provide, the consumer base to which marketing efforts are directed and the
methods we use to sell services. For additional information, including a
description of the services provided in each of our reportable operating
segments, see Note 7 to the consolidated financial statements.
Our consolidated revenues increased $24.8 million (12%) from $212.9 million in
1998 to $237.7 million in 1999. In addition, our Adjusted EBITDA increased $15.4
million (17%) from $93.0 million in 1998 to $108.4 million in 1999. Our Adjusted
EBITDA margin in 1999 was 46%, which represents an increase of 2 percentage
points over 1998.
Mortgage Segment
Revenues and Adjusted EBITDA increased $33.9 million (42%) and $13.9 million
(31%), respectively, in third quarter 1999 compared to third quarter 1998,
primarily due to growth in both mortgage origination revenue and servicing
revenue. The Adjusted EBITDA margin decreased from 57% in 1998 to 52% in 1999,
as higher revenues were offset by higher operating expenses including
technology, infrastructure expenditures and teleservices costs to support our
"Phone-In, Move-In" and "Log-In, Move-In" programs. Mortgage closings decreased
$0.4 billion (6%) to $6.6 billion, due to lower refinance volumes partially
offset by continued increases in the origination of mortgages for home
purchases. The average production fee increased 28.6 basis points, resulting in
a $14.6 million increase in production revenues. The increase in the average
production fee resulted from a shift to more profitable sales and processing
channels and growth in servicing origination revenues. The average servicing
portfolio grew $9.0 billion (23%) and recurring servicing revenue increased
$21.9 million, with the average servicing fee increasing 4.5 basis points.
Relocation Segment
Revenues and Adjusted EBITDA decreased $14.0 million (11%) and $3.6 million
(8%), respectively, in third quarter 1999 compared to third quarter 1998.
Certain niche-market asset management operations, which were sold in third
quarter 1998, benefited third quarter 1998 revenues and Adjusted EBITDA by $10.6
million and $8.9 million, respectively. Without this non-recurring item,
revenues were down 3% and Adjusted EBITDA increased 14%. Ancillary service fees
have generally increased, partially offsetting reduced home sale revenue and
reflecting a trend from asset-based to service-based fees. The Adjusted EBITDA
margin increased from 35% in 1998 to 36% in 1999 primarily due to operating
expense reductions of $10.6 million (12%), comprised of cost savings in
information technology, regional operations, sales and the sale of certain asset
management operations discussed above.
Results of Operations - Nine Months Ended September 30, 1999
vs.
Nine Months Ended September 30, 1998
Our consolidated revenues increased $43.7 million (7%) from $595.1 million in
1998 to $638.8 million in 1999. In addition, our Adjusted EBITDA increased $24.8
million (11%) from $226.8 million in 1998 to $251.6 million in 1999. Our
Adjusted EBITDA margin in 1999 was 39%, which represents an increase of one
percentage point over 1998.
Mortgage Segment
Revenues and Adjusted EBITDA increased $61.7 million (24%) and $25.3 million
(20%), respectively, in the first nine months of 1999 compared to the first nine
months of 1998, primarily due to substantial growth in both mortgage origination
revenue and servicing revenue. The Adjusted EBITDA margin decreased from 51% in
1998 to 49% in 1999, as higher revenues were partially offset by higher
operating expenses related to increases in hiring, technology and capacity to
support continued growth. Mortgage closings increased $2.8 billion (15%) to
$21.2 billion, while the average production fee increased 3.6 basis points,
resulting in a $39.0 million net increase in production revenues. The increase
in the average production fee resulted from a shift to more profitable sales and
processing channels and growth in servicing origination revenues. The average
servicing portfolio grew $11.1 billion (32%) and recurring servicing revenue
increased $27.5 million (83%), with the average servicing fee increasing 3.7
basis points.
Relocation Segment
Revenues and Adjusted EBITDA decreased $26.2 million (8%) and $3.6 million (4%),
respectively, in the first nine months of 1999 compared to the first nine months
of 1998. Certain niche-market asset management operations which were sold in the
third quarter of 1998 benefited the first nine months of 1998 revenues and
Adjusted EBITDA by $19.6 million and $14.5 million, respectively. This was
partially offset by the second quarter 1999 sale of a minority interest in our
Fairtide insurance subsidiary, which resulted in $7.2 million of additional
revenue and Adjusted EBITDA. Referral fees increased $10.2 million, nearly
offsetting an $11.5 million decline in home sale revenue and reflecting a trend
from asset-based to service-based fees. In 1998, revenues and Adjusted EBITDA
benefited from an improvement in receivable collections, which permitted a $7.5
million reduction in billing reserve requirements. Operating expenses decreased
$22.9 million (9%), comprised of cost savings in regional operations, reduced
government home sale expenses and the sale of certain asset management
operations discussed above. The Adjusted EBITDA margin increased to 30% in 1999
from 29% in 1998 primarily due to the previously discussed operating expense
reductions.
Discontinued Operations
Fleet segment operations, inclusive of the fuel card subsidiaries contributed by
Cendant, generated revenues and net income of $166.2 million and $33.7 million,
respectively, for the six months ended June 30, 1999, the disposition date of
the fleet segment. Fleet segment operations generated revenues and net income of
$284.9 million and $82.1 million, respectively, for the nine months ended
September 30, 1998.
Liquidity and Capital Resources - Continuing Operations
We manage our funding sources to ensure adequate liquidity. The sources of
liquidity fall into three general areas: ongoing liquidation of assets under
management, global capital markets, and committed credit agreements with various
high-quality domestic and international banks. In the ordinary course of
business, the liquidation of assets under management programs, as well as cash
flows generated from operating activities, provide the cash flow necessary for
the repayment of existing liabilities. Financial covenants are designed to
ensure our self-sufficient liquidity status. Financial covenants include
restrictions on dividends and other distributions payable to the Parent Company
and loans to the Parent Company from us, limitations on our ratio of debt to
equity, and certain other separate financial restrictions.
Our exposure to interest rate and liquidity risk is minimized by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities. Using historical information, we will project the relevant
characteristics of assets under management programs and generally match the
projected dollar amount, interest rate and maturity characteristics of the
assets within the overall funding program. This is accomplished through stated
debt terms or effectively modifying such terms through other instruments,
primarily interest rate swap agreements and revolving credit agreements. Within
our relocation business, we project the length of time that a home will be held
before being sold on behalf of the client. Within our mortgage services
business, we fund the mortgage loans on a short-term basis until the mortgage
loans are sold to unrelated investors, which generally occurs within sixty days.
Interest rate risk on mortgages originated for sale is managed through the use
of forward delivery contracts, financial futures and options. Financial
derivatives are also used as a hedge to minimize earnings volatility as it
relates to mortgage servicing assets.
We support originated mortgages and advances under relocation contracts
primarily by issuing commercial paper and medium term notes and by maintaining
securitized obligations. Such financing is included in liabilities under
management and mortgage programs since such debt corresponds directly with high
quality related assets. We continue to pursue opportunities to reduce our
borrowing requirements by securitizing increasing amounts of our high quality
assets. We currently have an agreement, expiring 2001 under which an
unaffiliated buyer, Bishops Gate Residential Mortgage Trust, a special purpose
entity (the "Buyer") commits to purchase, at our option, mortgage loans
originated by us on a daily basis, up to the Buyer's asset limit of $2.4
billion. Under the terms of this sale agreement, we retain the servicing rights
on the mortgage loans sold to the Buyer and provide the Buyer with the option to
sell or securitize the mortgage loans into the secondary market. At September
30, 1999, we were servicing approximately $1.0 billion of mortgage loans owned
by the Buyer.
Following the execution of our agreement to dispose of our fleet segment, Fitch
IBCA lowered our long-term debt rating from A+ to A and affirmed our short-term
debt rating at F1, and Standard and Poor's Corporation affirmed our long-term
and short-term debt ratings at A-/A2. Also, in connection with the closing of
the transaction, Duff and Phelps Credit Rating Co. lowered our long-term debt
rating from A+ to A and our short-term debt rating was reaffirmed at D1. Moody's
Investor Service, Inc. lowered our long-term debt rating from A3 to Baa1 and
affirmed our short-term debt rating at P2. (A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time).
We expect to continue to maximize our access to global capital markets by
maintaining the quality of our assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. Depending upon asset growth and financial market conditions, we utilize
the United States and European commercial paper markets, as well as other
cost-effective short-term instruments. In addition, we will continue to utilize
the public and private debt markets as sources of financing. Augmenting these
sources, we will continue to manage outstanding debt with the potential sale or
transfer of managed assets to third parties while retaining fee-related
servicing responsibility. At September 30, 1999, aggregate borrowings were
comprised of commercial paper, medium-term notes, securitized obligations and
other borrowings of $0.6 billion, $1.3 billion, $0.8 billion, and $0.1 billion,
respectively.
We have an effective shelf registration statement on file with the Securities
and Exchange Commission ("SEC"), providing for the aggregate issuance of up to
$3.0 billion of medium-term note debt securities. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. As of September 30, 1999, we had approximately
$1.2 billion of medium-term notes outstanding under this shelf registration
statement. Proceeds from future offerings will continue to be used to finance
assets we manage for our clients and for general corporate purposes.
Securitized Obligations
We maintain three separate financing facilities for our continuing operations,
the outstanding borrowings of which are securitized by corresponding assets
under management and mortgage programs. Such securitized obligations are
described below.
Mortgage Facility. We maintain a 364-day financing agreement, expiring in
December 1999, to sell mortgage loans under an agreement to repurchase such
mortgages (the "Mortgage Agreement"). The Mortgage Agreement is collateralized
by the underlying mortgage loans held in safekeeping by the custodian to the
Mortgage Agreement. The total commitment under this Mortgage Agreement is $500.0
million and is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Mortgage loans financed under this
Mortgage Agreement at September 30, 1999 totaled $439.8 million.
Relocation Facilities. We maintain a 364-day asset securitization agreement,
expiring in December 1999, under which an unaffiliated buyer has committed to
purchase an interest in the rights to payment related to certain of our
relocation receivables. The revolving purchase commitment provides for funding
up to a limit of $325.0 million and is renewable on an annual basis at the
discretion of the lender in accordance with the asset securitization agreement.
Under the terms of this agreement, we retain the servicing rights related to the
relocation receivables. At September 30, 1999, we were servicing $248.3 million
of assets which were funded under this agreement.
We also maintain an asset securitization agreement, with a separate unaffiliated
buyer, which had a purchase commitment up to a limit of $350.0 million. The
terms of this agreement are similar to the aforementioned facility, whereby we
retained the servicing rights on the rights of payment related to certain of our
relocation receivables. At September 30, 1999, we were servicing $85.0 million
of assets eligible for purchase under this agreement.
This facility matured and approximately $85.0 million was repaid on October 5,
1999. We are currently in the process of creating a new securitization facility
to purchase interests in the rights to payment related to our relocation
receivables, which will replace the existing securitizations.
Other Credit Facilities
To provide additional financial flexibility, our current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average
outstanding commercial paper. We maintain $2.65 billion of unsecured committed
credit facilities, which are backed by a consortium of domestic and foreign
banks. The facilities are comprised of $1.25 billion of syndicated lines of
credit maturing in March 2000 and $1.25 billion of syndicated lines of credit
maturing in the year 2002. In addition, we have a $150.0 million revolving
credit facility, which matures in December 1999, and other uncommitted lines of
credit with various financial institutions, which were unused at September 30,
1999. We closely evaluate not only the credit of the banks, but also the terms
of the various agreements to ensure ongoing availability. We believe that our
current policy provides adequate protection should volatility in the financial
markets limit our access to commercial paper or medium-term notes funding. We
continually seek additional sources of liquidity to accommodate asset growth and
to provide further protection from volatility in the financial markets.
In the event that the public debt market is unable to meet our funding needs, we
believe that we have appropriate alternative sources to provide adequate
liquidity, including current and potential future securitized obligations and
our $2.65 billion of revolving credit facilities.
Restrictions on Dividends to Cendant
Pursuant to a covenant in our Indenture with the trustee relating to our
medium-term notes, we are restricted from paying dividends, making
distributions, or making loans to Cendant to the extent that such payments are
collectively in excess of 40% of our consolidated net income (as defined in the
covenant) for each fiscal year, provided however, that we can distribute to
Cendant 100% of any extraordinary gains from asset sales and capital
contributions previously made to us by Cendant. Notwithstanding the foregoing,
we are prohibited under such covenant from paying dividends or making loans to
Cendant if upon giving effect to such dividends and/or loan, our debt to equity
ratio exceeds 8 to 1, at the time of the dividend or loan, as the case may be.
Liquidity and Capital Resources - Discontinued Operations
Contribution of Fuel Card Subsidiaries by Cendant. Cendant contributed its fuel
card subsidiaries, Wright Express Corporation ("WEX") and The Harpur Group, Ltd.
("Harpur"), to us in April 1999. As both entities were under common control,
such transaction has been accounted for in a manner similar to a pooling of
interests. Accordingly, our financial results for the three and nine months
ended September 30, 1998 have been restated as if the Company, WEX and Harpur
had operated as one entity since inception. The operating results of Harpur are
included from January 20, 1998, the date on which Harpur was acquired by Cendant
pursuant to a purchase business combination and, accordingly, when common
control was established.
Divestiture. On June 30, 1999, we completed the disposition of our fleet
segment, which included PHH Vehicle Management Services Corporation, WEX, Harpur
and other subsidiaries, pursuant to an agreement between Avis Rent A Car, Inc.
("ARAC") and us, which was executed on May 22, 1999. Pursuant to the agreement,
ARAC acquired the net assets of our fleet segment through the assumption and
subsequent repayment of $1.44 billion of intercompany debt and the issuance of
$360.0 million of convertible preferred stock of Avis Fleet Leasing and
Management Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC.
Coincident to the closing of the transaction, ARAC refinanced the assumed debt
under management programs, which was payable to us. Accordingly, on June 30,
1999, we received additional cash payments and a note receivable from ARAC of
$3,016.9 million and $30.6 million, respectively, which collectively were equal
to the outstanding balances of fleet segment financing arrangements on such
date. On such date, we utilized $1,809.4 million of proceeds to repay the
outstanding borrowings under the secured financing facilities as well as certain
other secured loans and borrowings under unsecured short-term facilities.
Additionally, in July and August 1999, utilizing the cash proceeds from the
Fleet segment disposition, we made dividend payments to Cendant in the amounts
of $1,033.0 million and $56.3 million, respectively. Such dividends were in
compliance with the dividend restriction covenant pursuant to the Indenture
under which we issue medium-term notes (see "Restrictions on Dividends to
Cendant"). The remaining proceeds were designated to repay outstanding corporate
debt as it matures (the borrowings of which had been loaned to the fleet segment
to finance the purchases of leased vehicles) and to finance other assets under
management and mortgage programs.
The convertible preferred stock of Avis Fleet pays dividends at an annual rate
of 5% and is convertible into common stock of ARAC at our option upon the
satisfaction of certain conditions, including the per share price of ARAC Class
A common stock equaling or exceeding $50 per share and the fleet segment
attaining certain EBITDA (earnings before interest, taxes, depreciation and
amortization) thresholds, as defined. There are additional circumstances upon
which the shares of Avis Fleet convertible preferred stock are automatically or
mandatorily convertible into ARAC common stock. If all of the Avis Fleet
convertible preferred stock was converted into common stock of ARAC, as of the
closing date, the Company would have owned approximately 15% of ARAC's
outstanding common equity. The transaction followed a competitive bidding
process. In connection with the disposition of our fleet segment, we recorded an
after-tax gain on sale of discontinued operations of $871.2 million in the
second quarter of 1999. The fleet segment disposition was structured in
accordance with applicable tax law to be treated as a tax-free reorganization
and, accordingly, no tax provision has been recorded on a majority of the gain.
Should the transaction be deemed taxable, the resultant tax liability could be
material.
Cash Flows
We generated $730.4 million of cash flows from operating activities during the
nine months ended September 30, 1999 representing a $1.0 billion increase from
the nine months ended September 30, 1998. The increase in cash flows from
operating activities was primarily due to a $1.4 billion increase in proceeds
from sales and mortgage loan payments which reflects larger loan sales to
secondary markets in proportion to loan originations.
We generated $1.2 billion of cash flows from investing activities during the
nine months ended September 30, 1999 representing a $1.4 billion increase from
the nine months ended September 30, 1998. The incremental cash flows from
investing activities was primarily attributable to net cash proceeds of $1.8
billion received in connection with our fleet segment disposition partially
offset by incremental net investments in assets under management and mortgage
programs of $468.7 million.
Net cash provided by financing activities decreased $2.4 billion in 1999 over
1998 primarily due to net repayments on fundings for our investments in assets
under management and mortgage programs.
Litigation
Accounting Irregularities. Since the April 15, 1998 announcement by our Parent
Company of the discovery of potential accounting irregularities in the former
business units of CUC International Inc. ("CUC"), approximately 70 lawsuits
claiming to be class actions, two lawsuits claiming to be brought derivatively
on the Parent Company's behalf and several individual lawsuits and arbitration
proceedings have been commenced in various courts and other forums against the
Parent Company and other defendants by or on behalf of persons claiming to have
purchased or otherwise acquired securities or options issued by CUC or Cendant
between May 1995 and August 1998. The Court has ordered consolidation of many of
the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Parent Company 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, the Parent Company made all
adjustments considered necessary which are reflected in its financial
statements. Although our Parent Company can provide no assurances, the Parent
Company does not expect that additional adjustments will be necessary.
While the Parent Company is engaged in discussions with counsel for the
plaintiffs in certain of these actions seeking a settlement of them, the Parent
Company does not believe that it is feasible to predict or determine the final
outcome of these proceedings or investigations or to estimate the amounts or
potential range of loss with respect to these proceedings or investigations. The
possible outcomes or resolutions of the proceedings and investigations could
include judgements against the Parent Company or settlements and could require
substantial payments by the Parent Company. In addition, the timing of the final
resolution of the proceedings or investigations is uncertain. We believe that
material adverse outcomes with respect to such Parent Company proceedings or
investigations could have a material adverse impact on our financial condition,
results of operations or cash flows.
Other Pending Litigation. We and our subsidiaries are involved in pending
litigation in the usual course of business. In the opinion of management, such
other litigation will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
Impact of New Accounting Pronouncements
We adopted Statement of Financial Accounting Standards ("SFAS") No. 134
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", effective
January 1, 1999. SFAS No. 134 requires that after the securitization of mortgage
loans, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other interests based on its ability and intent to
sell or hold those investments. As of January 1, 1999, we reclassified
mortgage-backed securities and other interests retained after the securitization
of mortgage loans from the trading to the available for sale category.
Subsequent to the adoption of SFAS No. 134, such securities and interests are
accounted for in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". The adoption of SFAS No. 134 did not
have a material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires us to record all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. If the derivative does not
qualify as a hedging instrument, the change in the derivative fair values will
be immediately recognized as a gain or loss in earnings. If the derivative does
qualify as a hedging instrument, the gain or loss on the change in the
derivative fair values will either be recognized (i) in earnings as offsets to
the changes in the fair value of the related item being hedged or (ii) be
deferred and recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged transactions
occur. We have not yet determined what impact the adoption of SFAS No. 133 will
have on our financial statements. Implementation of this standard has recently
been delayed by the FASB for a twelve month period. We will adopt SFAS No. 133
as required for our first quarterly filing of fiscal year 2001.
Year 2000 Compliance
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly beginning and after
January 1, 2000. To minimize or eliminate the effect of the Year 2000 risk on
our business systems and applications, we are continually identifying,
evaluating, implementing and testing changes to our computer systems,
applications and software necessary to achieve Year 2000 compliance. As part of
such initiative, we selected a team of managers to identify, evaluate and
implement a plan to bring all of our critical business systems and applications
into Year 2000 compliance prior to December 31, 1999. The Year 2000 initiative
consists of four phases: (i) identification of all critical business systems
subject to Year 2000 risk (the "Identification Phase"); (ii) assessment of such
business systems and applications to determine the method of correcting any Year
2000 problems (the "Assessment Phase"); (iii) implementing the corrective
measures (the "Implementation Phase"); and (iv) testing and maintaining system
compliance (the "Testing Phase"). We have substantially completed each of the
above stated Phases and have identified and assessed five areas of risk: (i)
internally developed business applications; (ii) third party vendor software,
such as business applications, operating systems and special function software;
(iii) computer hardware components; (iv) electronic data transfer systems
between our customers, third party service providers and us; and (v) embedded
systems, such as phone switches, check writers and alarm systems. Although no
assurances can be made, we believe that substantially all of our systems,
applications and related software that are subject to Year 2000 compliance risk
have been identified and that we have either implemented or initiated the
implementation of a plan to correct such systems that are not Year 2000
compliant. In addition, as part of our assessment process we are developing
contingency plans as considered necessary. Substantially all of our mission
critical systems have been remediated during 1998. However, we cannot directly
control the timing of certain Year 2000 compliant vendor products and in certain
situations, exceptions to the December 1998 date have been authorized. We have
made significant progress toward contingency planning. We are confident that the
contingency planning phases will be completed prior to December 31, 1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded and
other systems and other key services. Interruption of those services due to Year
2000 issues could have a material adverse impact on our operations. We initiated
an evaluation of the status of such third party service providers' efforts to
determine alternative and contingency requirements. While approaches to reducing
risks of interruption of business operations vary by business unit, options
include identification of alternative service providers available to provide
such services if a service provider fails to become Year 2000 compliant within
an acceptable timeframe prior to December 31, 1999.
The total cost of our Year 2000 compliance plan is anticipated to be $8.5
million. Approximately $7.9 million of these costs had been incurred through
September 30, 1999, and we expect to incur the balance of such costs to complete
the compliance plan. We have been expensing and capitalizing the costs to
complete the compliance plan in accordance with appropriate accounting policies.
Variations from anticipated expenditures and the effect on our future results of
operations are not anticipated to be material in any given year. However, if
Year 2000 modifications and conversions are not made, including modifications by
our third party service providers, or are not completed in time, the Year 2000
problem could have a material impact on our operations, cash flows and financial
condition. At this time, we believe the most likely "worst case" scenario
involves potential disruptions in our operations as a result of the failure of
services provided by third parties.
The estimates and conclusions herein are forward-looking statements and are
based on our best estimates of future events. Risks of completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of our service providers to bring their
systems into Year 2000 compliance.
Forward-Looking Statements
We make statements about our future results in this quarterly report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a number
of risks and uncertainties that are difficult to predict. Our actual results
could differ materially from those expressed or implied in the forward-looking
statements. Important assumptions and other important factors that could cause
our actual results to differ materially from those in the forward-looking
statements, include, but are not limited to:
o The resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities at the Parent Company;
o Our ability to develop and implement operational and financial systems to
manage rapidly growing operations;
o Competition in our existing and potential future lines of business;
o Our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by financin
arrangements; and
o Our ability and our vendors' and customers' ability to complete the
necessary actions to achieve a Year 2000 conversion for computer systems
and applications.
We derive the forward-looking statements in this quarterly report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In normal operations, we must consider the effects of changes in interest rates.
The following discussion presents an overview of how such changes are managed
and a view of their potential effects.
We use various financial instruments, particularly interest rate swaps, futures,
options and floors to manage our respective interest rate risks. We are
exclusively an end user of these instruments, which are commonly referred to as
derivatives. Established practices require that derivative financial instruments
relate to specific asset, liability or equity transactions.
The SEC requires that registrants include information about potential effects of
changes in interest rates on their financial statements. Although the rules
offer alternatives for presenting this information, none of the alternatives is
without limitation. The following discussion is based on so-called "shock
tests", which model effects of interest rate shifts on the reporting company.
Shock tests, while probably the most meaningful analysis permitted, are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to include the complex
market reactions that normally would arise from the market shifts modeled. While
the following results of shock tests for interest rate shifts may have some
limited use as benchmarks, they should not be viewed as forecasts.
One means of assessing exposure to interest rate changes is a duration-based
analysis that measures the potential loss in net earnings resulting from a
hypothetical 10% change in interest rates across all maturities (sometimes
referred to as a "parallel shift in the yield curve"). Under this model, it is
estimated that, all else constant, such an increase, including repricing effects
in the securities portfolio, would not materially effect our 1999 net earnings
based on current positions.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 - Computation of ratio of earnings to fixed charges
Exhibit 27 - Financial data schedule (for electronic
transmission only)
(b) Report on Form 8-K
Form 8-K dated July 9, 1999, reporting in Item 2 the disposition
of our fleet business segment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PHH CORPORATION
By: /s/Duncan H. Cocroft
Duncan H. Cocroft
Executive Vice President and
Chief Financial Officer
By: /s/ Jon F. Danski
Jon F. Danski
Executive Vice President, Finance and
Chief Accounting Officer
Date: November 4, 1999