SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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)
(973) 428-9700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if applicable)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [T] No [ ]
The Company meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is, therefore, filing this Form with the reduced
disclosure format.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Service fees:
Fleet management services $ 53.6 $ 49.9 $ 109.0 $ 116.5
Relocation services, net of interest 110.2 103.4 209.9 188.7
Mortgage services (net of amortization of
mortgage servicing rights and
interest of $53.2, $30.3, $101.3,
and $60.4, respectively) 94.0 42.5 172.0 76.1
----------- -------- ----------- -----------
Service fees - net 257.8 195.8 490.9 381.3
Fleet leasing (net of depreciation and interest
costs of $318.1, $298.2, $629.7 and
$584.3, respectively) 19.1 15.9 39.0 30.1
----------- -------- ----------- -----------
Net revenue 276.9 211.7 529.9 411.4
----------- -------- ----------- -----------
Expenses
Operating 128.3 93.5 238.4 183.0
General and administrative 44.2 43.1 83.1 87.3
Merger-related charges (credits)
associated with business combinations (6.3) 215.8 (6.3) 215.8
Depreciation and amortization 8.2 6.3 15.3 13.3
----------- -------- ----------- -----------
Total expenses 174.4 358.7 330.5 499.4
----------- -------- ----------- -----------
Income (loss) before income taxes 102.5 (147.0) 199.4 (88.0)
Provision (benefit) for income taxes 36.0 (11.0) 69.2 13.4
----------- --------- ----------- -----------
Net income (loss) $ 66.5 $ (136.0) $ 130.2 $ (101.4)
=========== ========= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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<S> <C> <C>
Assets
Cash and cash equivalents $ 47.3 $ 2.1
Restricted cash 13.2 23.7
Accounts and notes receivable,
net of allowance for doubtful accounts 592.2 570.8
Other assets 427.6 425.8
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Total assets exclusive of assets under programs 1,080.3 1,022.4
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Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,918.9 3,659.1
Relocation receivables 590.6 775.3
Mortgage loans held for sale 2,754.0 1,636.3
Mortgage servicing rights 480.5 373.0
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7,744.0 6,443.7
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Total assets $ 8,824.3 $ 7,466.1
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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<S> <C> <C>
Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 727.0 $ 698.5
Deferred revenue 67.9 53.3
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Total liabilities exclusive of liabilities under programs 794.9 751.8
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Liabilities under management and mortgage programs
Debt 6,830.0 5,602.6
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Deferred income taxes 264.8 295.7
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Total liabilities 7,889.7 6,650.1
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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 100 shares 289.2 289.2
Retained earnings 674.5 544.2
Accumulated other comprehensive loss (29.1) (17.4)
-------------- --------------
Total shareholder's equity 934.6 816.0
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Total liabilities and shareholder's equity $ 8,824.3 $ 7,466.1
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 130.2 $ (101.4)
Merger-related restructuring charge (credits) (6.3) 215.8
Merger-related payments (68.1) (113.2)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 15.3 13.3
Other 117.0 24.6
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188.1 39.1
Management and mortgage programs:
Depreciation and amortization 610.7 531.6
Mortgage loans held for sale (1,117.7) 427.7
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Net cash provided by (used in) operating activities (318.9) 998.4
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Investing Activities
Additions to property and equipment - net (77.8) (5.9)
Other (5.4) 13.0
Management and mortgage programs:
Investment in leases and leased vehicles (1,337.3) (1,243.4)
Payments received on investment in leases and leased vehicles 475.2 437.2
Proceeds from sales and transfers of leases and leased vehicles
to third parties 27.3 63.5
Equity advances on homes under management (3,293.4) (2,136.7)
Repayment of advances on homes under management 3,483.1 2,203.7
Additions to mortgage servicing rights (220.4) (86.0)
Proceeds from sales of mortgage servicing rights 53.6 29.1
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Net cash used in investing activities (895.1) (725.5)
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Financing Activities
Proceeds received from parent company capital contribution 46.0 --
Other -- 15.3
Management and mortgage programs:
Proceeds from debt issuance or borrowings 1,659.5 859.2
Principal payments on borrowings (1,125.5) (1,111.6)
Net change in short-term borrowings 693.4 (54.9)
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Net cash provided by (used in) financing activities 1,273.4 (292.0)
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Effect of exchange rates on cash and cash equivalents (14.2) 17.8
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Increase (decrease) in cash and cash equivalents 45.2 (1.3)
Cash and cash equivalents at beginning of period 2.1 13.8
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Cash and cash equivalents at end of period $ 47.3 $ 12.5
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 corporate relocation, fleet management
and mortgage services. In April 1997, the Company merged with HFS
Incorporated ("HFS") (the "HFS Merger") and on December 17, 1997, HFS
merged with CUC International Inc. ("CUC") with CUC surviving and changing
its name to Cendant Corporation (the "Cendant Merger"). Effective upon the
Cendant Merger, the Company became a wholly owned subsidiary of Cendant
Corporation (the "Parent Company"). However, pursuant to certain covenant
requirements under the indentures in 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 financial
statements and footnotes are presented.
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company included in this Form 10-Q reflect all
adjustments necessary for a fair presentation of such financial statements.
There were no adjustments of an unusual nature recorded during the three
and six months ended June 30, 1998 and 1997. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the
Company's annual consolidated financial statements. The December 31, 1997
consolidated balance sheet was derived from the Company's audited financial
statements. This Form 10-Q should be read in conjunction with the Company's
audited financial statements and notes thereto, included in the Company's
December 31, 1997 Annual Report on Form 10-K.
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the presentation used in 1998.
2. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" effective January 1, 1998. The statement
establishes standards for the reporting and display of an alternative
income measurement and its components in the financial statements.
The components of comprehensive income (loss) are summarized as follows:
Six Months Ended June 30,
1998 1997
------------- --0----------
(In millions)
Net income (loss) $ 130.2 $ (101.4)
Other comprehensive loss:
Currency translation adjustment (11.7) (3.3)
------------- --------------
Comprehensive income (loss) $ 118.5 $ (104.7)
============= ==============
3. Merger-Related Charges
Cendant Merger Charge
Coincident with the Cendant Merger, the Company recorded a merger-related
charge (the "Cendant Merger Charge") during the fourth quarter of 1997 of
$46.4 million ($32.5 million after tax) comprised of contract termination
fees and professional fees. At June 30, 1998, the remaining reserve related
to such charge was $1.5 million. During the six months ended June 30, 1998,
the Company made cash payments of $40.8 million related to the Cendant
Merger Charge.
HFS Merger Charge
In connection with the HFS Merger, the Company recorded a merger-related
charge (the "HFS Merger Charge") during the second quarter of 1997 of
$215.8 million ($176.3 million after tax). The remaining merger-related
reserves at December 31, 1997 and activity through the six months ended
June 30, 1998 is summarized by cost type as follows:
<PAGE>
<TABLE>
<CAPTION>
Reserves at Asset Cash Credit Reserves at
December 31, 1997 Write-offs Payments to Income June 30, 1998
----------------- ---------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Personnel related $ 30.3 $ .4 $ 11.4 $ (4.4) $ 14.1
Business terminations 9.0 7.5 1.1 (.4) -
Facility related and
other 34.3 5.5 14.3 (1.3) 13.2
Professional fees .7 - .5 (.2) -
---------- ----------- ---------- ---------- -------------
$ 74.3 $ 13.4 $ 27.3 $ (6.3) $ 27.3
========== =========== ========== ========== =============
</TABLE>
Remaining personnel related liabilities primarily represent separation
payments to employees who elected installment payments rather than a lump
sum payment. Such costs were incurred in connection with the consolidation
of corporate activities and the merger of HFS's relocation businesses with
and into the Company's relocation service business. Facility related and
other liabilities remaining at June 30, 1998 primarily include costs
associated with computer equipment and lease terminations in connection
with merger related consolidation and closure activities.
Merger related cash payments were partially funded with a capital infusion
from the Parent Company of $46.0 million in the first quarter of 1998. The
remaining cash payments will be financed from cash generated from
operations or borrowings under the Company's credit facilities. As a result
of the completion of the aforementioned restructuring activities, $6.3
million of the HFS Merger Charge was reversed in the second quarter of 1998
due to lower than estimated costs from restructuring activities principally
within the Company's relocation business.
<PAGE>
4. Mortgage Facility
The Company's mortgage services subsidiary ("Mortgage Services") entered
into a three year agreement effective May, 1998 (the "Effective Date")
under which an unaffiliated Buyer (the "Buyer") has committed to purchase
at Mortgage Services option, mortgage loans originated by Mortgage Services
on a daily basis, up to the Buyer's asset limit of $1.5 billion.
Under the terms of this sale agreement, Mortgage Services retains the
servicing rights on the mortgage loans sold to the Buyer and provides the
Buyer with options to sell or securitize the mortgage loans into the
secondary market. At June 30, 1998, Mortgage Services was servicing
approximately $890 million of mortgage loans owned by the Buyer.
5. Subsequent Event-Parent Company Investigation and Litigation
On April 15, 1998, as a result of the discovery of accounting
irregularities in the former CUC business units, which are part of the
Parent Company's Alliance Marketing segment (formerly the Membership
segment), the Audit Committee of the Parent Company's Board of Directors
initiated an investigation into such matters. The Audit Committee's
investigation has since been completed and, as a result of its findings,
the Parent Company has restated its financial results for the years 1995
through 1997 and the quarterly periods during 1996 and 1997 and the first
quarter of 1998. The Company expects to file the following financial
statements and other information with the Securities and Exchange
Commission ("SEC") in late August 1998: (i) audited restated financial
statements for the years ended December 31, 1995 through 1997 on an
an amended Form 10-K/A; (ii) unaudited restated financial
statements for the quarterly periods ended March 31, 1998 and 1997 on an
amended Form 10-Q/A; and (iii) restated financial information for each of
the quarterly periods in 1997 and 1996.
Since the Parent Company's announcement of the discovery of such accounting
irregularities on April 15, 1998, and prior to the date hereof, sixty-nine
purported class action lawsuits and one individual lawsuit have been filed
against the Parent Company and certain current and former officers and
directors of the Parent Company asserting claims under the federal
securities laws (the "Federal Securities Actions").Some of the actions also
name as defendants Merrill Lynch & Co. and, in one case, Chase Securities,
Inc., underwriters for the Parent Company's PRIDES securities offerings;
two others also name Ernst & Young LLP, the Parent Company's former
independent accountants. Sixty-two of the Federal Securities Actions
were filed in the United States District Court for the
District of New Jersey, six were filed in the United States District Court
for the District of Connecticut (including the individual action), one was
filed in the United States District Court for the Eastern District of
Pennsylvania and one has been filed in New Jersey Superior Court. The
Federal Securities Actions filed in the District of Connecticut and the
Eastern District of Pennsylvania have been transferred to the District of
New Jersey. On June 10, 1998, the Parent Company moved to dismiss or stay
the class action filed in New Jersey Superior Court on the ground that,
among other things, it is duplicative of the consolidated federal actions;
a decision on that motion is pending.
Certain of the Federal Securities Actions purport to be brought on behalf
of purchasers of the Parent Company's common stock and/or options on common
stock during various periods, most commonly from May 28, 1997 through
April 15, 1998(although the alleged class periods begin as early as
March 21, 1995 and end as late as July 15, 1998). Others claim to be
brought on behalf of persons who exchanged common stock of HFS for the
Parent Company's common stock coincident with the Cendant Merger. Some
plaintiffs purport to represent both of these types of investors. In
addition, eight actions pending in the District of New Jersey and one
action pending in New Jersey Superior Court purport to be brought, either
in their entirety or in part, on behalf of purchasers of the Parent
Company's PRIDES securities offering. The complaints in the Federal
Securities Actions allege, among other things, that as a result of
accounting irregularities, the Parent Company's previously issued financial
statements were materially false and misleading and that the defendants
knew or should have known that these financial statements caused and the
Parent Company's common stock prices to rise artificially. The Federal
Securities Actions variously allege violations of Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5
promulgated thereunder, Section 14(a) of the Exchange Act and SEC
Rule 14a-9 promulgated thereunder, Section 20(a) of the Exchange Act, and
Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the
"Securities Act"). Certain actions also allege violations of common law.
The individual action also alleges violations of Section 18(a) of the
Exchange Act and the Florida securities law. The class action complaints
seek damages in unspecified amounts. The individual action seeks damages
in the amount of approximately $9 million plus interest and expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
Order consolidating the 50 Federal Securities Actions that had at that
time been filed in the United States District Court for the District of
New Jersey, under the caption In re: Cendant Corporation Litigation, Master
File No. 98-1664(WHW). Pursuant to the Order, all related actions
subsequently filed in the District of New Jersey are also to be
consolidated under that caption. On August 4, 1998, United States District
Judge William H. Walls selected lead plaintiffs for the consolidated
actions. He also ordered that applications seeking appointment as lead
counsel to represent the lead plaintiffs are to be filed with the Court by
September 17, 1998.
In addition, on April 27, 1998 a shareholder derivative action, Deutch v.
Silverman, et al., No. 98-1998 (WHW), was filed in the United States
District Court for The District of New Jersey against certain of the Parent
Company's current and former directors and officers; The Bear Stearns
Companies, Inc., Bear Stearns & Co., Inc. and, as a nominal party, the
Parent Company. The complaint alleges that certain individual officers and
directors of the Parent Company breached their fiduciary duties by selling
shares of the Parent Company's stock while in possession of non-public
material information concerning accounting irregularities. The complaint
also alleges various other breaches of fiduciary duty, mismanagement,
negligence and corporate waste and seeks damages on behalf of the Parent
Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of Delaware.
The Corwin Action is purportedly brought on behalf of a class of all
shareholders of HFS who exchanged their HFS shares for Parent Company
shares in connection with the Cendant Merger, and names as defendants HFS
and twelve individuals who were directors of HFS. The complaint in the
Corwin Action alleges that the defendants breached their fiduciary duties
of loyalty, good faith, care and candor in connection with the Cendant
Merger, in that they failed to properly investigate the operations and
financial statements of the Parent Company before approving the Cendant
Merger at an allegedly inadequate price. The Corwin Action seeks, among
other things, recision of the Cendant Merger and compensation for all
losses and damages suffered in connection therewith.
While it is not feasible to predict or determine the final outcome of these
proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome
with respect to such proceedings could have a material adverse impact on
the financial condition, results of operations and cash flows of the
Parent Company which could have a material adverse impact on the
financial condition or cash flows of the Company.
The staff of the SEC and the United States Attorney for the District
of New Jersey are conducting investigations relating to the matters
referenced above. The SEC staff has advised 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.
<PAGE>
Item 2. Management's Narrative Analysis of Results of Operations and Liquidity
and Capital Resources
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements, include, but are not limited to:
uncertainty as to the Company's future profitability; the Company's ability to
develop and implement operational and financial systems to manage rapidly
growing operations; competition in the Company's existing and potential future
lines of business; the Company's ability to integrate and operate successfully
acquired businesses and the risks associated with such businesses; the Company's
ability to obtain financing on acceptable terms to finance the Company's growth
strategy and for the Company to operate within the limitations imposed by
financing arrangements; uncertainty as to the future profitability of acquired
businesses, the outcome of the pending class action litigation against the
Parent Company relating to the previously announced accounting irregularities at
the Parent Company, and other factors. Other factors and assumptions not
identified above were also involved in the derivation of these forward-looking
statements, and the failure of such other assumptions to be realized as well as
other factors may also cause actual results to differ materially from those
projected. The Company assumes no obligation to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.
General Overview
PHH Corporation, together with its wholly owned subsidiaries, (the "Company") is
a leading provider of corporate relocation, fleet management and mortgage
services. In April 1997, the Company merged with HFS Incorporated ("HFS") (the
"HFS Merger") and on December 17, 1997, HFS merged with CUC International Inc.
("CUC") with CUC surviving and changing its name to Cendant Corporation (the
"Cendant Merger"). Effective upon the Cendant Merger, the Company became a
wholly owned subsidiary of Cendant Corporation (the "Parent Company"). However,
pursuant to certain covenant requirements under the indentures in which the
Company issues debt, the Company continues to operate and maintain its status as
a separate public reporting entity.
Results of Operations - Three Months Ended June 30, 1998 vs Three Months Ended
June 30, 1997
Net Revenue
Net revenue of the Company increased $65.2 million (31%) to $276.9 million in
1998. The increase reflects higher revenue in both the Company's real estate
segment (relocation and mortgage service businesses) and fleet management
segment. Real estate net revenue of $204.2 million in 1998 increased $58.3
million or 40% from 1997. As a result of increases in both the relocation and
mortgage businesses, mortgage service net revenue increased $51.5 million or
121% to $94.0 million in 1998. Such increase principally reflects a $50.1
million (177%) increase in loan origination revenue, resulting from a $4.1
billion (165%) increase in loan closings as well as a $4.1 million (48%)
increase in loan servicing fees as a result of a 33% increase in the average
portfolio of loans serviced. Relocation services net revenue increased 7% to
$110.2 million in 1998 primarily resulting from increased transaction volume in
its government home sale assistance program.
Fleet Management net revenue increased $6.9 million or 10% to $72.7 million in
1998 due to increases in net leasing revenue and service fees. Such increases
are reflective of a 7% increase in the average number of leased vehicles and an
12% increase in fuel (service-based) cards.
Operating Margins
In connection with the HFS Merger and Cendant Merger, the Company recorded a
non-recurring charge (credit) of ($6.3) million and $215.8 million in 1998 and
1997, respectively. The charge in 1997 represents the HFS Merger Charge incurred
in connection with the HFS Merger in April 1997. The credit represents the
reversal of excess estimated HFS Merger Charge over actual amounts paid in 1998.
Exclusive of such non-recurring charge (credit), the Company's operating margin
increased from 33% in 1997 to 35% in 1998. Operating margins improved in the
fleet management and mortgage service business units as a result of revenue
increases of 10% and 121%, respectively, while corresponding expenses increased
8% and 115%, respectively. Operating margins decreased from 24% to 21% in the
relocation business as a result of an increase in lower margin government
business and approximately $6.5 million of incremental information technology
costs incurred in connection with the Company's planned consolidation of systems
supporting the former PHH and Coldwell Banker relocation businesses.
<PAGE>
Results of Operations - Six Months Ended June 30, 1998 vs Six Months Ended
June 30, 1997
Net Revenue
Net revenue of the Company increased $118.5 million (29%) to $529.9 million
primarily as a result of a $117.1 million (44% ) increase in the Company's real
estate segment. Mortgage services net revenue increased $95.9 million (126%) to
$172.0 million in 1998 primarily as a result of a $84.8 million (187%) increase
in loan origination revenue, resulting from a $6.9 billion (163%) increase in
loan closings and a $11.8 million increase in loan servicing fees as a result a
28% increase in the average loans serviced. Relocation services net revenue
increased 11% to $209.9 million 1998, primarily resulting from increased home
sale related transaction volume.
Fleet management net revenue increased $14.2 million (11%) exclusive of a $12.8
million of reduction in preferred alliance revenue. Leasing and service revenue
increased $9.6 million (14%) and $6.9 million (10%), respectively, due primarily
to growth in the number of leased vehicles and fuel (service based) cards.
Operating Margins
Total Company operating margin, exclusive of non-recurring merger charges
(credits) of $215.8 million and ($6.3) million in 1997 and 1998, respectively,
increased from 31% in 1997 to 36% in 1998. Operating margins in the mortgage and
relocation businesses increased 4percentage points and 2 percentage points,
respectively as a result of revenue increases of 126% and 11%, while
corresponding expenses increased 110% and 9%, respectively. Fleet management
operating margin increased as a result of a 5% reduction in expenses and a 1%
revenue increase.
Liquidity And Capital Resources
Liquidity Strategy
The Company manages its 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. Additionally, the Company
has successfully completed and continues to pursue opportunities to reduce its
borrowing requirements by securitizing increasing amounts of its high quality
assets. In May 1998, the Company commenced a program to sell originated mortgage
loans to an unaffiliated buyer up to the buyer's asset limit of $1.5 billion.
The buyer may sell or securitize such mortgage loans into the secondary market,
at the option of the company, however, servicing rights are retained by the
Company.
The Company supports purchases of leased vehicles, home equity advances, and
mortgage originations primarily by issuing commercial paper and medium term
notes. Such borrowings are included in liabilities under management and mortgage
programs since such debt corresponds directly with high quality assets. Pursuant
to certain covenant requirements under the indentures in which the Company
issues debt, the Company continues to operate and maintain its status as a
separate public reporting entity. Financial covenants are designed to ensure the
self-sufficient liquidity status of the Company. Financial covenants include
restrictions on Parent Company loans, debt to equity, and other separate Company
financial restrictions. The Company's long term and short term debt ratings are
A+/A1, A2/P1, A+/F1 and A+/D1 with Standard and Poor's (S&P), Moody's Investor
Services (Moody's), Fitch IBCA and Duff & Phelps Credit Rating Co. (Duff).
Presently, the long term and short term ratings issued by both S&P and Moody's
are on watch with negative implications. During the watch period, the Company
has experienced a marginal increase in its cot of funds, however, this cost will
not significantly impact the operations of the Company and the Company believes
that its sources of liquidity continue to be adequate. (A security rating is nit
a recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time).
Using historical information, the Company projects the time period that a
client's vehicle will be in service or the length of time that a home will be
held in inventory before being sold on behalf of the client. Once the relevant
asset characteristics are projected, the Company generally matches the projected
dollar amount, interest rate and maturity characteristics of the assets within
the overall funding program. This is accomplished through stated debt terms or
effectively modifying such terms through other instruments, primarily interest
rate swap agreements and revolving credit agreements. Within mortgage services,
not withstanding the aforementioned $1.5 million mortgage facility, the Company
funds 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.
The Company expects to continue to have broad access to global capital markets
by maintaining the quality of its 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, the Company
utilizes the United States, European and Canadian commercial paper markets, as
well as other cost-effective short-term instruments. In addition, the Company
will continue to utilize the public and private debt markets to issue unsecured
senior corporate debt. Augmenting these sources, the Company will continue to
manage outstanding debt with the potential sale or transfer of managed assets to
third parties while retaining fee-related services. At June 30, 1998, the
Company's outstanding debt was comprised of commercial paper, medium term notes
and other borrowings of $3.2 billion, $3.4 billion, and $.2 billion,
respectively.
The Company filed a shelf registration statement with the Securities and
Exchange Commission, which became effective March 2, 1998, for the aggregate
issuance of up to $3 billion of medium-term notes. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds will be used to finance the assets
under management and mortgage programs and for general corporate purposes. As of
July 31, 1998, the Company had issued $795 million of medium-term notes under
the shelf registration statement.
To provide additional financial flexibility, the Company's current policy is to
ensure that minimum committed bank facilities aggregate 80 percent of the
average amount of outstanding commercial paper. The Company maintains $2.7
billion of committed and unsecured credit facilities, which is backed by
domestic and foreign banks and is comprised of $1.25 billion of lines maturing
on March 8, 1999, which may be extended for an additional 364 days upon
receiving lender approval, $1.25 billion maturing on March 10, 2002 and $200
million maturing in June 1999. In addition, the Company has approximately $186
million of uncommitted lines of credit with various financial institutions.
Management closely evaluates not only the credit quality of the banks but the
terms of the various agreements to ensure ongoing availability. The full amount
of the Company's committed facilities at June 30, 1998, was undrawn and
available. Management believes that its current policy provides adequate
protection should volatility in the financial markets limit the Company's access
to commercial paper or medium-term notes funding.
On July 10, 1998, the Company entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with The First National Bank of Chicago, as trustee,
under the Senior Indenture dated as of June 5, 1997, which formalizes the
Company's policy of limiting the payment of dividends and the outstanding
principal balance of loans to the Parent Company to 40% of consolidated net
income (as defined in the Supplemental Indenture) for each fiscal year. The
Supplemental Indenture prohibits the Company from paying dividends or making
loans to the Parent Company if, upon giving effect to such dividend and/or loan,
the Company's debt to equity ratio exceeds 8 to 1.
Cash Flow
Cash flows used in operating activities for the six months ended June 30, 1998
was $318.9 million compared to cash provided by operating activities of $998.4
million for the same period in 1997. The $1.3 billion decrease in operating cash
flows reflects unprecedented growth in mortgage loan origination volume. Rapid
growth, which contributed to the 149% increase in Mortgage Services operating
income, also caused a temporary delay in selling mortgages on the secondary
market until July 1998. As a result, mortgage loans held for sale on the balance
sheet increased $1.1 billion, which gives rise to the operating cash shortfall
of $318.9 million.
The $169.6 million increase in net cash used in investing activities included
$71.9 million of incremental capital expenditures associated with planned
facility and other expenditures required to meet increased mortgage loan
origination demand and planned system development expenditures to consolidate
former PHH and Coldwell Banker relocation businesses. The $1.6 billion increase
in financing activities primarily reflects temporary funding requirements
associated with increased mortgage loans held for sale on the balance sheet at
June 30, 1998.
Parent Company Litigation
On April 15, 1998, as a result of the discovery of accounting irregularities in
the former CUC business units, which are part of the Parent Company's Alliance
Marketing segment (formerly the Membership segment), the Audit Committee of the
Parent Company's Board of Directors initiated an investigation into such
matters. The Audit Committee's investigation has since been completed and, as a
result of its findings, the Parent Company has restated its previously reported
financial results for the years 1995 through 1997 and the quarterly periods
during 1996 and 1997 and the first quarter of 1998. The Parent Company expects
to file the following financial statements and other information with the
Securities and Exchange Commission ("SEC") in late August 1998: (i) audited
restated financial statements for the years ended December 31, 1995 through 1997
on an amended Form 10-K/A; (ii) unaudited restated financial statements for the
quarterly periods ended March 31, 1998 and 1997 on an amended Form 10-Q/A; and
(iii) restated financial information for each of the quarterly periods in 1997
and 1996.
As a result of the aforementioned accounting irregularities, numerous purported
class action lawsuits, a purported derivative lawsuit and an individual lawsuit
have been filed against the Parent Company and, among others, its predecessor
HFS, and certain current and former officers and directors of the Parent Company
and HFS asserting various claims under the federal securities laws and certain
state statutory and common laws. In addition, the staff of the SEC and the
United States Attorney for the District of New Jersey are conducting
investigations relating to the accounting issues. The SEC staff has 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.
While it is not feasible to predict or determine the final outcome of these
proceedings or to estimate the amounts or potential range of loss with respect
to these matters, management believes that an adverse outcome with respect to
such proceedings could have a material adverse impact on the financial
condition, results of operations and cash flows of the Parent Company which
could have a material adverse impact on the financial condition or cash flows of
the Company.
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131 "Disclosures About Segments
of an Enterprise and Related Information" effective for annual periods beginning
after December 15, 1997 and interim periods subsequent to the initial year of
application. SFAS No. 131 establishes standards for the way that public business
enterprises report information about their operating segments in their annual
and interim financial statements. It also requires public enterprises to
disclose company-wide information regarding products and services and the
geographic areas in which they operate. The Company will adopt SFAS No. 131
effective for the 1998 calendar year end.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pension and Other Postretirement Benefits" effective for period beginning after
December 15, 1997. The Company will adopt SFAS No. 132 effective for the 1998
calendar year end.
<PAGE>
The aforementioned recently issued accounting pronouncements establish standards
for disclosures only and therefore will have no impact on the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective for the periods beginning after
June 15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective for the 2000 calendar year
end. The Company has not yet determined what the impact of SFAS No. 133 will
have on its financial statements.
Year 2000 Compliance
The Company currently is in the process of identifying, evaluating and
implementing changes to computer systems and applications necessary to achieve a
year 2000 date conversion with no effect on customers or disruption to business
operations. These actions are necessary to ensure that the systems and
applications will recognize and process data from and after January 1, 2000 and
beyond. Major areas of potential business impact have been identified and are
being reviewed, and initial conversion efforts are underway. However, if such
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have a material impact on the operations of the Company.
The total future cost of compliance associated with identified actions is
anticipated to be approximately $10 million. Variations from anticipated
expenditures and the effect on the Company's future results of operations are
not anticipated to be material in any given year.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In normal operations, the Company must deal with effects of changes in interest
rates and currency exchange rates. The following discussion presents an overview
of how such changes are managed and a view of their potential effects.
The Company uses various financial instruments, particularly interest rate and
currency swaps, but also options, floors and currency forwards, to manage its
respective interest rate and currency risks. The Company is exclusively an end
user of these instruments, which are commonly referred to as derivatives.
Established practices require that financial instruments relate to specific
asset, liability or equity transactions or to currency exposure.
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rate and currency
exchange in their financial statements. Although the rules offer alternatives
for presenting this information, none of the alternatives is without
limitations. The following discussion is based on so-called "shock tests", which
model effects of interest rate and currency 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
extraordinarily complex market reactions that normally would arise from the
market shifts modeled. While the following results of shock tests for interest
rate and currencies 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 the 1998 net earnings of the Company based on current
positions.
One means of assessing exposure to changes in currency exchange rates is
to model effects on reported earnings using a sensitivity analysis. The six
months ended June 30, 1998 consolidated currency exposures, including
financial instruments designated and effective as hedges, were analyzed to
identify the Company's assets and liabilities denominated in other than
their relevant functional currency. Net unhedged exposures in each currency
were then remeasured assuming a 10% change in currency exchange rates
compared with the U.S. dollar. Under this model, it is estimated that, all
else constant, such a change would not materially effect the 1998 net
earnings of the Company based on current positions.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The discussion contained under the heading "Subsequent Event - Parent
Company Litigation" in Note 5 contained in Part 1 - Financial
Information, Item 1 - Financial Statements, is incorporated herein by
reference in its entirety.
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHH CORPORATION
Date: August 14, 1998 By: /s/ Scott E. Forbes
------------------------
Scott E. Forbes
Executive Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT 12
PHH Corporation and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions)
Six Months
Ended June 30,
1998 1997
------------- -------------
Income (loss) before income taxes $ 199.4 $ (88.0)
Plus: Fixed charges 171.4 125.8
------------- -------------
Earnings available to cover
fixed charges 370.8 37.8
------------- -------------
Fixed charges (1):
Interest including amortization
and deferred loan costs 169.5 122.2
Interest portion of rental payment 1.9 3.6
------------- -------------
Total fixed charges $ 171.4 $ 125.8
============= =============
Ratio of earnings to fixed charges(2) 2.16x 0.30x
(1) Fixed charges consist of interest expense on all indebtedness (including
amortization of deferred financing costs) and the portion of operating
lease rental expense that is representative of the interest factor
(deemed to be one-third of operating lease rentals). The substantial
portion of interest expense in incurred on debt, which is used to finance
the Company's fleet leasing, mortgage service and relocation service
activities.
(2) For the six months ended June 30, 1998, income before income taxes
includes a reversal of the prior year's merger-related charges in the
amount of $6.3 million. Excluding the reversal, the ratio of earnings to
fixed charges would be 2.13x. For the six months ended June 30, 1997 loss
before income taxes includes non-recurring merger-related charges
associated with the HFS Merger in the amount of $215.8 million ($176.3
million after-tax). Excluding the charges, the ratio of earnings to fixed
charges would be 2.02x.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AN FOR THE QUARTER ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCED TO SUCH FINANCIAL
STATEMENTS. AMOUNTS ARE IN THOUSANDS, EXCEPT PER SHARE DATA.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 60,500
<SECURITIES> 0
<RECEIVABLES> 592,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,080,300
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,824,300
<CURRENT-LIABILITIES> 727,000
<BONDS> 0
0
0
<COMMON> 289,200
<OTHER-SE> 645,400
<TOTAL-LIABILITY-AND-EQUITY> 8,824,300
<SALES> 0
<TOTAL-REVENUES> 276,900
<CGS> 0
<TOTAL-COSTS> 174,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 102,500
<INCOME-TAX> 36,000
<INCOME-CONTINUING> 66,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
