<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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)
------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure
format.
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<PAGE>
PHH CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three and nine months ended
September 30, 2000 and 1999 1
Consolidated Condensed Balance Sheets as of September 30, 2000 and
December 31, 1999 2
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Narrative Analysis of Results of Operations and Liquidity
and Capital Resources 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
Certain statements in this Quarterly Report on Form 10-Q constitute "forward
looking statements" within the meaning of the Private 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: the
resolution or outcome of the unresolved pending litigation relating to the
previously announced accounting irregularities at our Parent Company;
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, including the acquisition of the fleet management business
from Avis Group Holdings, Inc.; competition in the Company's existing and
potential future lines of business; the Company's ability to integrate and
operate successfully acquired and merged 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; and the effect of
changes in current interest rates, particularly in the Company's Mortgage
segment. 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 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 the Company later becomes aware
that they are not likely to be achieved.
(i)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Service fees:
Relocation services (net of interest costs of $4, $7,
$14 and $18, respectively) $ 127 $ 117 $ 332 $ 315
Mortgage services (net of amortization of mortgage
servicing rights and interest of $66, $59, $181
and $178, respectively) 132 114 306 314
--------- --------- --------- ---------
Service fees, net 259 231 638 629
Other 5 7 21 10
--------- --------- --------- ---------
Net revenues 264 238 659 639
--------- --------- --------- ---------
EXPENSES
Operating 112 107 352 318
General and administrative 22 23 64 70
Depreciation and amortization 11 9 31 26
Other charges (credits) (1) - 1 -
--------- --------- --------- ---------
Total expenses 144 139 448 414
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 120 99 211 225
Provision for income taxes 47 37 84 85
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 73 62 127 140
Income from discontinued operations, net of tax - - - 34
Gain (loss) on sale of discontinued operations, net of tax (9) - (9) 871
--------- --------- --------- ---------
NET INCOME $ 64 $ 62 $ 118 $ 1,045
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
1
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 94 $ 80
Accounts and notes receivable, net 262 566
Property and equipment, net 158 167
Investment in convertible preferred stock 383 369
Other assets 543 379
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Total assets exclusive of assets under programs 1,440 1,561
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Assets under management and mortgage programs
Mortgage loans held for sale 1,249 1,112
Mortgage servicing rights 1,575 1,084
Relocation receivables 194 530
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3,018 2,726
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TOTAL ASSETS $ 4,458 $ 4,287
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 696 $ 447
Deferred income 30 32
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Total liabilities exclusive of liabilities under programs 726 479
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Liabilities under management and mortgage programs
Debt 2,143 2,314
Deferred income taxes 321 310
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2,464 2,624
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Commitments and contingencies (Note 7)
Stockholder's equity
Preferred stock - authorized 3,000,000 shares; none issued and outstanding - -
Common stock, no par value - authorized 75,000,000 shares; issued and
outstanding 1,000 shares 512 512
Retained earnings 753 674
Accumulated other comprehensive income (loss) 3 (2)
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Total stockholder's equity 1,268 1,184
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,458 $ 4,287
============= ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
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PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 118 $ 1,045
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of tax - (34)
(Gain) loss on sale of discontinued operations, net of tax 9 (871)
Depreciation and amortization 31 26
Other, net 216 (154)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 374 12
----------- -----------
Management and mortgage programs:
Depreciation and amortization 113 88
Origination of mortgage loans (17,980) (20,841)
Proceeds on sale and payments from mortgage loans held for sale 17,839 21,471
----------- -----------
(28) 718
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 346 730
----------- ----------
INVESTING ACTIVITIES
Property and equipment additions (21) (52)
Net proceeds from disposition of fleet businesses - 1,803
Other, net (40) (53)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (61) 1,698
----------- -----------
Management and mortgage programs:
Equity advances on homes under management (2,243) (6,026)
Repayment on advances on homes under management 2,752 6,033
Additions to mortgage servicing rights (664) (560)
Proceeds from sales of mortgage servicing rights 93 84
----------- -----------
(62) (469)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM CONTINUING OPERATIONS (123) 1,229
----------- -----------
FINANCING ACTIVITIES
Payment of dividends (40) (1,113)
----------- -----------
Management and mortgage programs:
Principal payments on borrowings (4,283) (6,252)
Proceeds from debt issuance or borrowings 3,237 4,133
Net change in short-term borrowings 875 (1,752)
Net change in fundings to discontinued operations - (101)
Proceeds received for debt repayment in connection with disposal of fleet businesses - 3,017
----------- -----------
(171) (955)
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NET CASH USED IN FINANCING ACTIVITIES FROM CONTINUING OPERATIONS (211) (2,068)
----------- -----------
Effect of changes in exchange rates on cash and cash equivalents 2 (42)
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Net increase (decrease) in cash and cash equivalents 14 (151)
Cash and cash equivalents, beginning of period 80 281
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94 $ 130
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
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PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNLESS OTHERWISE NOTED, ALL AMOUNTS ARE IN MILLIONS)
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements
include the accounts and transactions of PHH Corporation and its
wholly-owned subsidiaries (collectively, the "Company"). The Company is a
wholly-owned subsidiary of Cendant Corporation ("Cendant" or the "Parent
Company"). Pursuant to certain covenant requirements in the indentures
under which the Company issues debt, the Company continues to operate and
maintain its status as a separate public reporting entity, which is the
basis under which the accompanying Consolidated Condensed Financial
Statements and Notes thereto are presented.
In management's opinion, the Consolidated Condensed Financial Statements
contain all normal recurring adjustments necessary for a fair presentation
of interim results reported. The results of operations reported for interim
periods are not necessarily indicative of the results of operations for the
entire year or any subsequent interim periods. In addition, management is
required to make estimates and assumptions that affect the amounts reported
and related disclosures. Estimates, by their nature, are based on judgment
and available information. Accordingly, actual results could differ from
those estimates. The Consolidated Condensed Financial Statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," which
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 was previously amended by SFAS No. 137,
"Accounting For Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which deferred the effective
date of SFAS No. 133 to fiscal years commencing after June 15, 2000. The
Company has appointed a team to implement these standards on an
enterprise-wide basis. The Company has identified certain contracts, which
contain embedded derivatives, and additional freestanding derivatives as
defined by SFAS No. 133. Completion of the Company's implementation plan
and determination of the impact of adopting these standards is expected by
the end of the fourth quarter of 2000. Since the impact is dependent upon
market fluctuations and the notional value of such contracts at the time of
adoption, the impact of adopting these standards is not fully determinable.
However, the Company currently does not anticipate material changes to any
of its existing hedging strategies as a result of such adoption. The
Company will adopt SFAS No. 138 concurrently with SFAS No. 133 on January
1, 2001, as required.
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB Statement No. 125." SFAS No. 140 revises criteria for
accounting for securitizations, other financial-asset transfers, and
collateral and introduces new disclosures, but otherwise carries forward
most of the provisions of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
4
<PAGE>
Liabilities" without amendment. The Company will adopt SFAS No. 140 on
December 31, 2000, as required.
3. COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 64 $ 62 $ 118 $ 1,045
Other comprehensive income (loss):
Currency translation adjustment 3 (1) 1 25
Unrealized gain (loss) on marketable securities,
net of tax 1 - 4 (2)
--------- --------- --------- ---------
Total comprehensive income $ 68 $ 61 $ 123 $ 1,068
========= ========= ========= =========
</TABLE>
The after tax components of accumulated other comprehensive income (loss)
for the nine months ended September 30, 2000 are as follows:
<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
CURRENCY GAIN (LOSS) ON OTHER
TRANSLATION MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME (LOSS)
--------------- --------------- --------------
<S> <C> <C> <C>
Balance, January 1, 2000 $ (1) $ (1) $ (2)
Current period change 1 4 5
--------------- --------------- --------------
Balance, September 30, 2000 $ - $ 3 $ 3
=============== =============== ==============
</TABLE>
4. OTHER CHARGES (CREDITS)
In connection with Parent Company restructuring initiatives, the Company
incurred facility related charges of $2 million during the first quarter of
2000 resulting from the consolidation of business operations. Further, the
Company recorded a non-cash credit of $1 million during the third quarter
of 2000 resulting from the reduction of certain merger-related liabilities
recorded in the fourth quarter of 1997.
5. DISCONTINUED OPERATIONS
During the three months ended September 30, 2000, the Company recognized a
loss of $9 million for additional costs in connection with the disposition
of its former fleet businesses in June 1999.
6. SECURITIZATIONS
During the second and third quarters of 2000, the Company entered into
three separate financing agreements with Apple Ridge Funding LLC ("Apple
Ridge"), a bankruptcy remote, special purpose entity. Under the terms of
these agreements, certain relocation receivables will be transferred for
cash, on a revolving basis, to Apple Ridge until March 31, 2007. The
Company retains a subordinated residual interest and the related servicing
rights and obligations in the relocation receivables. At September 30,
2000, the Company was servicing $703 million of receivables under these
agreements.
7. COMMITMENTS AND CONTINGENCIES
PARENT COMPANY CLASS ACTION LITIGATION AND GOVERNMENT INVESTIGATIONS
Since the April 15, 1998 announcement by Cendant of the discovery of
accounting irregularities in former CUC International Inc. ("CUC") business
units of Cendant, approximately 70 lawsuits claiming to be class actions,
two lawsuits claiming to be brought derivatively on Cendant's behalf and
several individual lawsuits and arbitration proceedings have commenced in
various courts and other forums against Cendant and other defendants by or
on behalf of persons claiming to have purchased
5
<PAGE>
or otherwise acquired securities or options issued by CUC or Cendant
between May 1995 and August 1998.
The Securities and Exchange Commission ("SEC") and the United States
Attorney for the District of New Jersey are also conducting investigations
relating to the matters referenced above. As a result of the findings from
Cendant's internal investigations, Cendant made all adjustments considered
necessary by Cendant. On June 14, 2000, pursuant to an offer of settlement
made by Cendant, the SEC issued an Order Instituting Public Administrative
Proceedings Pursuant to Section 21C of the Securities and Exchange Act of
1934, Making Findings and Imposing a Cease and Desist Order. In such Order,
the SEC found that Cendant had violated certain financial reporting
provisions of the Securities and Exchange Act of 1934 and ordered Cendant
to cease and desist from committing any future violations of such
provisions. No financial penalties were imposed by the SEC against Cendant
or any of its subsidiaries, including the Company.
On December 7, 1999, Cendant announced that it reached a preliminary
agreement to settle the principal securities class action pending against
Cendant in the U.S. District Court in Newark, New Jersey (the "Settlement
Agreement") brought on behalf of purchasers of all Cendant and CUC publicly
traded securities, other than PRIDES, between May 1995 and August 1998.
Under the Settlement Agreement, Cendant would pay the class members
approximately $2.85 billion in cash. The definitive settlement document was
approved by the U.S. District Court by order dated August 14, 2000. Certain
parties in the class action have appealed the District Court's ordered
approving the plan of allocation of the settlement fund and awarding of
attorneys' fees and expenses to counsel for the lead plaintiffs. No appeals
challenging the fairness of the $2.85 billion settlement amount were filed.
The U.S. Court of Appeals for the Third Circuit has not issued a briefing
schedule for the appeals. Accordingly, Cendant will not be required to fund
the settlement amount of $2.85 billion for some time. However, the
Settlement Agreement required Cendant to post collateral in the form of
credit facilities and/or surety bonds by November 13, 2000. Accordingly,
on November 13, 2000, Cendant posted a surety bond in the amount of $790
million and letters of credit aggregating $1.71 billion. Cendant also
funded a trust established for the benefit of the plaintiffs with a cash
deposit of approximately $350 million on November 13, 2000. Such deposit
will serve to reduce the amount of collateral required to be posted by
Cendant under the Settlement Agreement.
The settlement does not encompass all litigation asserting claims
associated with Cendant's accounting irregularities. Cendant does not
believe that it is feasible to predict or determine the final outcome or
resolution of these unresolved proceedings. An adverse outcome from such
proceedings could be material with respect to Cendant's earnings in any
given reporting period. However, the Company does not believe that the
impact of such unresolved proceedings should result in a material liability
to the Company in relation to its consolidated financial position or
liquidity.
FLEET DISPOSITION
The fleet businesses disposition was structured as a tax-free
reorganization and, accordingly, no tax provision has been recorded on a
majority of the gain. However, pursuant to a recent interpretive ruling,
the Internal Revenue Service ("IRS") has taken the position that similarly
structured transactions do not qualify as tax-free reorganizations under
the Internal Revenue Code Section 368(a)(1)(A). If the transaction is not
considered a tax-free reorganization, the resultant incremental liability
could range between $10 million and $170 million depending upon certain
factors including utilization of tax attributes and contractual
indemnification provisions. Notwithstanding the IRS interpretive ruling,
the Company believes that, based upon analysis of current tax law, its
position would prevail, if challenged.
OTHER PENDING LITIGATION
The Company is involved in pending litigation in the usual course of
business. In the opinion of management, such other litigation will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
6
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8. SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes and depreciation and amortization
calculation. For this purpose, Adjusted EBITDA is defined as earnings
before non-operating interest, income taxes and depreciation and
amortization (exclusive of depreciation and amortization on assets under
management and mortgage programs), adjusted to exclude certain items which
are of a non-recurring or unusual nature and are not measured in assessing
segment performance or are not segment specific.
SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
2000 1999
------------------------ ------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Relocation $ 127 $ 49 $ 117 $ 42
Mortgage 132 74 114 59
Other 7 7 7 7
Inter-segment Eliminations (2) - - -
--------- --------- -------- ---------
Total $ 264 $ 130 $ 238 $ 108
========= ========= ======== =========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
2000 1999
------------------------ ------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Relocation $ 332 $ 105 $ 315 $ 94
Mortgage 306 117 314 153
Other 23 21 10 4
Inter-segment Eliminations (2) - - -
--------- --------- -------- ---------
Total $ 659 $ 243 $ 639 $ 251
========= ========= ======== =========
</TABLE>
Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Adjusted EBITDA $ 130 $ 108 $ 243 $ 251
Depreciation and amortization 11 9 31 26
Other unusual charges (credits) (1) - 1 -
--------- --------- -------- ---------
Income before income taxes $ 120 $ 99 $ 211 $ 225
========= ========= ======== =========
</TABLE>
9. SUBSEQUENT EVENT
On November 13, 2000, Cendant announced that they entered into a definitive
agreement to acquire all of the outstanding shares of Avis Group Holdings, Inc.
("Avis") that are not currently owned by them at a price of $33.00 per share in
cash. Approximately 26 million outstanding shares of Avis common stock, and
options to purchase approximately 7.9 million additional shares, are not
currently owned by Cendant. Accordingly, the transaction is valued at
approximately $935 million, net of option proceeds.
The acquisition will be made by a subsidiary of the Company. The consumer car
rental business, Avis Rent a Car, will be distributed to a Cendant subsidiary
not within the Company's ownership structure. After the acquisition and the
distribution of the consumer car rental business, the Company will own and
operate the Vehicle Management and Leasing business as well as the Wright
Express fuel card business. The merger is conditioned upon, among other things,
approval of a majority of the votes cast by Avis stockholders who are
unaffiliated with Cendant and also customary regulatory approvals. Although no
assurances can be given, Cendant expects the transaction to close in the first
quarter of 2001.
7
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES
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.
The following discussion should be read in conjunction with the information
contained in our Consolidated Condensed Financial Statements and accompanying
Notes thereto appearing elsewhere herein. Unless otherwise noted, all dollar
amounts are in millions.
RESULTS OF CONSOLIDATED OPERATIONS
Revenues for the three months ended September 30, 2000 increased $26 million
(11%) compared with the corresponding period in 1999. Income from continuing
operations for the three months ended September 30, 2000 increased $11 million
(18%) compared with the corresponding period in 1999 primarily due to the
increase in revenues, partially offset by an increase in our provision for
income taxes.
Revenues for the nine months ended September 30, 2000 increased $20 million (3%)
compared with the corresponding period in 1999. Income from continuing
operations for the nine months ended September 30, 2000 decreased $13 million
(9%) compared with the corresponding period in 1999 primarily due to an increase
in operating expenses, partially offset by the increase in revenues. During the
three months ended September 30, 2000, we recognized a loss of $9 million for
additional costs in connection with the disposition of our fleet businesses in
June 1999.
RESULTS OF REPORTABLE OPERATING SEGMENTS
The underlying discussions 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 depreciation and
amortization on assets under management and mortgage programs), adjusted to
exclude certain items, which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific. Our
management believes such discussion is the most informative representation of
how management evaluates performance. However, our presentation of Adjusted
EBITDA may not be comparable with similar measures used by other companies.
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999
RELOCATION
Revenues and EBITDA increased $10 million (9%) and $7 million (17%),
respectively, in third quarter 2000 compared with third quarter 1999 and the
EBITDA margin grew from 36% to 39% for the comparable periods. Revenues and
EBITDA reflect a continuing trend in our business operations from asset based to
service based. Higher service based fees in third quarter 2000 versus third
quarter 1999 include increases in (i) outsourcing fees of $3 million as a result
of expanded services, (ii) international service fees of $3 million as a result
of increased marketing and sales efforts, and (iii) referral fees of $4 million.
Partially offsetting the increase in service fee revenues was a decline in
corporate and governmental homesale closings and the related management fees,
which contributed reductions in revenue and EBITDA of $3 million and $5 million,
respectively, in third quarter 2000 vs. third quarter 1999. Revenues and EBITDA
also reflect $4 million of improved net interest income in third quarter 2000
compared with third quarter 1999.
8
<PAGE>
MORTGAGE
Revenues and EBITDA increased $18 million (16%) and $15 million, (25%),
respectively, in third quarter 2000 compared with the third quarter 1999,
principally as a result of increased revenues from loan production. Revenues
from mortgage loans closed increased $18 million due to favorable production
margins. Accordingly, the average production fee increased 28 basis points in
third quarter 2000 compared with third quarter 1999. Total mortgage closings for
third quarter 2000 amounted to $6.5 billion, which was equal to the comparable
prior year quarter. Purchase mortgage closings, however increased by $278
million (5%) while refinancing volume decreased by $287 million (41%). Retail
purchase mortgages, which are loans where we interact directly with the
consumer, increased $225 million to $4.9 billion. Retail mortgage lending has
been our primary focus and accounted for more than 80% of loan volume in third
quarter 2000. Moreover, we ranked as the fourth largest retail mortgage lender
by the National Mortgage News(TM) for the second quarter of 2000, the latest
period for which data are available. Mortgage closings from our Internet
business, known as Log-In, Move-In, amounted to $183 million in third quarter
2000, compared with $73 million in third quarter 1999. Revenues generated by our
servicing portfolio remained relatively level with last year despite a $17.0
billion (36%) increase in the average servicing portfolio, principally because
of higher servicing amortization and interest expenses and lower revenues from
mortgage insurance. The EBITDA margin increased from 52% in third quarter 1999
to 56% in third quarter 2000. The increase in EBITDA and EBITDA margin resulted
principally from the increase in the average production fee on mortgage
originations. As we had anticipated, market conditions improved in third quarter
2000 which produced more positive margin comparisons. The amount of loans in
process at September 30, 2000 was 13% higher than at September 30, 1999.
Although no assurances can be made, we expect continued period-over-period
market conditions to improve in the fourth quarter of the year.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999
RELOCATION
Revenues and Adjusted EBITDA increased $17 million (5%) and $11 million (12%),
respectively, in nine months 2000 compared with nine months 1999 and the
Adjusted EBITDA margin increased from 30% to 32% for the comparable periods.
Revenues and Adjusted EBITDA reflect a continuing trend in our business
operations from asset based to service based. Higher service based fees for nine
months 2000 versus nine months 1999 including increases in: (i) outsourcing fees
of $9 million as a result of expanded services; (ii) international fees of $7
million as a result of increased marketing and sales efforts and; (iii) referral
and other ancillary service fees of $10 million. Partially offsetting the
increase in service fee revenues was a decline in corporate and government
homesale closings and the related management fees which contributed reductions
in revenues and Adjusted EBITDA of $10 million and $16 million, respectively, in
third quarter 2000 versus third quarter 1999. Also contributing to increases in
revenues and Adjusted EBITDA was $8 million of improved net interest income in
nine months 2000 compared with nine months 1999. In addition, a $7 million gain
was recognized in nine months 1999 on the sale of a minority interest in an
insurance subsidiary. On a comparable basis, excluding the non-recurring gain,
revenues and Adjusted EBITDA increased $24 million (8%) and $18 million (21%),
respectively, in nine months 2000 compared with nine months 1999.
MORTGAGE
Revenues and Adjusted EBITDA decreased $8 million (3%) and $36 million (24%),
respectively in nine months 2000 compared with nine months 1999. The impact on
Revenues and Adjusted EBITDA from a $4.8 billion (23%) reduction in mortgage
loan closings was offset by an increase in the average production fee. The
average production fee increased 29 basis points (25%) in nine months 2000
compared to the prior year period due to a reduction in the direct cost per
loan. Mortgage loan closings for nine months 2000 were $16.3 billion, consisting
of $15.1 billion in purchase mortgages and $1.2 billion in refinancing
mortgages. The decline in loans closed in nine months 2000 is substantially a
result of a
9
<PAGE>
$4.6 billion reduction in mortgage refinancing volume due to the unprecedented
industry-wide refinancing activity in 1999. Purchase mortgage closings in our
retail lending business amounted to $12.6 billion in nine months 2000 and 1999.
Mortgage closings from our Internet business, known as Log-In, Move-In, amounted
to $587 million in nine months 2000, compared with $165 million in nine months
1999. Loan servicing revenues in 1999 included a $9 million gain on the sale of
servicing rights. Excluding such gain, recurring loan servicing revenue
increased $11 million (18%) in nine months 2000 compared to nine months 1999.
The increase in loan servicing revenues was principally attributable to a
corresponding increase in the average servicing portfolio which grew
approximately $12.7 billion (28%) in nine months 2000 versus the prior year
period. The Adjusted EBITDA margin decreased from 49% in nine months 1999 to 38%
in nine months 2000. The decline in Adjusted EBITDA and Adjusted EBITDA margin
resulted principally from increased expenses to market to the real estate
Phone-In Move-In offices and salary and infrastructure expenses incurred in the
first half of 2000, which were not fully utilized. As we anticipated, market
conditions improved in third quarter 2000 and we continue to expect improvement
of our operating results in fourth quarter 2000 versus fourth quarter 1999.
DISCONTINUED OPERATIONS
Our fleet businesses generated revenues and Adjusted EBITDA of $166 million and
$66 million, respectively, for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
To ensure adequate funding, we maintain three sources of liquidity: ongoing
liquidation of assets under management, global capital markets and committed
credit agreements with various domestic and international banks. In the ordinary
course of business, the liquidation of assets under management and mortgage
programs, as well as cash flows generated from operating activities, provide the
cash flow necessary for the repayment of existing liabilities. In addition, our
financial covenants are designed to ensure our self-sufficient liquidity status
and include restrictions on dividends payable to our Parent Company and loans
made to our Parent Company, limitations on the ratio of debt to equity, and
other separate financial restrictions.
We expect to continue to maximize our access to global capital markets by
maintaining the quality of our assets under management, which is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. We minimize our exposure to interest rate and liquidity risk 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. Depending upon asset growth and financial market
conditions, we utilize the domestic commercial paper markets, public and private
debt markets, as well as other cost-effective short-term instruments. As of
November 3, 2000, we had approximately $3.0 billion available for issuing
medium-term notes under our existing shelf registration statement. Proceeds from
future offerings will continue to be used to finance assets we manage for our
clients, for a portion of the acquisition of Avis Group Holdings, Inc. and for
general corporate purposes.
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, 2000, we maintained the
following agreements, whereby managed assets were sold or transferred to third
parties.
Mortgage. We maintain a revolving sales agreement, under which an unaffiliated
bankruptcy remote buyer, Bishops Gate Residential Mortgage Trust (the "Buyer"),
a special purpose entity, committed to purchase, at our option, mortgage loans
originated by us on a daily basis, up to the Buyer's asset limit of $2.1
billion. Under the terms of this sales agreement, we retain the servicing rights
on the mortgage loans sold to the Buyer and arrange for the sale or
securitization of the mortgage loans into the secondary
10
<PAGE>
market. The Buyer retains the right to select alternative sale or securitization
arrangements. At September 30, 2000, we were servicing approximately $980
billion of mortgage loans owned by the Buyer.
Relocation. We maintain three separate financing agreements with Apple Ridge
Funding LLC ("Apple Ridge"), a bankruptcy remote, special purpose entity. Under
the terms of these agreements, certain relocation receivables will be
transferred for cash, on a revolving basis, to Apple Ridge until March 31, 2007.
We retain a subordinated residual interest and the related servicing rights and
obligations in the relocation receivables. At September 30, 2000, we were
servicing approximately $703 million of receivables under these agreements.
At September 30, 2000, aggregate outstanding borrowings consisted of the
following:
Commercial paper $ 1,494
Secured obligations (1) 400
Medium-term notes 124
Other 125
----------
$ 2,143
==========
--------
(1)Consists of a 364 day financing agreement to sell mortgage loans under
an agreement to repurchase such mortgages. The agreement is
collateralized by the underlying mortgage loans held in safekeeping by
the custodian to the agreement. The total commitment under this
agreement is $500 million. The agreement is renewable on an annual basis
at the discretion of the lender in accordance with the securitization
agreement.
To provide additional financial flexibility, our current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average amount of
outstanding commercial paper. As of September 30, 2000, the Company maintained
$1.625 billion of unsecured committed credit facilities, which were provided by
domestic and foreign banks. The facilities consist of a $750 million revolving
credit facility maturing in February 2001, a $125 million revolving credit
facility maturing in September 2001 and a $750 million revolving credit facility
maturing in February 2005. The full amount of our committed facilities at
September 30, 2000 was undrawn and available to support the average outstanding
commercial paper balance.
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
continuously seek additional sources of liquidity to accommodate our asset
growth and to provide further protection from volatility in the financial
markets. In the event that the public debt market is unable to meet our funding
needs, we believe that we have appropriate alternative sources to provide
adequate liquidity, including current and potential future securitized
obligations and our revolving credit facilities.
ACQUISITIONS
On November 13, 2000, Cendant announced that they entered into a definitive
agreement to acquire all of the outstanding shares of Avis Group Holdings, Inc.
("Avis") that are not currently owned by them at a price of $33.00 per share in
cash. Approximately 26 million outstanding shares of Avis common stock, and
options to purchase approximately 7.9 million additional shares, are not
currently owned by Cendant. Accordingly, the transaction is valued at
approximately $935 million, net of option proceeds. Cendant anticipates that
more than 50% of the purchase price will be financed from new borrowings
available to them and to us, and expects that the remaining amount will be
provided either from available cash or from the issuance of CD common
stock. However, the actual funding for the acquisition will be finalized before
the closing of the transaction.
The acquisition will be made by one of our subsidiaries. The consumer car rental
business, Avis Rent a Car, will be distributed to a Cendant subsidiary not
within our ownership structure. After the acquisition and the distribution of
the consumer car rental business, we will own and operate the Vehicle Management
and Leasing business as well as the Wright Express fuel card business. The
merger is conditioned upon, among other things, approval of a majority of the
votes cast by Avis stockholders who are unaffiliated with Cendant and also
customary regulatory approvals. Although no assurances can be given, Cendant
expects the transaction to close in the first quarter of 2001.
11
<PAGE>
CASH FLOWS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
2000 1999 CHANGE
------------- ------------- -------------
<S> <C> <C> <C>
Cash provided by (used in) continuing operations:
Operating activities $ 374 $ 12 $ 362
Investing activities (61) 1,698 (1,759)
Financing activities (40) (1,113) 1,073
Effects of exchange rate changes on
cash and cash equivalents 2 (42) 44
------------- ------------- -------------
Net change in cash and cash equivalents $ 275 $ 555 $ (280)
============= ============= =============
</TABLE>
Cash flows from operating activities increased primarily due to a decrease in
working capital.
Cash flows from investing activities resulted in an outflow of $61 million in
2000 compared to an inflow of $1,698 million in 1999 primarily due to the
absence in 2000 of approximately $1.8 billion of net proceeds from the
disposition of the fleet businesses in 1999.
Cash flows used in financing activities decreased due to a reduction in
dividends paid to Cendant in 2000.
MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 CHANGE
-------- --------- ---------
<S> <C> <C> <C>
Cash provided by (used in) continuing operations:
Operating activities $ (28) $ 718 $ (746)
Investing activities (62) (469) 407
Financing activities (171) (955) 784
-------- --------- ---------
Net change in cash and cash equivalents (261) $ (706) $ 445
======== ========= =========
</TABLE>
Cash flows from operating activities resulted in an outflow of $28 million in
2000 compared to an inflow of $718 million in 1999 primarily due to a decrease
in cash flows from the originations of mortgage loans, which reflects larger
mortgage loan originations in proportion to mortgage loan sales.
Cash flows used in investing activities decreased primarily due to a net inflow
of funds generated from advances on homes under management.
Cash flows used in financing activities decreased primarily due to the absence
in 2000 of $3.0 billion in proceeds received for debt repayment in connection
with the disposal of our former Fleet segment and a reduction in net borrowing
requirements for our investment in assets under management and mortgage
programs.
CAPITAL EXPENDITURES
During the nine months ended September 30, 2000, we invested $21 million in
property and equipment to support operational growth and to enhance marketing
opportunities. In addition, technological improvements were made to improve
operating efficiencies. We anticipate an aggregate capital expenditure
investment of approximately $38 million.
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PARENT COMPANY CLASS ACTION LITIGATION
Since the April 15, 1998 announcement by Cendant of the discovery of accounting
irregularities in former CUC International Inc. ("CUC") business units of
Cendant, approximately 70 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on Cendant's behalf and several individual
lawsuits and arbitration proceedings have commenced in various courts and other
forums against Cendant and other defendants by or on behalf of persons claiming
to have purchased or otherwise acquired securities or options issued by CUC or
Cendant between May 1995 and August 1998.
The Securities and Exchange Commission ("SEC") and the United States Attorney
for the District of New Jersey are also conducting investigations relating to
the matters referenced above. As a result of the findings from Cendant's
internal investigations, Cendant made all adjustments considered necessary by
Cendant. On June 14, 2000, pursuant to an offer of settlement made by Cendant,
the SEC issued an Order Instituting Public Administrative Proceedings Pursuant
to Section 21C of the Securities and Exchange Act of 1934, Making Findings and
Imposing a Cease and Desist Order. In such Order, the SEC found that Cendant had
violated certain financial reporting provisions of the Securities and Exchange
Act of 1934 and ordered Cendant to cease and desist from committing any future
violations of such provisions. No financial penalties were imposed by the SEC
against us, Cendant or any of its other subsidiaries.
On December 7, 1999, Cendant announced that it reached a preliminary agreement
to settle the principal securities class action pending against Cendant in the
U.S. District Court in Newark, New Jersey (the "Settlement Agreement") brought
on behalf of purchasers of all Cendant and CUC publicly traded securities, other
than PRIDES, between May 1995 and August 1998. Under the Settlement Agreement,
Cendant would pay the class members approximately $2.85 billion in cash. The
definitive settlement document was approved by the U.S. District Court by order
dated August 14, 2000. Certain parties in the class action have appealed the
District Court's ordered approving the plan of allocation of the settlement fund
and awarding of attorneys' fees and expenses to counsel for the lead plaintiffs.
No appeals challenging the fairness of the $2.85 billion settlement amount were
filed. The U.S. Court of Appeals for the Third Circuit has not issued a briefing
schedule for the appeals. Accordingly, Cendant will not be required to fund the
settlement amount of $2.85 billion for some time. However, the Settlement
Agreement required Cendant to post collateral in the form of credit facilities
and/or surety bonds by November 13, 2000. Accordingly, on November 13, 2000,
Cendant posted a surety bond in the amount of $790 million and letters of credit
aggregating $1.71 billion. Cendant also funded a trust established for the
benefit of the plaintiffs with a cash deposit of approximately $350 million on
November 13, 2000. Such deposit will serve to reduce the amount of collateral
required to be posted by Cendant under the Settlement Agreement.
The settlement does not encompass all litigation asserting claims associated
with Cendant's accounting irregularities. Cendant does not believe that it is
feasible to predict or determine the final outcome or resolution of these
unresolved proceedings. An adverse outcome from such proceedings could be
material with respect to Cendant's earnings in any given reporting period.
However, we do not believe that the impact of such unresolved proceedings should
result in a material liability to us in relation to our consolidated financial
position or liquidity.
FLEET DISPOSITION
The fleet businesses disposition was structured as a tax-free reorganization
and, accordingly, no tax provision has been recorded on a majority of the gain.
However, pursuant to a recent interpretive ruling, the Internal Revenue Service
("IRS") has taken the position that similarly structured transactions do not
qualify as tax-free reorganizations under the Internal Revenue Code Section
368(a)(1)(A). If the transaction is not considered a tax-free reorganization,
the resultant incremental liability could range between $10 million and $170
million depending upon certain factors including utilization of tax attributes
and contractual indemnification provisions. Notwithstanding the IRS interpretive
ruling, we believe that, based upon analysis of current tax law, our position
would prevail, if challenged.
13
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 was previously amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which deferred the effective date of SFAS No. 133 to fiscal
years commencing after June 15, 2000. We have appointed a team to implement
these standards on an enterprise-wide basis. We have identified certain
contracts, which contain embedded derivatives, and additional freestanding
derivatives as defined by SFAS No. 133. Completion of our implementation plan
and determination of the impact of adopting these standards is expected by the
end of the fourth quarter of 2000. Since the impact is dependent upon market
fluctuations and the notional value of such contracts at the time of adoption,
the impact of adopting these standards is not fully determinable. However, we
currently do not anticipate material changes to any of our existing hedging
strategies as a result of such adoption. We will adopt SFAS No. 138 concurrently
with SFAS No. 133 on January 1, 2001, as required.
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement
of FASB Statement No. 125." SFAS No. 140 revises criteria for accounting for
securitizations, other financial-asset transfers, and collateral and introduces
new disclosures, but otherwise carries forward most of the provisions of SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" without amendment. We will adopt SFAS No. 140
on December 31, 2000, as required.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As previously disclosed in our 1999 Annual Report filed on Form 10-K, we assess
our market risk based on changes in interest and foreign currency exchange rates
utilizing a sensitivity analysis. The sensitivity analysis measures the
potential loss in earnings, fair values, and cash flows based on a hypothetical
10% change (increase or decrease) in our market risk sensitive positions. We
used September 30, 2000 market rates to perform the sensitivity analysis
separately for each of our market risk exposures. The estimates assume
instantaneous, parallel shifts in interest rate yield curves and exchange rates.
We have determined, through such analyses, that the impact of a 10% change in
interest and foreign currency exchange rates and prices on our earnings, fair
values and cash flows would not be material.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussions contained under the headings "Parent Company Class Action
Litigation and Government Investigations" in Note 7 contained in PART I -
FINANCIAL INFORMATION, Item 1. Financial Statements, are incorporated herein by
reference in their entirety.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly 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/ John T. McClain
-----------------------
John T. McClain
Senior Vice President,
Finance
and Corporate Controller
Date: November 14, 2000
17
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Charter of PHH Corporation, as amended August 23, 1996
(incorporated by reference to Exhibit 3-1 to the Company's
Transition Report on Form 10-K filed on July 29, 1997).
3.2 By-Laws of PHH Corporation, as amended October 15, 1990,
(incorporated by reference to Exhibit 3-1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.1 Agreement and Plan of Merger by and among Cendant Corporation, PHH
Corporation, Avis Acquisition Corp. and Avis Group Holdings, Inc.,
dated as of November 12, 2000.
12 Computation of ratio of earnings to fixed charges
27 Financial data schedule (for electronic transmission only)
18
