<PAGE>
CONFORMED
As filed with the Securities and Exchange Commission on August 4, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File No. 1-7797
------------
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.
================================================================================
<PAGE>
PHH Corporation and Subsidiaries
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the three and six months ended
June 30, 2000 and 1999 1
Consolidated Condensed Balance Sheets as of June 30, 2000 and
December 31, 1999 2
Consolidated Condensed Statements of Cash Flows for the six months ended
June 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 13
PART II Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
</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, including the
proposed settlement of the class action 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;
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 1999 2000 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
REVENUES
Service fees:
Relocation services (net of interest costs of $5, $5,
$10 and $11, respectively) $114 $107 $206 $198
Mortgage services (net of amortization of mortgage
servicing rights and interest of $64, $59, $115
and $119, respectively) 97 107 174 200
---- ---- ---- ----
Service fees, net 211 214 380 398
Other 8 1 14 3
---- ---- ---- ----
Net revenues 219 215 394 401
---- ---- ---- ----
EXPENSES
Operating 123 108 239 211
General and administrative 21 22 42 47
Depreciation and amortization 10 9 21 17
Other unusual charges -- -- 2 --
---- ---- ---- ----
Total expenses 154 139 304 275
---- ---- ---- ----
INCOME BEFORE INCOME TAXES 65 76 90 126
Provision for income taxes 26 30 36 48
---- ---- ---- ----
INCOME FROM CONTINUING OPERATIONS 39 46 54 78
Income from discontinued operations, net of tax -- 12 -- 34
Gain on sale of discontinued operations, net of tax -- 871 -- 871
---- ---- ---- ----
NET INCOME $ 39 $929 $ 54 $983
==== ==== ==== ====
</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>
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 221 $ 80
Accounts and notes receivable, net 337 566
Property and equipment, net 159 167
Investment in convertible preferred stock 378 369
Other assets 393 379
------------- -------------
Total assets exclusive of assets under programs 1,488 1,561
------------- -------------
Assets under management and mortgage programs
Mortgage loans held for sale 1,392 1,112
Mortgage servicing rights 1,370 1,084
Relocation receivables 205 530
------------- -------------
2,967 2,726
------------- -------------
TOTAL ASSETS $ 4,455 $ 4,287
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 520 $ 447
Deferred income 34 32
------------- -------------
Total liabilities exclusive of liabilities under programs 554 479
------------- -------------
Liabilities under management and mortgage programs
Debt 2,369 2,314
Deferred income taxes 317 310
------------- -------------
2,686 2,624
------------- -------------
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 704 674
Accumulated other comprehensive loss (1) (2)
------------- -------------
Total stockholder's equity 1,215 1,184
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,455 $ 4,287
============= =============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 54 $ 983
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of tax - (34)
Gain on sale of discontinued operations, net of tax - (871)
Depreciation and amortization 21 17
Other, net 203 (106)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES EXCLUSIVE OF
MANAGEMENT AND MORTGAGE PROGRAMS 278 (11)
----------- -----------
Management and mortgage programs:
Depreciation and amortization 67 59
Origination of mortgage loans (11,184) (14,520)
Proceeds on sale and payments from mortgage loans held for sale 10,903 14,776
----------- -----------
(214) 315
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 64 304
----------- ----------
INVESTING ACTIVITIES
Property and equipment additions (13) (35)
Net proceeds from disposition of fleet businesses - 1,803
Other, net (44) (19)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES EXCLUSIVE OF
MANAGEMENT AND MORTGAGE PROGRAMS (57) 1,749
----------- -----------
Management and mortgage programs:
Equity advances on homes under management (1,853) (3,475)
Repayment on advances on homes under management 2,276 3,506
Additions to mortgage servicing rights (384) (371)
Proceeds from sales of mortgage servicing rights 65 124
----------- -----------
104 (216)
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES FROM CONTINUING OPERATIONS 47 1,533
----------- -----------
FINANCING ACTIVITIES
Payment of dividends (25) -
----------- -----------
Management and mortgage programs:
Principal payments on borrowings (2,719) (4,516)
Proceeds from debt issuance or borrowings 2,009 3,043
Net change in short-term borrowings 765 (742)
Net change in fundings to discontinued operations - (101)
Proceeds received for debt repayment in connection with disposal of fleet businesses - 3,017
----------- -----------
55 701
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30 701
----------- -----------
Effect of changes in exchange rates on cash and cash equivalents - (40)
Cash used in discontinued operations - (31)
----------- -----------
Net increase in cash and cash equivalents 141 2,467
Cash and cash equivalents, beginning of period 80 281
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 221 $ 2,748
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
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.
Completion of the Company's implementation plan and determination of the
impact of adopting these standards is expected by the fourth quarter of
2000. The Company will adopt SFAS No. 138 concurrently with SFAS No. 133 on
January 1, 2001, as required.
3. COMPREHENSIVE INCOME
The components of comprehensive income are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 39 $ 929 $ 54 $ 983
Other comprehensive income (loss):
Currency translation adjustment (1) 48 (2) 26
Unrealized gain (loss) on marketable securities,
net of tax 2 - 3 (2)
--------- --------- --------- ---------
Total comprehensive income $ 40 $ 977 $ 55 $ 1,007
========= ========= ========= =========
</TABLE>
4
<PAGE>
The after tax components of accumulated other comprehensive loss for the
six months ended June 30, 2000 are as follows:
<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
CURRENCY GAIN (LOSS) ON OTHER
TRANSLATION MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES LOSS
--------------- -------------- -------------
<S> <C> <C> <C>
Balance, January 1, 2000 $ (1) $ (1) $ (2)
Current period change (2) 3 1
--------------- -------------- --------------
Balance, June 30, 2000 $ (3) $ 2 $ (1)
=============== =============== ==============
</TABLE>
4. OTHER UNUSUAL CHARGES
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.
5. DISCONTINUED OPERATIONS
In June 1999, the Company completed the disposition of its fleet
businesses, a former segment of the Company, which was classified as a
discontinued operation. The fleet businesses primarily provided fleet and
fuel card related products and services to corporate clients and government
agencies. Summarized financial data of discontinued operations were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ ------------------
<S> <C> <C>
Net revenues $ 67 $ 166
================== ==================
Income before income taxes 22 52
Provision for income taxes 10 18
------------------ ------------------
Net income $ 12 $ 34
================== ==================
</TABLE>
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.
6. SECURITIZATIONS
During the second quarter of 2000, the Company entered into two 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 January 31, 2005. The Company
retains a subordinated residual interest and the related servicing rights
and obligations in the relocation receivables. At June 30, 2000, the
Company was servicing $738 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
5
<PAGE>
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. 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 brought on behalf
of purchasers of all Cendant and CUC publicly traded securities, other than
PRIDES, between May 1995 and August 1998. Under the agreement, Cendant
would pay the class members approximately $2.85 billion in cash. The
settlement remains subject to approval by the court. On June 28, 2000, a
hearing was held by the court to hear all objectors to the settlement. If
the settlement is not approved by the court, Cendant can make no assurances
that the final outcome or other settlement of this litigation will not be
for an amount greater than that set forth in the preliminary agreement.
The proposed 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.
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.
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 JUNE 30,
---------------------------------------------------------
2000 1999
------------------------ ------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Relocation $ 114 $ 38 $ 107 $ 34
Mortgage 97 30 107 50
Other 8 7 1 1
--------- --------- -------- ---------
Total $ 219 $ 75 $ 215 $ 85
======== ========= ======== =========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
2000 1999
------------------------ -------------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Relocation $ 206 $ 56 $ 198 $ 52
Mortgage 174 42 200 94
Other 14 15 3 (3)
--------- --------- -------- ----------
Total $ 394 $ 113 $ 401 $ 143
========= ========= ======== ==========
</TABLE>
Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Adjusted EBITDA $ 75 $ 85 $ 113 $ 143
Depreciation and amortization 10 9 21 17
Other unusual charges - - 2 -
--------- --------- -------- ---------
Income before income taxes $ 65 $ 76 $ 90 $ 126
========= ========= ======== =========
</TABLE>
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 the three months ended June 30, 2000 increased $4 million (2%) compared
with the corresponding period in 1999. Net income for the three months ended
June 30, 2000 decreased $890 million compared with the corresponding period in
1999 due to the absence in 2000 of $12 million of income and $871 million of
gains from discontinued operations in 1999.
Revenues for the six months ended June 30, 2000 decreased $7 million (2%)
compared with the corresponding period in 1999. Net income for the six months
ended June 30, 2000 decreased $929 million compared with the corresponding
period in 1999 due to the absence in 2000 of $34 million of income and $871
million of gains from discontinued operations in 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, 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 JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
RELOCATION
Revenues and EBITDA increased $7 million (7%) and $4 million (12%),
respectively, in second quarter 2000 compared with second quarter 1999. The
EBITDA margin grew from 32% in second quarter 1999 to 33% in second quarter
2000. Revenues and EDITDA reflect increases in service based fees for second
quarter 2000 versus second quarter 1999 including increases in: (i) outsourcing
fees of $2 million as a result of expanded service; (ii) international service
fees of $3 million as a result of increased marketing and sales efforts; and
(iii) other ancillary service fees of $3 million. The increase in service fee
revenues reflects a continuing trend in our business from asset based to service
based revenues. Also contributing to increases in revenues and EBITDA was $4
million of favorable net interest income in second quarter 2000 compared with
second quarter 1999. Partially offsetting the growth in revenue and EBITDA was a
$7 million gain recognized in second quarter 1999 on the sale of a minority
interest in an insurance subsidiary. On a comparable basis, excluding the
non-recurring gain, revenues and EBITDA increased $14 million (14%) and $11
million (41%), respectively, in second quarter 2000 compared with second quarter
1999.
MORTGAGE
Revenues and EBITDA decreased $10 million (9%) and $20 million (40%),
respectively, in second quarter 2000 compared with second quarter 1999. Revenues
from mortgage loans closed declined $10 million. Mortgage closings for the
quarter of $5.9 billion consisted of $5.5 billion in purchase mortgages and $400
8
<PAGE>
million in refinancing mortgages. Closings for the quarter declined by $1.9
billion (24%) primarily because of a $1.4 billion reduction in mortgage
refinancing volume. Purchase mortgage closings declined by $500 million overall
from second quarter 1999 while retail purchase mortgages, which are loans where
we interact directly with the consumer, decreased $100 million to $4.6 billion.
Retail mortgage lending has been our primary focus and accounted for more than
80% of loan volume in the first six months of 2000. Moreover, we ranked as the
sixth largest retail mortgage lender in first quarter 2000, the latest period
for which data is available, as provided by the National Mortgage News. Our
closing volume in second quarter 2000 exceeded first quarter 2000 levels by $2.0
billion (54%), of which $1.7 billion were retail mortgages. Mortgage closings
from our Internet business, known as Log-In, Move-In, amounted to $244 million
in second quarter 2000, compared with $64 million in second quarter 1999. The
impact on revenues from the quarter-over-quarter collective decrease in closing
volume was partially offset by lower direct costs per loan. Revenues generated
by our servicing portfolio remained constant with last year despite a $14.5
billion (33%) increase in the average servicing portfolio, principally because
of higher servicing amortization expenses. The EBITDA margin decreased from 47%
in second quarter 1999 to 31% in second quarter 2000. The decline in EBITDA and
the EBITDA margin resulted principally from reduced volume of refinancings and
increased spending for technology, infrastructure and teleservices costs to
support capacity anticipated in future periods. Although no assurances can be
made, we expect that market conditions will improve in the second half of the
year to produce more positive comparisons as the year progresses. However, we
currently expect full year 2000 EBITDA to be slightly lower than 1999.
DISCONTINUED OPERATIONS
Our fleet businesses generated revenues and income from operations of
$67 million and $12 million, respectively, for the three months ended
June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
RELOCATION
Revenues and Adjusted EBITDA increased $8 million (4%) and $4 million (8%),
respectively, in six months 2000 compared with six months 1999. The Adjusted
EBITDA margin increased from 26% in six months 1999 to 27% in six months 2000.
Revenues and Adjusted EBITDA reflect increases in service based fees for six
months 2000 versus six months 1999 including increases in: (i) outsourcing fees
of $5 million as a result of expanded services; (ii) international fees of $4
million as a result of increased marketing and sales efforts and; (iii) other
ancillary service fees of $5 million. The increase in service fee revenues
reflects a continuing trend in our business from asset based to service based
revenues. Also contributing to increases in revenues and Adjusted EBITDA was $4
million of favorable net interest income in six months 2000 compared with six
months 1999. The aforementioned increases in service based fees was partially
offset by lower corporate and government home sale closings. In addition, a $7
million gain was recognized in six 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 $15 million (8%) and
$11 million (24%), respectively, in six months 2000 compared with six months
1999.
MORTGAGE
Revenues and Adjusted EBITDA decreased $26 million (13%) and $52 million (55%),
respectively, in six months 2000 compared with six months 1999, caused primarily
by a $28 million decline in revenues from mortgage loans closed. Mortgage loan
closings for six months 2000 were $9.7 billion, consisting of $9.0 billion in
purchase mortgages and $700 million in refinancing mortgages. Loans closed
declined by $4.8 billion (33%), primarily because of a $4.3 billion reduction in
mortgage refinancing volume. Purchase mortgage closings in our retail lending
business amounted to $7.6 billion in both six months 2000 and 1999. Mortgage
closings from our Internet business, known as Log-In, Move-In, amounted to $404
million in six months 2000, compared with $91 million in six months 1999. Loan
servicing revenues increased $2 million (4%) in six months 2000 versus six
months 1999. Loan servicing revenues in 1999 included a $9 million gain on the
sale of servicing rights. The average servicing portfolio grew approximately $10
billion (24%) in six months 2000 versus the prior year period. The Adjusted
EBITDA margin decreased from 47% in six months
9
<PAGE>
1999 to 24% in six months 2000. The declines in Adjusted EBITDA and the Adjusted
EBITDA margin resulted principally from the reduced volume of refinancings and
increased spending for technology, infrastructure and teleservices costs
incurred to support capacity for volume anticipated in future periods. Although
no assurances can be made, we expect that market conditions will improve in the
second half of the year and produce more positive comparisons as the year
progresses. However, we currently expect full year 2000 Adjusted EBITDA to be
slightly lower than 1999.
DISCONTINUED OPERATIONS
Our fleet businesses generated revenues and income from operations of $166
million and $34 million, respectively, for the six months ended June 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 United States commercial paper markets, public and
private debt markets, as well as other cost-effective short-term instruments.
Also at June 30, 2000, we had approximately $375 million available for issuing
medium-term notes under an existing shelf registration statement. Proceeds from
future offerings will continue to be used to finance assets we manage for our
clients and for general corporate purposes.
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 June 30, 2000, we maintained two
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, has 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 sale 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 market. The Buyer
retains the right to select alternative sale or securitization arrangements. At
June 30, 2000, we were servicing approximately $1.3 billion of mortgage loans
owned by the Buyer.
Relocation. During the second quarter 2000, we entered into two 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 January 31, 2005. We retain a subordinated residual interest
and the related servicing rights and obligations in the relocation receivables.
At June 30, 2000, we were servicing approximately $738 million of receivables
under these agreements.
10
<PAGE>
At June 30, 2000, aggregate outstanding borrowings consisted of the following:
Commercial paper $ 1,383
Medium-term notes 390
Secured obligations (1) 470
Other 126
----------------
$ 2,369
================
--------
(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 June 30, 2000, the Company maintained $1.5
billion of unsecured committed credit facilities, which were provided by
domestic and foreign banks. The facilities consist of a $750 million revolving
credit maturing in February 2001 and a $750 million revolving credit maturing in
February 2005. The full amount of our committed facilities at June 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.
On May 10, 2000, Thomson Financial Bankwatch initiated coverage of us and
assigned ratings of A- for senior debt and TBD-1 for short-term debt. In
addition to these ratings, we have the following long-term/short-term debt
ratings: A/F1, A-/A2, and Baal/P2 from Fitch, Standard and Poor's Corporation
and Moody's Investor Service, respectively. A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time.
CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS 2000 1999 CHANGE
------------- ------------- -------------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities $ 278 $ (11) $ 289
Investing activities (57) 1,749 (1,806)
Financing activities (25) - (25)
Effects of exchange rate changes on
cash and cash equivalents - (40) 40
------------- ------------- ------------
Net change in cash and cash equivalents $ 196 $ 1,698 $ (1,502)
============= ============= ============
</TABLE>
Cash flows from operating activities increased primarily due to a decrease in
accounts receivable of $196 million and a $123 million net transfer of assets
other than relocation receivables under the Apple Ridge financing agreements.
Cash flows from investing activities decreased 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 from financing activities decreased due to dividends paid to the
Parent Company in 2000, which were absent in 1999.
11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------
MANAGEMENT AND MORTGAGE PROGRAMS CASH FLOWS 2000 1999 CHANGE
----------------- ------------- --------------
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities $ (214) $ 315 $ (529)
Investing activities 104 (216) 320
Financing activities 55 701 (646)
------------- ------------- -------------
Net change in cash and cash equivalents (55) $ 800 $ (855)
============= ============= =============
</TABLE>
Cash flows from operating activities decreased primarily due to a decrease of
$537 million in cash flows from the originations of mortgage loans, which
reflects larger mortgage loan originations in proportion to mortgage loan sales.
Cash flows from investing activities increased primarily due to a $324 million
net transfer of relocation receivables under the Apple Ridge financing
agreements.
Cash flows from financing activities decreased primarily due to changes in net
borrowings requirements for our investment in assets under management and
mortgage programs, offset by debt repayments from cash received under the Apple
Ridge financing agreements.
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. Completion of our implementation plan and
determination of the impact of adopting these standards is expected by the
fourth quarter of 2000. We will adopt SFAS No. 138 concurrently with SFAS No.
133 on January 1, 2001, as required.
12
<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 June 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.
13
<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.
14
<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/ Jon F. Danski
---------------------
Jon F. Danski
Executive Vice President, Finance
and Chief Accounting Officer
Date: August 4, 2000
15
<PAGE>
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).
4.1 Indenture, dated April 25, 2000 by and between Apple Ridge
Funding LLC, Bank One, National Association and The Bank of
New York (for electronic transmission only).
4.2 Indenture Supplement, dated April 25, 2000 by and between
Apple Ridge Funding LLC, Bank One, National Association and
The Bank of New York (for electronic transmission only).
4.3 Purchase Agreement, dated April 25, 2000 by and between
Cendant Mobility Financial Corporation and Cendant Mobility
Services Corporation (for electronic transmission only).
12 Computation of ratio of earnings to fixed charges
27 Financial data schedule (for electronic transmission only)
16
